Regardless of where you fall on the retirement timeline, we can help you make the most of your current situation and the opportunities available to you. A plan, focused on your values and goals, will help keep you on track.
Companies often give Restricted Stock Units (RSUs) to their employees as compensation for hard work and to retain talent. RSUs are a promise of actual company stock, as opposed to stock options, which are just the option to buy the stock at a future date and have no intrinsic value. The significant RSU restriction is that you aren’t vested until a future date, typically over four years. If you leave the company, the company will retain the unvested shares. The main question is should you sell your RSUs immediately as each segment (or tranche) vests or should you hold on to the shares?
As with all planning, you should look at this as a piece of your financial puzzle, which includes short-term, intermediate, and long-term goals.
On the vesting date, the restricted stock units are converted into actual shares. You don’t pay anything. However, the conversion creates a taxable event and your income for the year will be increased by the value of the shares – REGARDLESS OF WHETHER YOU SELL THEM OR NOT.
Let’s say Sally works for XYZ company making $100k. She is given $200k in RSUs vesting over four years. This year, $50k in RSUs are available. When the RSUs are converted, her Adjusted Gross Income (AGI) will be increased by $50k, making her total AGI $150k. Sally may have to pay around $14k more in taxes. (Tax will vary depending on many factors: marital status, spousal income, deductions, etc.). If Sally doesn’t have the $14k in the bank, how will she pay the extra taxes?
In many cases, employees end up selling their RSUs to pay the taxes unless the company’s plan allows some shares to be sold to pay the taxes. As a rule of thumb, an individual shouldn’t have more than 20 percent in their company stock. So, even if employees can sell shares to pay the taxes, you may still want to sell your vested shares. Selling allows you to diversify away from having too much in one investment. You may also sell to use the proceeds for other beneficial purposes, like building an emergency fund, funding your children’s education, or paying down your mortgage.
When the first block of RSUs becomes available, there is typically some downward pressure on the stock price. A growing company can overcome this, but it is also a question of how long you are willing to wait.
If you hold the shares for longer than one year from the vesting date, your growth will qualify for long-term capital gains rates. So, if an RSU was given to you at $20 per share and after one year you sell at $25 per share, you will pay tax on the $5 in growth at the long-term capital gains rate. The risk in waiting is the stock price could go down.
Deciding to sell or hold your shares depends on a myriad of factors including taxes, diversification, company performance, market conditions, and the purpose of the money. Your decision should be based on your overall financial plan that includes short-term, intermediate, and long-term goals. If you need help creating your financial plan or even if you have questions about how to handle Restricted Stock Units, please contact one of our Wealth Managers that can help you navigate the waters of life.
*SFS and its representatives do not provide tax advice; it is important to coordinate with your tax advisor regarding your specific situation.
The people who helped start the 401(k) revolution in 1981 lament what has become of it. At the time, the hope was just to help supplement a traditional pension program. The reality is that 401(k)s have replaced pension plans as the main retirement savings vehicle.
Herbert Whitehouse, a Human Resources executive for Johnson & Johnson, was one of the first to recommend his executives use a 401(k) as a tax-free way to defer compensation. “We weren’t social visionaries,” he says. They were looking for ways to cut expenses and retain top workers. However, because many companies have jumped on the bandwagon, pensions are becoming a thing of the past.
Traditional pension plans do have their weaknesses: bankruptcies could weaken or wipe out the plan, and it is difficult for employees to transfer the plan to a new company.
Enter the 401(k) with the promise that an employee could have enough savings for retirement. Teresa Ghilarducci, who directed the Schwartz Center for Economic Policy Analysis offered assurances to Union Boards and even to Congress that 3 percent savings would be enough. She now admits the first calculations were a little “too rosy.”
There were other issues policy makers didn’t take into account, such as workers yanking the money out of the 401(k) or choosing investments unsuitable for their ages.
Only 61 percent of eligible workers are currently saving. A whopping 52 percent of households are at risk of running low on money during retirement.4 These are scary numbers. It is no wonder people fear running out of money more than they fear death.5
The nation’s policy makers and some states have made proposals or started initiatives to help change the behaviors of savers and companies. One proposal would mandate retirement savings and the system would be run by the Social Security Administration. However, we are a ways off from having a solution to a societal problem that could be compounded by the Social Security trust fund running dry by 2034.6
The onus is on each one of us to save for retirement and implore our parents, children, friends, and even neighbors to help patch the holes in a sinking ship by saving for retirement.
The bright spots are the people that have benefited from the 401(k). For example, Robert Reynolds could retire comfortably at age 64 after saving for 3 decades. He says the formula is very simple, “If you save at 10 percent plus a year and participate in your plan, you will have more than 100 percent of your annual income for retirement.”7
Like it or not, we live in a world where 401(k) accounts have nearly eliminated pensions. Your financial future is your responsibility. So, make a personal commitment to save for your future.
