Deciding when to retire is something nearly all people struggle with, but for corporate executives, this question comes with some additional considerations.
For starters, their compensation arrangements often come with an added layer of complexity as they navigate everything from deferred compensation and vesting windows to heavy stock concentration and the need for diversification.
But beyond that, for many, their life’s work has been attached to leading and influencing a business, so making the decision to retire can be impacted as much by emotion as by their personal balance sheet.
Jaclyn Smith, Private Wealth Planning Director at Wealth & Investment Management, Wells Fargo Clearing Services, LLC, shares some key considerations for corporate executives as they consider retirement.
One common mistake that Smith sees is executives waiting until the last minute to take inventory of what they have.
“It really is an issue of time. Executives are so busy running a company that sometimes they neglect their own planning,” said Smith. “The sooner they start, the better.”
Like all investors, executives eyeing retirement first need to evaluate the status of their standard retirement accounts (401(k)s, Individual Retirement Accounts (IRAs), etc.), along with an honest evaluation of their income, debt, and spending. That’s what Smith calls the “retirement baseline.” From there, they need to create a comprehensive list of additional compensation with operative dates. Examples of this include stock options, restricted stock units, deferred compensation plans, and specialty assets.
“In most cases, this type of compensation has vesting or severance dates that need to be met before the executive can fully access the assets, and in nearly all cases, there are tax considerations to be mindful of,” said Smith.
Because many executive compensation plans are stock-based, Smith finds that executives are often over-concentrated in one company or industry.
“This part of retirement planning for executives can be particularly difficult because there is an emotional attachment to the company they work for and a reluctance to sell,” said Smith.
Even so, executives need to consider balancing their portfolio to avoid taking on too much risk.
Working with an investment professional, there are several strategies that may potentially be considered, including options contracts.
Options contracts, on the other hand, serve as an agreement between two parties that allows the buyer to buy or sell underlying stocks at a predetermined price within a set time.
Of course, Smith stressed, all of this should be done with taxes and overall financial objectives top of mind.
“Ultimately, the executive should plan ahead and understand tax consequences, including timing or state specific considerations, on that compensation," Smith says.
For example, if an executive has plans to relocate to a state with a lower income tax, it may be prudent to hold off on selling shares until they’ve established residence elsewhere, explained Smith. Or if an executive knows that they won’t be getting a large salary in the future, it may be best to wait on selling until then.
Lastly, Smith said that many executive compensation structures open the individual up to the Alternative Minimum Tax (AMT) system, which requires them to calculate their tax liability twice — first, under ordinary income tax rules, then under the AMT — and pay whichever amount is highest.
Smith stressed that beyond crunching numbers, executives should prioritize the estate planning and family legacy conversation ahead of retirement.
Some additional questions to ask yourself:
“While people can do all this great wealth planning, they can’t neglect the qualitative planning,” said Smith. “It can make or break those golden years.”
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All investing involves risk including the possible loss of principal. Asset allocation and diversification are investment methods used to help manage risk. They do not guarantee investment returns or eliminate risk of loss including in a declining market.
Wealth & Investment Management (WIM) offers financial products and services through bank and brokerage affiliates of Wells Fargo & Company. Bank products and services are available through Wells Fargo Bank, N.A.
Wells Fargo & Company and its affiliates do not provide tax or legal advice. This communication cannot be relied upon to avoid tax penalties. Please consult your tax and legal advisors to determine how this information may apply to your own situation. Whether any planned tax result is realized by you depends on the specific facts of your own situation at the time your tax return is filed.
Options involve risk and are not appropriate for all investors. Before opening an option position, please read "Characteristics and Risks of Standardized Options" carefully before investing. Supporting documentation for any claims, comparison, recommendations, statistics or other technical data will be supplied upon request.
