By Dan Trumbower, CFP
Are you leaving money on the table by not fully taking advantage of your executive compensation package? With summertime upon us, combined with extra time at home these days, there is no better time than now to dive in and make sure you are optimizing the benefits available to you.
Use the Annual Allowance for Financial Advice
Some executive comp plans provide an allowance to hire your own financial advisor. This is a wonderful opportunity to review your overall financial situation with an expert. Remember, if the advisor is not a fee-only, independent fiduciary, he or she may not have an obligation to put your best financial interest first.
Evaluate Pension Plan Options
Pensions come in a variety of flavors for executives of both large and small corporations. Do you have a defined benefit plan and are looking to retire soon? Can’t decide on a monthly payment versus a lump sum payout? There are pros and cons for each that your financial advisor can help you weigh out. If you are considering a lump sum payout option, keep in mind that a key factor in the calculation is the interest rate, which has an inverse relationship on the amount you will receive. The lower the rate, the bigger your lump sum should be. With rates at historic lows, a lump sum option should be very appealing.
Exercise Stock Options Strategically
Non-qualified (NQ) and incentive (ISO) stock options provide executives with a very powerful earnings boost as long as the company is performing well. There are different exercise strategies for each type of award and tax considerations should be at the forefront. I’ve seen my fair share of do-it-yourselfers punish themselves with unnecessary tax liability by not following a well-executed strategy.
Diversify Concentrated Stock
Identity shares that you would like to diversify into two main groups – low cost-basis and high cost-basis. Generally, you want to sell the tax neutral or higher basis lots. Zero to low basis lots can be earmarked for other purposes such as charitable giving and legacy planning.
Be disciplined about selling off your shares over time – even if you truly believe in your company’s future success. When the stock price hits a new high most employee investors believe it will keep going higher, which is often not the case. Avoid placing all of your eggs in one basket since your salary is already dependent on a single company. A well-disciplined and diversified portfolio strategy limits this risk.
Consider using trailing stop-loss orders and targeted sales of concentrated stock positions to improve the diversification of your overall portfolio. For example, if you work at Microsoft, you could simply consider these shares as part of the “Domestic Large-Cap Growth” sleeve within your portfolio. You could complement your company stock with a low-cost ETF or mutual fund in the same category, and over time you would use trailing stop losses and targeted sales to divest of your shares and improve diversification of this part of your portfolio.
Restricted Stock – Hold or Sell?
If you are receiving restricted stock then you might already have a concentrated position in your company stock. Assuming that your awards vest in shares (as opposed to cash payout), it’s important to employ a disciplined diversification strategy and not become emotionally tied to the stock. Remember, even if the stock vests at a price that you may believe to be low, it’s essentially the same as receiving cash. You can diversify into other asset classes with the sale proceeds. Remember, stay disciplined to a diversified portfolio allocation with a mix of asset types in a proportion that makes sense for your long term goals. Your company’s stock may never reach your own price objectives, adding to your concentrated position year after year while missing out on other opportunities.
Health Savings Account Utilization
There are some creative ways to utilize your health savings account (HSA) to pay for medical costs now or in the future. There is no “use it or lose it” time restriction like in a Flexible Spending Account (FSA). Because an HSA is a tax-advantaged account, you can use it to supplement your retirement income (think Roth IRA but with a very specific purpose).
If you need to draw on your HSA now for medical expenses, then limit current withdrawals to the extent possible while allowing the balance to grow. If you are able to cover your existing healthcare costs out of pocket, then max out your HSA each year ($7,100 family limit for 2020), save your medical receipts, and allow your HSA to compound over time (and tax-free!) through diversified investments. You can always reimburse yourself later on – even many years down the road. Save those receipts.
When you use your HSA as a long-term investment, it can be a powerful form of “self-insurance” in lieu of expensive long term care coverage. An HSA investment account does not require a health exam so there is no need to worry about being excluded for certain medical conditions. Using an HSA also avoids the administrative fees and commissions with an insurance policy, and all of the “premiums” go directly to your investment account. Sometimes it’s best to self-insure.
About the Author
Dan Trumbower, CFP® is a Senior Wealth Advisor at Halpern Financial, Inc., a fee-only, independent, fiduciary wealth management firm in the Washington, D.C. area. He has two decades of experience in the wealth management field, and special expertise in executive compensation strategies.