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Tips for Retiring with Restricted Stock Awards, Ep 56

Today's episode is the second of several episodes that I will be doing that focus on retiring with equity compensation. There's too much to cover in one episode, especially since mine are pretty short. Blame the GenX lack of attention span I guess. Really I just wanted to break these up so you can pick and choose which to listen to since it’s unlikely that all will apply to each of you.

We'll talk about restricted stock awards today, but I'll just call it restricted stock. I know there are others but we will stick with non-qualified stock options, restricted stock awards, restricted stock units, and employee stock purchase plans for these episodes. Most of you will have some combination of these types of equity compensation. DISCLAIMER: If you listened to the last episode on retiring with restricted stock units, better known as RSUs, a lot of this will sound very familiar. Honestly, most parts are the same, except when it comes to taxation, dividends, and voting rights.

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

  • Do you know your spending number? [2:37]
  • Do you know your net worth [4:46]
  • Let’s talk about restricted stock awards! [5:56]
  • Concentration risk and taxes [6:42]
  • What sets restricted stock apart [9:16]
  • Tracking various cost basis [11:09]
  • 83b election option [13:13]
  • This week’s FLASHBACK [16:24] 

Things that stay the same 

Like I mentioned some things are going to carry from each type of compensation option. And this is a list of those things. 

First things first, before anything else, and specifically anything with equity compensation, is to look at your spending. A theme I repeat too often is unless you know your spending number, I cannot tell you if you have enough savings for retirement. Spend a bit of time taking a look at what you spend.

Your next task is to gather up numbers on your entire financial net worth. This includes balances for your 401k, Roth IRA, regular old IRA, taxable accounts, and savings accounts. I would also say to bring in things like social security estimates and your pension from work if you have one. You will also want to include the value of your equity compensation positions in this overall net worth number.

Now that you have done the prep work, this tip is to assess your restricted stock units and look at your concentrated risk. How much of your net worth is in one or a few holdings, in this case, company stock? 

Then identify and track the various cost basis lots for all of your company stock identifying the cost basis. This will be key when you get ready to dispose of shares.

Your final tip is circling back to identifying how much you're projecting to spend in retirement. Try and project out big planned spending numbers. Things like needing a new roof, wedding costs, a big vacation, or whatever that big planned expense may be. These are one-time expenses but too often I see people not consider them as expenses because they're not ongoing.

What makes restricted stock awards different

The unique thing with restricted stock awards and how it differs from restricted stock units is the ability to immediately recognize the ordinary income taxation of restricted stock. The 83B election is not a mandatory thing that happens, but an option available to you within the first 30 days of receiving your restricted stock awards. 

The 83B election option is where you can recognize and pay taxes at the higher ordinary income level upon the awarding of these shares. This is a tremendous advantage restricted stock awards have over restricted stock units. Simply you have more control over recognition and how much you pay in taxes.

When you get closer to retirement it's critically important to have a strong estimate of future income and taxation numbers to know if the 83B option is going to be advantageous or not.

This week’s FLASHBACK: CliffsNotes®

In today's flashback, I wanted to touch on cliff notes* or is it Cliff's notes**? I don't know. Doesn't matter. I remember trying to use these in high school right before junior year started. I found out the "recommended summer reading" was actually required and the honors English teacher was going to start testing us on them immediately. I wasn't alone in this boat and had several soccer teammates who were in the same class. We were scrambling to figure out how we could get through a half dozen classic albums in just a matter of days. The frantic searches began for movies and cliff notes. Unsurprisingly, we all did poorly on the testing of the summer reading. Maybe you had more luck with your cliff notes experience than I ever did, but I don't ever recall using them as a resource in school again.

* ** I looked it up and it’s actually CliffsNotes®

Resources & People Mentioned

  • Check out Episode 55 if you have RSUs

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.