Often our clients hear us say the phrase “for a season” during our meetings or in a response via email to a question or pending financial decision they are facing.
What does this mean? Why do we repeat this over and over? Because nothing is forever. Life happens, careers progress, families grow, and balance sheets climb. A change you are making now might be the best way forward for the next year or so, but it is not cemented in stone forever. These seasons generate different needs and desires for our clients. There is one season in a client’s life cycle during which we are most often asked to become engaged. Read on!
Allow me to describe the typical cycle for many of our clients:
- A Corporate job begins in the mid-’20s. Maxing out 401ks & Roth IRAs while facing expenses such as marriage, first home, and children.
- Promotions arise, which come with higher cash compensation and likely stock options. Roth IRAs are no longer an option (or limited within 401Ks) due to income limitations, so taxable brokerage accounts come into play. Many of our clients are interested in the markets, so they develop a skillset in managing their resources. At first, they might be quite active in their self-management, but over time they realize they are more and more detached each year. Mistakes are made, opportunities are missed, discomfort grows, and a desire for change develops.
- By the time our clients are in their mid-40s, their kids are getting ready to move out, and they are at a point where stock options are exercised annually before an expiration date arises. Hence, more funds are loaded into the taxable account. Total compensation is elevating to newer heights, and the tax bill is climbing (for our LT readers, remember, it is better to have a tax problem than an income problem). As a result, interest in Deferring Compensation grows.
- In the blink of an eye, our clients hit the magic age of 50.
If we reviewed the percentage of clients that reached out and became clients at age 50, it would be a substantial percentage. Why is this so common?
Inevitably, these individuals managing their own money hit a point where they feel they could be missing something within their investment portfolio. As the numbers grow, it’s not fun anymore. Secondarily, because of growing asset balances, it is easier, or more comfortable, to leave resources in Company Stock, which they know, instead of diversifying into the unknown world of outside equities. Lastly, the thought begins to dawn that just because they may enjoy picking stocks, if something happens to them, their spouse might need a professional relationship. Often a new client will join our firm, and 30% of their portfolio is company stock, 60% is tax-deferred, and 10% is in a taxable brokerage account. There is a great need to find a better balance.
Back to the earlier “for a season” comment and an example of a real-life scenario to provide clarity here. When we observe the bulk of new client assets residing in the tax-deferred bucket, and the client is still maxing 401ks and deferring compensation (which isn’t a tax saving, merely a tax deferral), we suggest a prospective change “for a season.” We model the impact of reducing the 401k contribution to the amount required to maximize the company match and suspend deferred comp contributions. Yes, pay tax now and fund tax-free and taxable investments. We know what it is like for clients to retire with all their money in deferred and qualified assets, and tax management suffers immensely. For optimal planning flexibility, one not only needs multiple sources of income, but such sources need to be diversified from a tax perspective.
Aside from the growing compensation, investment accounts, and career progression, we reach the most important reason the phone rings. TIME. Our clients are traveling constantly, receiving hundreds of emails a day, and managing hundreds on their team, OH – and most have a family as well. That’s where we come into the mix. Of course, to take the load off and manage their investments (more on that in a moment), but most importantly, to assist with the qualitative aspect of life. What do we mean here? Our main desire is to handle the investments and all aspects of our client’s financial needs so they can focus on family and their careers. We know the life of a Senior Leader and the complexities that arise from this career track.
Why else would age 50 be such a magical time to reach out to an advisor? Well, retirement is on the horizon. Many of our clients have the rule of 10 baked into their compensation packages. A large number of stock options, restricted stock units (RSUs), and Performance Stock Units (PSUs) are in their portfolio. Some vested, many unvested. When a client finds themselves vested in all of their equity awards, they start to think about a new season of life. Five to ten years out from retirement comes at you fast. A big question arises as you sit down and think about retirement and discuss this with your spouse. What are we going to do about income? See our blog: Replacing Your Paycheck in Retirement. These 50-somethings have managed their portfolio along the way, but there is no evergreen strategy to the investment approach. The investments are likely made up of various passive, low-yielding ETFs and Mutual Funds because they have not had the time to actively manage a multi-million dollar portfolio of individual stocks.
- We have a known evergreen strategy for clients that are “accumulators” (building wealth and still working) and for clients who are “withdrawers” (retired). This strategy, of course, is Dividend Growth!
- We have the time and vetting capabilities to watch these positions like a HAWK via our investment committee and equity analyst leaders.
- Our active strategy is forward-looking instead of passive. We have set parameters for what we buy, hold, and sell and why we do so. There is no hocus pocus to what we do, and our clients desire this conviction.
- We skate to where the puck is going, NOT to where the puck is. We know what life looks like at Age 55 and beyond. We know what a growing Net Worth means for Federal AND State Estate taxes. We know how to build a financial model that shows what the portfolio is now, what is possibly missing or needs to be added, and what life looks like out to life expectancy.
So why do families hire us? We are not hired to tell clients what to do (unless we are asked). We are hired to partner with them and provide context. We are hired because we know the life of a Senior Leader from start to finish. We are hired because we understand both the quantitative & qualitative factors that life presents and how they fit into financial decisions. We are hired because we can be politely persistent and implement direction on items families don’t like to think about, such as Estate Planning, Life Insurance, and conversations with adult children. The list goes on.
Age 50 truly is a magical number, and we are not talking about the motorcycle purchase or tattoo. Age 50 still provides time for new investments to tick and the high compensation to front load such investments. Our goal from Age 50 to retirement is to provide multiple known sources of income to replace your paycheck in retirement. It is difficult to do this one year out from retirement. We, of course, hope clients reach out well before age 50. We gain clients and referrals because we know what’s ahead, and we help implement changes in one’s portfolio that otherwise would have never been implemented if self-management was prolonged to full retirement.
Give us a call today – no need to wait until you are 50.
Stoddard Barnhill, CFP®
Sarah Leitzke, CFP®
Phillip Barnhill, CLU®