1. The Champions of the 401(k) Lament the Revolution They Started, Wall Street Journal, Jan 2, 2017
2. The Champions of the 401(k) Lament the Revolution They Started, Wall Street Journal, Jan 2, 2017
3. The Champions of the 401(k) Lament the Revolution They Started, Wall Street Journal, Jan 2, 2017
4. The Champions of the 401(k) Lament the Revolution They Started, Wall Street Journal, Jan 2, 2017
7. The Champions of the 401(k) Lament the Revolution They Started, Wall Street Journal, Jan 2, 2017
Preparing for a successful retirement takes years of planning, saving, and dreaming about the years when you will no longer be working. When planning for retirement we recommend you think about the amount of monthly income you need to maintain your lifestyle.
However, there are some expenses you may not think of before retiring.
1. Home Repairs: Before retiring take inventory of the age of your house. What are some of the items that may need to be updated? Then come up with a plan for how to have cash on hand to pay for each of those repairs.
Some of the most expensive items include your home’s: HVAC, roof, pipes, septic system, deck, siding, and plumbing.
Planning for home repairs can alleviate a lot of financial burden by either repairing items before retirement or by creating a reserve home repair fund, in addition to an emergency fund.
2. Healthcare Costs: Did you know the average couple will spend about $250,000 on healthcare during their retirement? Even if you believe you will not spend that much on healthcare, it is a good idea to plan for the unexpected, especially with the rising cost of healthcare.
Although Medicare is available at the age of 65, it does not cover all medical expenses. There are additional premiums and expenses for prescription coverage. Dental and vision insurance is not covered by Medicare, so private insurance will be needed if you would like this coverage.
If you are planning to retire before the age of 65, be sure to know how much the cost of private healthcare will be. The premiums are a lot more than individuals think.
3. Purchasing Power: The average price of a movie ticket in 1974 was $2.00. Fast-forward to 2015, the average price was $8.50! That is a 3.4 percent increase in cost per year and a good example of the power of inflation.
Inflation is hard to see as it happens slowly over time, yet it is crucial to plan for in retirement.
• If you retired today with a monthly income of $3,000 and an inflation rate of 3 percent, in the year 2040 you would need about $6,000 per month to maintain the same standard of living.
• Outpacing inflation with a risk appropriate, diversified portfolio can help to minimize the risk of purchasing power.
4. Spending too much early on in retirement: Yay! You made it to retirement. You’ll have more free time, which often means spending more money. It might be spent on visiting loved ones, traveling, golfing, lunching, or starting new hobbies.
Before you retire, make sure to have a realistic amount of money you will spend each month. Make sure to include your day to day expenses, healthcare costs, taxes, home repairs, utilities, travel expenses, and any other items that may be important to you.
5. Longevity: If you know the exact day you will pass away, planning for retirement is easy. That’s not the way life goes. If we plan based solely on previous generations’ life spans, we may not plan for a long enough lifespan.
Planning beyond age 90 is a more conservative plan. Although you may need to reduce your monthly income, you will have a well-rounded plan that will help your income last for your lifetime.
Planning for retirement can be a daunting task, yet with the right team on your side you can be set up for success and live out the retirement of your dreams.
Simple missteps when choosing your Medicare and Supplemental Plans can cost you greatly if you are not careful. Here are a few to watch out for:
1. Prescription drugs
When it comes to paying for your prescriptions, all plans are not equal. In fact, plans can change the lineup of drugs they cover each year.
According to Kaiser Family Foundation, your costs for a prescription may increase ten times between formulary and non formulary drugs. Screen the plans to see how much each insurer will pay for the drugs you are taking.
You can visit Medicare.gov (under drug coverage, find health & drug plans) to search for plans that offer coverage for the drugs you take. Make a point to compare your drug plan with others each year to assure you are getting the best bang for your buck.
2. Medigap coverage
Getting the right plan for your specific needs can be tricky. If you choose Original Medicare Part A, you need a Medigap or supplemental policy – Part B to pick up where Medicare coverage leaves off. You also need to choose a separate Part D – prescription drug plan.
You can simplify by choosing a Medicare Advantage Plan – Part C which combines all of the coverages together and handles all claim processing through one carrier.
Some Advantage Plans still require you to pick up a separate policy for prescription drug coverage. In 2016, 69 percent of enrollees went with Original Medicare Plans while 31 percent chose Medicare Advantage Plans.
Medicare Advantage Plans generally require you to use a specific list of doctors and medical facilities through either a Health Maintenance Organization (HMO) or Preferred Provider Organization (PPO).
When choosing an Advantage Plan check to make sure your favorite doctors and the facilities you most often visit are covered on the list of providers.
3. Important deadlines
Harsh financial penalties can be avoided by knowing your deadline dates. Failure to sign up during the enrollment period could mean your Part B premium may be 10 percent higher – for life – for each full year you are late signing up for Medicare Part B.
If you are 65 or older, still an active employee and covered under your employer’s health insurance plan you are not required to sign up at 65 unless your company has 20 or fewer employees. If this is the case, you may be required to sign up for Medicare Part A and Medicare Part B, which will become the primary payer when you have a claim and your employer’s plan will become the secondary payer.
Once the clock starts ticking, there is only a seven-month window to avoid permanent penalties. Call our office if you have questions regarding the deadlines or need more information about the requirements.