Last Updated Sep 3, 2009 12:02 PM EDT
Pete Steckl went to his financial adviser with an ambitious financial goal: to retire — or at least have the option of retiring — at 55. An emergency-room physician who lives in Atlanta, Steckl had an aggressive investing style for someone nearing 50: His retirement account was 100 percent in stocks, only partly offset by some bonds owned by his wife.
His adviser, Scott Beaudin, had this message for Steckl: Stay heavily in stocks and keep reaching for that ambitious goal. His reasoning wasn’t just based on his client’s retirement date or stomach for risk, the traditional factors used by financial advisers in determining an asset mix. It was also based on his client’s job.
Demand for ER doctors is high, especially in Atlanta. So Beaudin reasoned that Steckl is unlikely to lose his job and be forced to reduce his retirement contributions or make early withdrawals. And unlike the case of, say, a jet pilot — who may have a similar income, but faces a mandatory retirement date — “an ER doctor can still work a few shifts a month as he nears full retirement to create extra income if the portfolio needs a little more time to fatten up,” Beaudin says. “All else being equal, we can take more risk and expect a better income with an ER doc.”
Beaudin is one of a growing number of advisers who are strongly factoring occupation into their investment recommendations, particularly since the recession has brought job security to the fore. “If you’re not thinking about occupation, stability of income, and the need for resources if a change occurs, then you’re not doing the client a full service,” Beaudin says.
To be sure, even many advisers who agree that occupation is important warn that it isn’t time to throw the traditional asset-allocation criteria out the window. “There’s no hard and fast rule, unfortunately, when it comes to determining asset allocation for retirement,” says Kevin M. Reardon, an adviser with Shakespeare Wealth Management in Brookfield, Wisconsin. “In addition to occupation, you have to consider age, time horizon, risk tolerance, and pension income.”
Are You a Stock, a Bond, or Cash?
Advisers like Beaudin may give very different retirement investment advice to an investment banker than to a tenured university professor, even if their ages and incomes are similar. Why? The investment banker’s income is highly variable and much more dependent on the gyrations of the stock market, which means that his “human capital” performs more like a stock: high risk, high return. Therefore, to ensure an adequately diversified portfolio, the banker should put a healthy chunk of his savings in bonds. By contrast, the steady flow of cash from the tenured professor’s university salary means that his human capital performs more like a bond. Therefore, he can afford to go big on stocks.
|Financial advisers||Tenured professors|
|Commissioned salespeople||Police officers|
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Whether you’re more like a stock or a bond depends on the steadiness of your job as well as the stability of your earnings, says York University professor Moshe Milevsky, who’s written a book entitled Are You a Stock or a Bond? Create Your Own Pension for a Secure Financial Future. On the “bond” side are people with jobs that have the protection of a union or tenure, such as teachers, police officers, and firefighters. They are unlikely to get a six-figure bonus, but neither are they likely to lose their jobs because the economy heads south. On the “stock” end are commission-based salespeople, realtors, stockbrokers, and others whose income is more variable and whose job security depends on the fate of a single company or market.
Unlike a Treasury bond, however, most people don’t have a rock-solid guarantee that they’ll keep their job. What’s more, bonds tend to move in the opposite direction of stocks, but that’s not true with jobs. In fact, when the economy tanks, your job may be in danger at the same time your stock portfolio is tumbling. That’s why most advisers recommend keeping a cash cushion of three to six months of living expenses so you don’t need to dip into your retirement account to cover expenses during a temporary job loss. And people working in fields with less job security will want to have even larger cushions on hand.
Analyze Your Income
Most people will have a pretty good intuitive sense about whether their profession offers job security or income stability. How much of an impact those factors should have on your asset allocation is a matter of some debate.
Wes Moss, for example, an Atlanta-based financial adviser, says he gives occupation at most a 20 percent weighting on his suggestions for stock-bond mix in retirement accounts. While he’d normally advise a 35-year-old client to invest 35 percent of his retirement portfolio in bonds on the general principle that people should “own their age” in bonds, that number might be more like 20 percent for a tenured professor. By contrast, Moss has clients who work in commercial real estate — a highly cyclical profession — and he recommends they put less than half of their retirement accounts in stocks, a very conservative allocation.
If it’s possible to take a good idea too far, Milevsky has done so: He suggests that a 45-year-old tenured university professor should borrow nearly twice the value of his or her nest egg and invest it all in equities. This strategy is a hedge against the professor’s very bond-like human capital and ensures his or her “total balance sheet is diversified,” Milevsky says. Yet even Milevsky — himself a tenured university professor — admits he doesn’t follow that advice because his wife has a lower tolerance for risk than he does. Over the past year he’s probably quite glad he married her.
The idea that occupation should be factored into investment decisions is mainstream enough that many financial advisers use asset-allocation software that accounts for income variability, says John E. Grable, a Kansas State University finance professor. If you don’t work with an adviser, Grable says there is a fairly simple do-it-yourself version: Next time you get the annual report chronicling your income history sent to you by the Social Security Administration, make a simple graph containing two lines: One is the annual growth of your income in percentage terms, the other is the annual growth of the S&P 500. If your income grows and/or swings like the S&P, you should shift your asset allocation more to bonds; if it shows more slow-and-steady growth, then keep a heavier proportion in stocks. “The stability of your human capital is an enormously overlooked and important aspect of financial planning,” says Wes Moss. “In every single meeting with a client, [occupation] is one of the first things we talk about.”
Don’t Ignore Risk Tolerance
Financial decisions should never be made in a vacuum, so you shouldn’t put too much weight on the human-capital approach. The severity of the current recession has shown that no job is truly secure, notes Charlie Farrell, a Denver-based adviser and MoneyWatch blogger. What’s more, Farrell is wary of the suggestion that people who have chosen conservative careers should invest aggressively, and vice versa. That seems to invite people to invest outside of their risk tolerance. “Most people in more secure jobs have chosen them because they don’t like uncertainty,” Farrell says.
Paul Palazzo, a Manhattan-based adviser, says he won’t push a client to invest more aggressively than she feels comfortable, no matter how secure her job. “We still want our clients to sleep well at night.”
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