Editor's Soapbox: Protect Yourself
We lend the soapbox to snoofle today, to dispense a combination of career and financial advice. I've seen too many of my peers sell their lives for a handful of magic beans. Your time is too valuable to waste for no reward. -- Remy
There is a WTF that far too many people make with their retirement accounts at work. I've seen many many people get massively financially burned. A friend recently lost a huge amount of money from their retirement account when the company went under, which prompted me to write this to help you prevent it from happening to you.
The housing bubble that led up to the 2008 financial collapse was caused by overinflated housing values coming back down to reality. People had been given mortgages far beyond what they could afford using traditional financial norms, and when the value of their homes came back down to realistic values, they couldn't afford their mortgages and started missing payments, or worse, defaulted. This left the banks and brokerages that were holding the mortgage-backed-securities with billions in cash flow, but upside down on the balance sheet. When it crossed a standard threshold, they went under. Notably Bear Stearns and Lehman. Numerous companies (AIG, Citi, etc.) that invested in these MBS also nearly went under.
One person I knew of had worked at BS for many years and had a great deal of BS stock in their retirement account. When they left for Lehman, they left the account in-tact at BS. Then they spent many years at Lehman. When both melted down, that person not only lost their job, but the company stock in both retirement accounts was worth... a whole lot less.
As a general statement, if you work for a company, don't buy only stock of that company in your retirement account because if the place goes belly up, you lose twice: your job and your retirement account!
Another thing people do is accept stock options in lieu of pay. Startups are big on doing this as it limits the cash outflow when they are new. If they succeed, they'll have the cash to cover the options. If they go bust, you lose. Basically, you put in the long hours and take a large chunk of the financial risk on the hopes that the managers know what they're doing, and are one of the lucky unicorns that "makes it". But large companies also pay people (in part) in options. A friend worked their way up to Managing Director of a large firm. He was paid 20% cash and 80% company stock options, but had to hold the options for five years before he was allowed to exercise them - so that he'd be vested in the success of the company. By the time the sixth year had rolled by, he had forgotten about it and let-it-ride, with the options auto-exercising and being converted into regular shares. When he left the job, he left the account in-tact and in-place. When the market tanked, so did the value of the stock that he had earned and been awarded.
When you leave a job, either voluntarily or forcibly, roll the assets in your retirement account in-kind into a personal retirement account at any bank or brokerage that provides that (custodian) service. You won't pay taxes if you do a direct transfer, but if some company where you used to work goes under, you won't have to chase lawyers to get what belongs to you.
Remember, Bill Gates routinely divested huge blocks of MS stock as part of diversifying, even while it was still increasing in value. Your numbers will be smaller but the same principle applies to you too (e.g.: Don't put all your eggs in one basket).
While the 2008 fiasco and dot-com bust will hopefully never be repeated, in the current climate of deregulation, you never know. If you've heavily weighted your retirement account with company stock, or have a trail of retirement accounts at former employers, please go talk to a financial advisor about diversifying your holdings, and collect the past corporate retirement accounts in a single personal retirement brokerage account, where you can more easily control it and keep an eye on it.
Personally, I'm retired. My assets are split foreign/domestic, bonds/equities, large/medium/small-cap and growth/blend/value. a certain percentage is professionally managed, but I keep an eye on what they're doing and the costs. The rest is in mutual funds that cover the desired sectors, etc.
The amounts and percentages across investment types in which you invest will vary by your age, total assets and time horizon. Only you can know what's best for your family, but you should discuss it with an independent advisor (before they repeal the fiduciary rule, which states that they must put your interests ahead of what their firm is pushing).
For what it's worth, over my career, I've worked at five companies that went under, more than twenty years down the road after I moved on. I have always taken the cash value of the pension/401(k) and rolled it into a brokerage account where I manage it myself. Had I left those assets at the respective companies, I would have lost over $100,000 of money that I had earned and been awarded - for absolutely no reason!
Consider for a moment that the managers that we all too often read about in this space are often the same ones who set up and manage these workplace retirement plans. Do you really want them managing money that you've already earned? Especially after you've moved on to the next gig? When you're not there to hear office gossip about Bad Thingsa that may be happening?
One final point. During the first few years of my career, there were no 401(k)'s. If you didn't have a pension, your savings account was your main investment vehicle. Unless the IRA and 401(k) plan rules are changed, you can start saving very early on. At first, it seems like it accumulates very slowly, but the rate of growth increases rapidly as you get nearer to the end of your career. The sooner you start saving for the big ticket items down the road, the quicker you'll be able to pay for them. Patience, persistence and diversification are key!
As someone who has spent the last quarter century working for these massive financial institutions, I've seen too many people lose far too much; please protect yourself!
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