Our clients are compensated with company stock such as restricted stock units (RSUs) and stock options. This compensation is paid on top of their salary to incentivize our clients to stay with the company longer term (aka - the “golden handcuffs”). Quite often, that equity compensation is equal to or more than their base salary. This results in our client's income and net worth growing significantly if their company stock performs well. Here’s how we’ve seen some of our clients use their stock compensation to better their lives and financial plans.
Before we go into details, we must first mention that the purpose of the proceeds of stock compensation comes with great intention. We ask our clients to map out their short and long-term goals. This can help them better understand how this additional capital can help them achieve the life they want and how their resources can help them get there.
Buying a new home
Many of our clients in their 30s and 40s are prioritizing buying a home for their growing family. Additional funds from vested RSUs or exercised stock options can help put additional money down on a property. We’ve seen proceeds from stock compensation help clients get to 20% down, whereas without it they may have only been able to put 5-10% down which may have made their offer less appealing to the seller.
Don’t limit your thinking to just funding your primary residence. We’ve had several clients purchase their second home before their first home. Confusing? Read our blog, Should I Buy a Second Home First?
Renovating a home
2020 - 2022 may go down in history (at least Fyooz history) as the years of home remodel. With the world shut down, and our high-earning clients sitting at home all day, we witnessed many households fund various renovation projects. Proceeds from stock compensation led to kitchen remodels, landscaping projects, bathroom renovations, and total home renovations. These projects don’t require an all upfront payment, so it’s important to understand how your future RSU vesting schedule or stock option grants come into play for your renovation installment payments.
Funding a wedding
COVID may have reshaped how people think about their wedding. We are talking about guest count and total expenses incurred. Either way, weddings are still expensive. Some of our clients have been fortunate to earmark a portion of their proceeds from stock compensation to fund their wedding and ease the burden of planning their most special day.
Planning a wedding can be fun! Learn how we planned for our wedding in our blog, How to Financially Plan for a Wedding.
Recreating income and letting the other partner thrive
Some of our clients are in a position where one spouse receives stock compensation and the other is self-employed. We’ve helped clients come up with a plan to sell vested stock compensation to recreate household income (basically another paycheck) and allow their self-employed partner to not draw as much from their business. This allows the self-employed person to keep more money in the business, ultimately allowing them to potentially contribute more to a retirement account. We know from personal experience that entrepreneurs tend to save less for retirement because they are so focused on the business. Utilizing stock compensation to allow your partner to also prioritize savings is beautiful.
Diversifying investment portfolio
We see it over and over again. Your company is rewarding you with stock compensation. You don’t know what to do with your shares so you just hold onto them. After a few years at your company, your net worth is now made up of more than 10% of your company stock.
Our rule of thumb with stock compensation is this… Your net worth should be no more than 5% in a single stock. Why? Because single stock risk can be very problematic for a portfolio, especially if that stock is also the provider of your income, life insurance, medical insurance, and more. Now, with that said, it is more of an art than science. We work with our clients to help balance the risk they’re most comfortable with.
Your RSUs are taxed as ordinary income immediately upon vest. Our thought is that you should consider selling your shares right away because you are already being taxed right up front. Interested in learning more about selling or holding your RSUs? Read our blog, Should I Sell My Restricted Stock (RSUs)? The tax implications of a stock option exercise are dependent upon what type of option they are (nonqualified or incentive). Tax considerations are important in the decision of when to hold or sell your stock. If we had to make this a hierarchy, then we’d say diversification is above tax considerations. Although this might depend on who you ask.
529 contribution
Many of our clients are going through constant life events. The most common one we see is welcoming a new life into the world. Children are expensive. All of you parents may be thinking “no sh*t”. If you’re fortunate enough to have large deposits into your bank accounts after selling RSUs or exercising stock options then you should consider making a lump sum contribution to your child’s 529 plan. In 2022, each parent can contribute up to $16,000 to a 529 without triggering the need to file a gift tax return. This lump sum contribution with 18 years of investment growth may ensure your child will have most of their education needs covered.
We have clients that have decided to make a lump sum contribution and others that make monthly contributions. It’s ultimately up to you. Some of our clients don’t want to fund 100% of education costs. You may want your child to have some “skin in the game”. We are fine with any approach, as long as you have a reason behind it and it doesn’t negatively impact your retirement and future purchase goals.
What now?
Stock compensation requires you to understand your priorities and your financial goals. If you receive stock compensation and are stuck with what to do with the proceeds then that’s where a financial planner can step in and put a plan in motion. If you’re interested in understanding how to maximize your stock compensation, then schedule a 45-minute meeting with us to learn how we can help!
Disclaimer: This article is for informational purposes only and is not a recommendation of Fyooz Financial Planning, Natalie Slagle CFP®, or Daniel Slagle CFP®. Past performance may not be indicative of future results and may have been impacted by events and economic conditions that will not prevail in the future. Therefore, it should not be assumed that future performance of any specific security, investment product or investment strategy referenced in the article, either directly or indirectly, will be profitable or equal to the corresponding indicated performance level(s). No portion of the article shall be construed as a solicitation to buy or sell any specific security or investment product or to engage in any particular investment or financial planning strategy. Any reference to a market index is included for illustrative purposes only, as it is not possible to directly invest in an index. Indices are unmanaged, hypothetical vehicles that serve as market indicators and do not account for the deduction of management fees or transaction costs generally associated with investable products, which otherwise have the effect of reducing the performance of an actual investment portfolio.
