- Be prepared for the inevitable changes that come with the boom and bust nature of a commodities-based industry.
- Have easily accessible savings outside of your retirement in case of an emergency.
- Spend some time getting your financial house in order before surprises hit.
- Take full advantage of rich employee benefits that oil & gas industry employers provide
T. Boone Pickens, the corporate raider and oil industry disruptor once said,
“It's important to show a new look periodically. Predictability can lead to failure.”
Many of you have made a great living by working hard, keeping your skills sharp, by helping your company innovate, and by staying ahead of the curve in the always-volatile oil and gas industry. But, while uncertainty and speculation is part of your working life, you don’t want that instability disrupting your retirement plan and family’s well-being. As many of you know, life circumstances change all the time and retirement planning is not a one-and-done exercise.
The following case study involves hypothetical couples, with various realistic experiences and is provided for illustrative purposes only. Due to the complexity of each scenario, we have combined them and are providing the solutions that were most applicable to their situation. The strategies provided may not be specific or applicable to your situation. This case study does not constitute a recommendation as to the suitability of any investment for any person or persons having circumstances similar to those portrayed. Please consult a financial advisor regarding your individual situation. Past performances does not guarantee future results.
Just the other day, John and Mary came in to see me. We started working together about a year ago to develop a comprehensive retirement and wealth management plan for them. We had an in-depth conversation about how much longer John wanted to work at his job as a highly-compensated reservoir engineer at a major oil company. Mary was recently retired.
Went through our Consultative Wealth Management Process and identified the couple’s ability to achieve these goals and then built an action plan from there. Based on their nice income and good savings habits, they were in very solid shape. But, things had changed.
You never know what life will throw at you
About a year after our first meeting, John’s company went through a restructuring due to a protracted slump in oil prices.
Many longstanding employees like John were asked to retire earlier than originally planned. It’s never easy for any employee to go through a layoff or forced retirement, especially for older workers who haven’t been on the job market in decades.
Needless to say, this news caught John and Mary off guard. John did receive a generous severance package that included more than half of his $225,000 annual salary, plus his $50,000 bonus and $30,000 in accumulated vacation and sick pay. He also received $150,000 in employer stock from his restricted stock units accelerating their vesting. Due to John’s severance package, we knew it would be an unusually high tax year for the couple. We also knew that neither John nor Mary wanted to go out and find another job. So, we re-evaluated the couple’s financial plan and their ability to achieve all the things that were originally important to them.
Mapping out retirement goals
If nothing else, John and Mary wanted to maintain their standard of living throughout retirement and leaving a small legacy to their grandchildren. They wanted to move from California to Texas to be closer to John’s elderly father. They also wanted to build a house near John’s dad and buy a small airplane so they could more easily make frequent trips back to California where the majority of their family still resides. Finally, they wanted to travel, to support their grown children and grandchildren as needed and to continue donating to their church and to charities that are important to them.
Given all the factors at work, including John’s unexpected early retirement, a number of strategic adjustments to their plan would need to be made (see below):
- Adjusting the couple’s risk profile to be more in line with their new stage of life.
- Consolidating various retirement accounts for ease of management.
- Reducing the couple’s exposure to a $200,000 concentrated stock position (from past employer company stock) that accounted for over 13 percent of their overall liquid assets.
- Utilizing net unrealized appreciation (NUA) to reduce the tax consequences of employer stock in John’s retirement account.
- Maximizing the contribution to John’s 401(k) and health savings account (HSA) before John was officially let go from his company, and
- Working with a CPA to discuss other ways to reduce John and Mary’s tax liability in the current year. Again, they were facing an abnormally high income year due to the lump sum severance John received from his ex-employer.
In addition to the above, we would review the couple’s estate plan for updates due to changes in their family structure. We would work with a health insurance specialist to evaluate the best coverage option for the couple before they turned 65. We would also design a long term care (LTC) insurance policy for John and Mary, review their auto and home insurance with their P&C agent, increase the coverage on their umbrella policy and increase the deductibles on their auto and home to reduce their premium. Finally, we would determine a sustainable tithing level and look at special cash and non-cash donations that the couple could make to their church in their current high income year.
Advanced planning in action
If you are familiar with our firm’s process, you’ll notice that the steps we took with John and Mary above involved the 5 key components of advanced planning:
- Wealth Preservation
- Wealth Enhancement
- Wealth Transfer
- Wealth Protection
- Charitable Giving
John and Mary have retired earlier than expected. In addition to settling into their new plane and home in Texas, they’re busy fixing up their California residence so they can start renting it out for additional income. Finally, they’re planning a trip to Mexico and will bring along their children and grandchildren.
What to look for in a severance package
John and Mary were smart. John essentially received a “golden handshake” from his former company and we helped him make the most of it. If you are impacted by a restructuring, you may not be thinking 100-percent clearly as so many anchors in your normal routine have been disrupted. Take the time to review your options carefully and don’t agree to anything (verbally or in writing) that you don’t understand. If nothing else, make sure you:
- Max out your 401(k) & HSA.
- Evaluate your options for your 401(k).
- Review your risk tolerance and exposure to concentrated stock positions.
- Take advantage of outplacement services or other assistance your employer provides to update your resume and prep for new job interviews.
- Ensure continuous health insurance coverage through either your spouse, COBRA or a Covered California plan.
In my next article, we’ll take a closer look at these and other important severance considerations. I learned from my late father the value of always preparing for the unexpected. When my father passed away suddenly in 2005, his thriving aviation business was forced to close. However, thanks to dad’s advance planning, our family was well taken care of. By naming our practice Screaming Eagle Wealth Management, I am hoping to keep the spirit of my father's hard work and foresight alive for years to come.
About the author
Erik Dullenkopf, CFP® is the founder of Ventura-California-based Screaming Eagle Wealth Management. The firm specializes in working with families in the energy & agriculture industry and guides them in successfully managing their transition into and throughout retirement. By focusing on this niche, Erik and his team brings unique knowledge and insight about the commonalities, struggles and benefits that the ever-changing oil and gas industry faces.