By Mike Gibbons, RICP®
The pharmaceutical industry is a highly lucrative field, and its employees are some of the most well-paid professionals out there. However, despite having a high income, pharma employees often make financial mistakes that can have serious consequences in the long run. In this article, we’ll take a look at some of the top financial mistakes pharma employees make and how to avoid them.
Misunderstanding Equity Compensation
Many pharmaceutical companies offer equity compensation as a way to incentivize and retain talented employees. One of the biggest mistakes I see pharma employees make is not fully understanding the terms of their equity compensation packages before making decisions about what to do with the stock.
Depending on the type of equity compensation you are granted, you may receive the stock outright at a certain date (as with RSUs), or you may receive the right to purchase company stock at a set, usually discounted, price (as with stock options). Equity compensation can be a valuable addition to a pharma employee’s compensation package, as it aligns their financial interests with the company’s success. But the award contracts can be complicated. Employees must understand the exercise price, vesting schedule, expiration date, and tax implications in order to avoid making costly mistakes.
For instance, you may receive stock options with a vesting schedule that requires you to continue working at the company for a certain period before the options become exercisable. If you leave the company before the options are vested, you may forfeit the right to exercise them and miss out on compensation you rightly earned. Additionally, the timing of exercising or selling of stock can have major tax implications and may even result in an alternative minimum tax liability.
Before accepting equity compensation or making decisions about what to do with your company stock, be sure to read the contract carefully, ask questions, and seek the advice of a financial professional if necessary.
Not Being Properly Shielded From Risk
It’s also very common for pharma employees to be overexposed to risk, in part because of the equity compensation they receive. Because company stock is part of many pharma employees’ compensation packages, it can be very easy to fall into the trap of overconcentration.
Like the age-old adage says, “Don’t keep all your eggs in one basket.” The opposite of overconcentration, diversification is a critical element in managing risk in your portfolio. If you have more than 10% of your portfolio concentrated in your employer’s stock, your entire portfolio can be greatly affected by the decline of that one investment.
Reduce your exposure to risk by keeping your investments in different parts of the market and utilizing an allocation strategy that considers which components of your portfolio can move together and which can act as a hedge against downside risk.
It’s also important to understand that risk comes in more forms than just exposure to market volatility. As high-earning professionals, pharma employees have a lot to lose. Be sure to evaluate your life, health, and long-term care insurance policies. These expenses are often overlooked and can have devastating effects on your accumulated wealth. Putting adequate coverage in place now saves you time, money, and energy in the future.
Failing to Save Enough to Retire
If you’ve earned a healthy salary over the years, you’ve likely created a lifestyle that’s costly to maintain. With lifestyle creep, early career debt, and delayed retirement planning, it’s very common for pharma employees to be behind the curve when it comes to retirement savings, despite their high-earning potential.
Though Social Security retirement benefits make up the bulk of retirement income for many, they likely won’t make much of a dent in your retirement living expenses, especially if you are earning above the maximum annual wage limit of $160,200. It’s crucial for pharma employees to determine how much they have saved and how that might stack up against anticipated retirement expenses.
A qualified financial professional can help you find ways to improve your retirement savings plan, whether through increased contributions to your employer retirement plan, HSAs, and taxable investment accounts, or exploring deferred compensation options. A financial professional can also help you determine whether your current spending is compatible with the lifestyle you would like to maintain in retirement, and whether you need to make cuts in some areas. Taking these steps while you still have time to make adjustments can make your financial situation in retirement much more comfortable.
Are You Making Some of These Mistakes?
If you’re a pharma employee and these mistakes sound familiar to you, don’t worry! It’s not too late to start taking steps in the right direction. At Gibbons Financial Group, we have decades of experience working with pharma employees as they navigate their journey to financial independence, and we can help keep you on track to meet your retirement goals.
Call 224-419-5550 or email me at Mike@gibbonsfinancialgroup.com to schedule a complimentary consultation. And be sure to join our free webinar, Retiring Early From Pharma.
About Mike
Michael J. Gibbons is founder and president of Gibbons Financial Group, an independent advisory firm providing custom-tailored financial planning and investment management services to pharmaceutical and healthcare professionals and their families. Mike has over 25 years of experience and spends a significant portion of his day working with pre-retirees and retirees, focusing on asset management, Social Security and pension planning, as well as retirement income preparation.
Mike has degrees in both business and psychology from Lake Forest College and currently holds his Retirement Income Certified Professional (RICP®) designation from the American College. Mike was named a Five Star Wealth Manager for 2016 and 2018* Mike is heavily involved in his community, having served on the Village of Gurnee Police Pension Board as a Community Volunteer and the St. Patrick’s Parish Financial Board. When he’s not working or volunteering, Mike loves playing golf and spending his time with his wife and children. To learn more about Mike and how he can help you, connect with him on LinkedIn, visit his website, and register for his free webinar, Retiring Early From Pharma, created specifically for professionals retiring from the pharmaceutical, biotechnology, and healthcare industries.
*Award based on 10 objective criteria associated with providing quality services to clients such as credentials, experience, and assets under management among other factors. Wealth managers do not pay a fee to be considered or placed on the final list of 2016/2018 Five Star Wealth Managers.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
Investing involves risk including loss of principal. No strategy assures success or protects against loss.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.