Remember Equity Compensation When Planning For Retirement

Your equity compensation can be one of your most valuable workplace benefits. Whether it’s in the form of stock options, restricted stock units (RSUs), or an employee stock purchase plan (ESPP), it offers you a chance to share in your company’s success.

But what about your own long-term goals? According to a recent survey, 68% of stock plan participants are seeking retirement planning information¹. Yet not everyone thinks about using their equity compensation as a tool to build wealth for retirement. While there are many factors to consider, from vesting schedules to taxation to market volatility, you can build financial strategies for the future with your company equity as a key component.

Let’s start by looking at a few important considerations for your equity compensation at each stage: saving for retirement, nearing retirement and entering retirement.

When You’re Saving for Retirement

Get involved and stay engaged.

The first place to start is a simple one: Consider taking advantage of any retirement and equity benefits available to you at work, and know the details of each. That means not just participating in your 401(k) or other employer-sponsored plan, but understanding contribution limits, company matches and automatic features, plus exploring retirement savings plans outside the workplace, like individual retirement accounts (IRAs). Understand the rules and requirements of your company stock awards, and consider enrolling in the ESPP if one is offered. Remember, like all investments, your equity compensation may fluctuate in price over the course of time you own the shares.

Think about retirement with every equity compensation payout. 

When you receive a payout, it’s OK to treat yourself to something you’ve always wanted, or perhaps start that long-awaited home improvement. But it’s also a good time to give your retirement savings a boost. Consider contributing a percentage point more of your salary to your workplace retirement plan or IRA, or funding an investment portfolio dedicated to generating retirement income.

Be aware of overconcentration. 

One of the biggest risks of building a portfolio that includes equity compensation is owning too much of your company’s stock. Your investment portfolio includes stocks you own as part of your workplace retirement savings account, your personal investments, and more. A diversified portfolio can help you balance risk and potential reward, while overconcentration can leave you too dependent on the value of your company’s stock and overly exposed to market volatility. Some financial planners suggest keeping no more than 10-15 percent of your investable net worth invested in a single stock, although this is a rule of thumb. You may wish to consult with a financial professional about an asset allocation that makes sense for your specific situation.²

When You’re Nearing Retirement

Know where equity compensation fits in.

With retirement in your sights, it’s important to have a clear picture of how much income you’ll need to support your lifestyle. Decide what role you expect your equity compensation to play here. Do you see it as a critical piece of the puzzle, or as a nice cushion to supplement your other income sources? Or could you even retire early by using your current equity compensation holdings as a bridge until you can tap into other assets, like your 401(k) and Social Security benefits? A Financial Advisor can help you answer these questions and more.

Tie up any loose ends long before you set your date.

Before you enter retirement, there may be some actions you need to take, or requirements you need to satisfy, with your equity awards. While an ESPP will likely end when your employment does, stock options or RSUs may be subject to different vesting schedules as you near retirement, post-termination exercise periods, and length-of-service or age-at-retirement requirements (see below). Make sure you understand and plan for these conditions, or you may risk forfeiting shares or not being able to sell shares when you’d planned to.

Brush up on the language of equity compensation and retirement.

Get familiar with these terms, and find out how they might impact you. 

When You Retire

Enjoy the income, but don’t forget about taxes.

You should always factor in the impact of taxes as you plan for retirement, but it’s especially important do so when you’re actually entering retirement, when your sources of income will be changing. If you sell shares to generate retirement income, there will likely be tax consequences, whether that’s owing ordinary income taxes, capital gains taxes, or both. This may be a time to work with a tax professional, who can help you plan the timing of any stock sales to spread out the tax burden, and a Financial Advisor, who can help you manage withdrawals and retirement cash flow.

Do what matters most to you. 

When you’ve retired from a company after many years, determining what to do with your shares can be a complex—and perhaps even emotional—decision. Just remember that once you retire, you deserve to enjoy the fruits of your labor. Now may be an opportunity to use your equity compensation for something that’s meaningful to you, from travel to philanthropy to funding a passion or new business venture.

Prepare for a More Secure Retirement Today

From understanding plan requirements to determining the role of stock awards in your retirement income strategy, it takes careful planning over time to make the most of your equity compensation benefits.

¹ Annual Stock Plan Participant Survey, Morgan Stanley at Work, 2022

² "Top 10 Financial-Planning Rules That Everyone With Stock Options Needs To Know" Available at  https://www.mystockoptions.com/articles/ten-financial-planning-rules-everyone-with-stock-options-needs-to-knowAccessed  09/12/23