One of the most valuable benefits a financial advisor can provide is to help your family develop a concept of excess. Well, now you’re thinking…what exactly is the concept of excess? By simple definition, it’s the amount of income, each year, that you can do anything with, without negative repercussions to your financial goals. 

For most people, the savings within your employer 401(k) may not be enough to reach your family’s retirement goals, college savings goals, etc. Often, there is a need to save money beyond your employer's retirement account. At Consilio, one of our primary focuses is to help every one of our clients identify, at minimum, how much their annual savings target needs to be to reach what’s important to them. After that, any cash left over is all gravy, or your Excess! Extra vacation? Book it first class! Spa day? You bet! Want to retire early? Invest it!

RSUs

Over 70% of the clients that Consilio Wealth Advisors works with are professionals within the tech industry, specifically at Amazon, Microsoft, Facebook, & Google. This provides some unique obstacles that need to be addressed within the financial planning realm. For other types of clients such as government workers who earn a pension over a specific number of service years, they may be able to save less from their paychecks to reach their goals because they are supplemented with a pension (these individuals may also be paid less relative to private industry workers to account for this added benefit in the first place!). Self-employed business owners often save within a SEP IRA which is a tax deduction for them and also allows for a very high maximum annual contribution ($61,000 in 2022, subject to certain limitations). Both of these examples vastly differ from that of individuals and families in the tech space.

For tech professionals, some of the above-mentioned strategies are just not available. The industry adds another layer of complexity by compensating a high percentage of income in company stock. What can make this even more confusing are the various types of stock compensation one can receive. Incentive stock options (ISO), non-qualified stock options (NQSO), restricted stock units (RSU), employee stock purchase program (ESPP)??? There are enough abbreviations to make you feel like it’s an entirely different language. 

Today, I’m focusing on one of the most commonly seen forms of stock compensation, Restricted Stock Units. Depending on the company you work for, stock compensation can be as little as 5% of your total gross income vs another company that will design their compensation to be 60%, 80%, or even multiples of your salary. 

What do you do if you’re paid mostly in stock but don’t want to sell every share? This is where the Concept of Excess plays a significant role in your financial plan. It’s perfectly understandable for someone to be emotionally attached to their employer stock. You show up every day, work hard, understand company goals, and have strong relationships with your coworkers. You wouldn’t believe in the company if you didn’t work there! 

I will be the first one to say that, for most people, you don’t have to sell all your company stock! If you build your budget and find that your base salary leaves 0 excess or even a deficit, it’s going to be a case of selling enough stock to cover your budget and meet additional savings needs. 

Here’s how it works for Consilio clients. Once we’ve identified your goals and objectives, we help you develop a plan to determine just how much you would need to save on an annual basis to achieve what’s important to you. If you don’t have experience selling stock, we develop a schedule that aligns with trading windows to walk through the trading process and answer questions before you place any trades. Whatever stock is remaining can be kept to be invested for the long term or sold to fund upcoming vacations, home purchases, etc. On at least an annual basis, we will review stock concentration targets to ensure your financial plan doesn’t take more risk than you’re willing to. That helps our clients sleep better at night.

Pro Planning Tip

If you work for a company that has seen substantial growth over the past 1, 3, 5, 10 years + it could be rather difficult to pull the trigger on selling stock that has performed so well. A common myth is that you will pay more tax if you sell shares you’ve just received. Most often, when you receive an RSU stock vest, a “sell-to-cover” transaction occurs in that a percentage of the vest value is sold and withheld for income taxes. This is why you might vest 100 shares but only receive 70-80 in your account, the remaining 20-30 are automatically sold and sent in for taxes. The most tax-efficient time to sell shares is immediately when they vest. This is because the shares vest at the current market price (NOT the price at grant), there is no or very minimal “gain” or appreciation, so there are no additional capital gains taxes to be paid.

Pro Planning Tip

Many investment accounts only allow for cash contributions to be made which means you’ll likely need to sell RSUs to fund these accounts such as a Roth IRA or HSA. If you really want to hold onto company stock, many firms allow for stock to be purchased in these types of accounts that offer great tax savings on the growth! Of course, your financial advisor will likely recommend diversification because as long as you work for that company there is a high probability you will be paid with employer stock which could become a tax issue down the road.

Disclosures:

The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.

The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.

Consilio Wealth Advisors, LLC (“CWA”) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where CWA and its representatives are properly licensed or exempt from licensure.