“A man must be big enough to admit his mistakes, smart enough to profit from them, and strong enough to correct them.”- John Maxwell
In December of 2018, Fred Smith, CEO of FedEx, said that FedEx would offer voluntary buyouts to some U.S. and international employees through 2019 and into 2020. The majority of U.S. employees offered voluntary buyouts would be FedEx Express and FedEx Services staff. Employees will be offered four weeks of pay for every year they have worked for the company.[i] Monday, April 22, was the date employees would reportedly find out who would be leaving the company.[ii]
If you are considering a company buyout or retiring make sure you consider these following points:
- Clean out your desk, not your 401(k)– Cashing out your 401(k), or in this case “cleaning out” your 401(k), is for many, the worst mistake a retiree can make for the following reasons. First, whenever you cash in your 401(k) instead of rolling it over your former employer is required by law to withhold a mandatory 20% tax on your entire account balance. You will then have 60 days to deposit the cash, including the amount withheld, in a new tax-deferred retirement account before Uncle Sam keeps the 20 percent and you become responsible for any additional income tax due. Secondly, if you are under the age of 59½ and you do not roll over your 401(k) in addition to the 20% tax withholding you will have an additional 10% early withdrawal penalty added to your previous tax amount. Finally, there is the opportunity cost you lose when you clean out your desk and your 401(k). Opportunity cost refers to a benefit that a person could have received, but gave up, to take another course of action. Stated differently, an opportunity cost represents an alternative given up when a decision is made. This cost is, therefore, most relevant for two mutually exclusive events. In investing, it is the difference in return between a chosen investment and one that is necessarily passed up. When you sacrifice 20% (maybe 30% if you are under the age of 59½) of your retirement savings because you cashed out your 401(k) instead of rolling it over to an IRA imagine how much more interest you could have earned if you did not give up those dollars. In my professional opinion, the way to avoid this mistake is to have a plan. When I say a plan, I mean a retirement plan, not just a rollover plan.
- Have a Retirement Plan, not just a Rollover Plan– The reason most people make the first mistake of cleaning out their desk and their 401(k) when they leave their employer is because they have a rollover plan but not a retirement income plan. Rollover planning is short-term thinking. Retirement Income planning is long-term thinking. When you have a rollover plan, your number one goal is getting access to the money you have inside your retirement account by any means necessary. The priority when you only have a rollover plan is gaining access to your money, while the potential taxes, penalties, and fees are not the focus. I have seen this happen time and time again when a retiree becomes anxious with the thought that now I am out on an island all alone managing money that in the past was handled by the Custodian who managed my former company’s retirement plan. There have been other times when a former company stipulates a timetable in which a retiree must decide on where to direct their account after retirement and this forces decisions to be made in haste. I believe all of us have pieces to our own Retirement Income Puzzle. A puzzle is defined as a problem designed to amuse by presenting difficulties to be solved by ingenuity or patient effort. Having adequate Retirement Income is a problem that is solved through the patient effort of planning and preparing. I consider a 401(k) a piece to that Retirement Income Puzzle just as I consider savings, pensions, Social Security, IRAs, and Real Estate as pieces to that Puzzle. I have found however working with retirees for the last 21 years that most retirees have retirement income pieces, but they do not have a retirement income plan. You will not and cannot solve your Retirement Income Puzzle with scattered pieces, you only solve your Retirement Income Puzzle when all the pieces come together to complete your Retirement Income Plan. All the pieces of the puzzle working together as a retirement income plan include, but not limited to, Income & Social Security strategies, Investments for liquidity & growth, Insurance products–for income, and protection. Diversification using investments that meet your risk tolerance and investment objective. At the end of the day – it’s simply about making your life and retirement work together. This planning incorporates not just money but also Health care – Long term care planning, Life Insurance with a Long-term care rider. As well as Legacy Planning –where you work with an estate planning attorney to create and solidify your legacy plan. Have a Retirement plan and not just a Rollover Plan.
- Putting all your Retirement Eggs in One Basket- We have all heard this statement said over our lifetime “do not put all your eggs in one basket”, this is a piece of advice which means that one should not concentrate all efforts and resources in one area as one could lose everything. But how is that a mistake for retirees with their 401(k)s? In my professional opinion, all retirees have three needs that need to be covered through planning and preparation. Those needs are emergencies, income, and lifestyle. I call these buckets the Trilateral Retirement Plan™. When a retiree rolls over their 401(k) into one basket at least two of the three needs are not covered sufficiently and create potential dangers for the retiree. But why three baskets instead of one? Because you have three needs that must be met by three different means. Let us discuss Bucket #1-Income. The first rule of retirement is to guarantee consistent reliable income- period–regardless of what is happening in the economy! The key to the Income bucket is the income generated for the retiree in retirement should be guaranteed lifetime income. Income that provides you with the peace of mind that no matter how long you live you will not outlive your money. This income also should keep pace with inflation. As the cost of living increases your income should keep up with the rising costs and allow you to maintain your same standard of living. This income should provide for healthcare costs as you age and not worry about a major medical event to derail your retirement income. When you rollover your 401(k) into one basket that basket may be designed to cover your current and future income needs but how do you cover your Emergency needs? The second rule of retirement is to have enough funds to cover unexpected emergencies. No matter where you live, how old you are, how well life is going right now for you at some point unexpected events happen. Unexpected life situations happen that cause disruption in your normal day to day operations of your household and require resources to address those situations. That is why the second basket for Emergencies is necessary so when that time comes or that situation warrants immediate attention you have the resources to address the emergency immediately. When you rollover your 401(k) into one basket that may be designed to cover your current and future Income needs but you also use it to cover your Emergency needs what about your Lifestyle needs? The third rule of retirement is having enough funds above your income and emergency needs that cover your lifestyle expenses. Our Lifestyle bucket is the bucket that provides the additional funds for you to have a lifestyle in retirement to travel, make necessary and desired purchases, gifts, realized dreams you have deferred until retirement but not using the funds from your Income or Emergency Bucket to cover those expenses. When the Trilateral Retirement Plan™ is established properly before you rollover your 401(k) it provides the Retirement Confidence™ you need by covering your Income needs, Emergency needs and Lifestyle needs. Henry Ford has been credited for saying, “Put all your eggs in one basket and watch that basket.” My study of Mr. Ford’s statement is centered around the idea of being focused on your primary aim, not retirement income planning. Retirement Income Planning requires your attention and focus on your three financial buckets to ensure financial success in retirement. Remember your three buckets are the Income Bucket, Emergency Bucket, and your Lifestyle Bucket. To learn more about these and other mistakes, download a free copy of my book, “Rollover Mistakes Retirees Make” at our website www.rollovercompany.com
If you have accepted the FedEx buyout, know someone who has or you are just thinking about retiring we would love to assist them and you in ensuring you do not make one of these mistakes. Feel free to call us at our office 615-678-6603 or visit us at our website www.rollovercompany.com
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