One of my favorite television shows when I was a kid was "The Lone Ranger.” Yes, it was on a black-and-white television! The Lone Ranger was also popular on the radio, in comic books and in several movies. I even had a chance to meet him once at a county fair.
The Lone Ranger was a tough and smart guy who was part of a group of six Texas Rangers who went after bad guys. He became known as the Lone Ranger when the other five Rangers were killed in an ambush after being betrayed by a guide. In fact, the Lone Ranger barely survived the attack. An Indian came across the scene, found him and nursed him back to health. We came to know the Indian as Tonto, the Lone Ranger’s loyal and trusted friend and advisor. The Lone Ranger couldn’t have accomplished all that he did by himself. He needed Tonto.
Financial Planning and Investing on Your Own
The memory of one of my childhood heroes came to mind after I received a phone call the other day from a friend of mine. He recently made a terrible financial mistake and wanted my advice on how to fix it. This friend is a smart and successful professional. Like a lot of other smart people, he manages his own investment portfolio and does his own financial planning. He is confident in his abilities and is a do-it-yourself type who has never felt the need to pay an advisor to help him. However, his recent predicament showed him it might be a good idea to have a Tonto.
My friend and his wife—let’s call them Ozzie and Harriett—have done very well financially. One of their goals was to have Harriett retire early. This year, they felt they could make it happen, so she retired in January at age 52. Ozzie could support their lifestyle on his income, and they had done a good job saving for this day. Harriett had accumulated a significant amount of wealth in her company’s employee stock ownership plan (ESOP) and also had built up a substantial 401(k) account.
Lack of Financial Knowledge Can Lead to a Costly Mistake
Ozzie knew that at her age, Harriett could not access the funds in her 401(k) without paying the 10% early withdrawal penalty. Apparently, he did not know the same rule applied to her ESOP. In an effort to diversify the ESOP, they processed a complete distribution of the employee stock plan. She received a check for over $450,000 and promptly deposited it into their savings account for safekeeping. They knew she could later roll it over to an IRA account, which would maintain the tax-deferred status that is an important benefit of an employer retirement plan. What they didn’t consider was that the IRS rules require you to process the rollover within 60 days. It is now well past the 60 days. They are looking at an increase in their taxable income of $450,000 for the year plus the 10% early withdrawal penalty! That means they will pay income taxes of $225,000 on the money she took from her plan. Taxes and penalties will take more than half of their distribution. That’s a pretty costly mistake. (For related reading, see: Getting the Most out of Employee Stock Options.)
I am not sure there is a solution to their problem. I have advised them to hire a tax attorney to explore potential solutions. Hiring a high-end tax attorney to represent you in front of the IRS is not an inexpensive endeavor. If they had been working with a good advisor—a Tonto, so to speak—they would have been advised of the potential tax implication before it became a problem.
A good financial advisor will guide you through the major life transitions, like retirement. They will work as your advocate, ensuring you don't make that big mistake.
Do you have a Tonto in your life? If not, you probably should. The world is a complicated place, especially the financial world. As smart as we may be, we can’t possibly know everything about everything. We get in trouble when we make decisions on important matters without knowing all there is to know about the subject matter. The Lone Ranger and Tonto worked together well. Tonto gave his friend the Indian name "Kemo Sabe," which he said means “trusted scout.” Appropriate, don’t you think?
(For more from this author, see: How Market Pricing Should Fit in Your Investment Strategy.)