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EP 60 - Tips for Retiring with Non-Qualified Stock Options

There are many things to consider when it comes to retiring with non qualified stock options… your spending number, your net worth, the status of your stock options, how much is in tax-deferred accounts, current tax rates, other income sources like social security, etc. If you work through all those things, you can work out a plan to sell off company stock, reduce your concentration risk, and by doing so, not pay too much in taxes. This episode highlights some of the issues to consider, and I’m happy for you to reach out to me to think it through from an experienced perspective.

You will want to hear this episode if you are interested in...

  • Why I’m breaking down this complicated issue into more than one episode [0:32]
  • DISCLAIMER: This is NOT an options episode, the focus is Equity Compensation [1:56]
  • First: figure out what you spend, then you can project retirement numbers [2:30]
  • Get the numbers needed to calculate your entire net worth [4:32]
  • This week’s FLASHBACK [11:23] 

First steps: monthly spending and net worth

If you don’t know what you actually use and actually need to survive month to month, it’s hard to say whether or not your retirement plans are adequate. Seriously, even if you are putting aside $10 million for retirement, it’s not a certainty that it will be enough. Let’s say you spend $8,000 a month for all your expenses. The $10 million figure will surely be adequate in that case. But if you spend $20K or more, maybe not. Because the expenses you have during retirement will be different from what you experience now, including the likelihood of increased expenses for health care related costs. So start there, and move on to the next steps. 

It’s time to calculate your net worth. When I think about net worth I’m considering anything I would consider, “Investible assets.” These would include…

  • 401K balances
  • Roth IRAs and regular IRAs
  • Taxable accounts
  • Large savings accounts
  • Social security estimates
  • Pensions
  • The value of your equity compensation positions

I would not include the value of your home or possible inheritances unless you know with 100% certainty that they will come into play for retirement assets.

Exercising stock options: What is smartest when it comes to taxes?

Once you have those numbers you can begin to consider the best time and manner to exercise your stock options. An example of what you’ll be considering might be helpful…

Let’s say you have 1000 shares of non-qualified stock options. They were awarded to you at a strike price of $20 per share. The current price is $35 per share, so you’ve realized a gain of $15 per share. That’s a $15,000 gain, which is recognized as part of your compensation income in the year you exercise it. So when should you exercise those options in light of retirement? 

You may wish to spread out the recognition of taxes over a couple of years if you have multiple blocks of company stock options. This is because exercising those options in the same tax year could dramatically increase your taxable income for that year, which could move you into a higher tax bracket and require you to pay more in taxes.

What happens to your non-exercised stock options once you retire? There is no blanket answer because each employer is going to handle the issue differently. Talk to your employer or HR department, or consult with your Certified Financial Planner. Whatever you do, take the steps to ensure you optimize stock options for retirement so you don’t leave risk free money on the table.

This week’s FLASHBACK: 

Back to my old “wicker company” days. It was a seasonal furniture store where I worked during my college days. The day after Christmas, everything Christmas-related was 50% off and I was shocked to find that people were waiting to get into the store when I arrived for work. It was my first day of “sales craziness” and I hope, is a trend that never returns. 

I’m Dan Johnson, CFP®, founder of Forward Thinking Wealth Management. I run a flat-fee financial planning and investment management firm located in beautiful Akron, OH. Although I am in Akron, OH, I work with clients regardless of location. I cater to owners of equity compensation positions who are looking to organize their financial lives, keep more of what they make, and do the things they want in retirement and even now.