“Susan,” a 62-year-old corporate vice president, is a public-company executive whose recent health issues are making her reconsider her retirement date. Will Susan need to work a few more years, or has she gained financial independence based on the value of her overall assets, including holdings in her company’s Performance Stock Units (PSUs) and Restricted Stock Units (RSUs)?

Deciding when to retire may be one of the biggest financial decisions you will ever make. Many executives keep their stock compensation separate from their other financial account statements and monthly valuations. They often underestimate the significance of their stock-based compensation or cannot quantify the tax implications of holding vs. divesting. In many cases, including your equity-based compensation can be beneficial for your long-term financial goals.

When evaluating the structural and tax implications of significant stock-based compensation, keep these factors in mind:

The underlying security, the level of risk involved in holding a significant amount of company stock, and
the need to sequence the tax liability of diversifying away from company stock to reposition for the future.

If your PSUs and RSUs have vested, you have likely already paid ordinary income tax. If you maintain voting rights and receive dividends, any future appreciation will be taxable at lower long-term capital gains rates if you hold the PSUs or RSUs longer than 12 months and one day from vesting.

Suppose Susan were working with a financial advisor experienced in executive compensation. In that case, she and her advisor would not only need to examine Susan’s unique circumstances, including her life situation, but also her other investments and the future prospects of her company’s stock and attractive dividend yield. Questions to explore include:

Should Susan hold the stock beyond her retirement date and make at least a short-term ordinary income-tax deferral when her RSU shares release?

Should Susan hold on to her company’s stock as part of her retirement portfolio, since it has a healthy dividend yield and could still increase in value?

Should Susan reduce risk by moving her money into a well-diversified portfolio?

While it may seem counter-intuitive to stay invested in company stock at retirement, it would be prudent to engage in a rigorous review process to determine the right course of action – one that considers the financial, executive compensation, and tax implications of holding versus divesting. Be sure your financial professional has the appropriate experience to consider all of these considerations before making a recommendation.

At Savant, we have a team of specialists who hold the Certified Equity Professional credential, and work frequently with executives to develop comprehensive financial plans. Having a plan in place can help ease the decision-making process for executives leading into retirement. Please contact us to schedule an introductory call for more information about evaluating stock-based compensation to determine retirement readiness.

This is intended for informational purposes only and should not be construed as personalized investment advice. The above is a hypothetical scenario not involving an actual Savant client. Please consult your investment professional regarding your unique situation.

Author Charles F. Steege Financial Advisor / Managing Director

Chuck is an advisor to senior-level executives of public companies, helping them unlock the value from their varied and complex stock-based compensation plans and equity awards.

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