Your Company Stock as Part of Your Retirement Planning Strategy
The U.S. stock market has been on the rise for more than eight years and healthcare stocks—including many life sciences companies—have participated in this rally. In fact, year-to-date, healthcare is the second best performing sector within the S&P 500 Index.
While this is great news if you own these stocks, you may be wondering, “How long can this last?” The short answer is that nobody knows. Trying to predict the future direction of the stock market is futile.
But there is one thing we do know, and that is that the economy and the stock market are cyclical. Periods of strong economic growth are followed by recessions. Bear markets follow bull markets. The only question is when the pendulum will swing the other way.
If a large portion of your personal wealth is tied to the fortunes of your company’s stock, you need to be prepared for a potential downturn – especially if these assets are part of your overall savings strategy for your retirement.
Here are five ways you can diversify your portfolio and earmark your equity compensation for your retirement goal:
1. Take inventory of your retirement savings and your retirement income needs. Understand how much income you’ll need in retirement and how much you’ll need to save on an annual basis in order to achieve your goals. As part of this process, consider what role your company stock plays in your overall financial plan and whether you have too much riding on a single stock. Once you have these answers, you will have more flexibility to develop a strategy for your company stock and other forms of equity compensation.
2. Know what you own and how to maximize its value. Understand the different types of equity compensation you have, such as restricted stock, restricted stock units, non-qualified and incentive stock options. Understand when your shares vest and what rules you have to follow to exercise options. Taxes are an important part of this decision, so be sure you understand the different tax implications of your various grants.
3. Reassess your risk tolerance. Understand how much you are willing and able to risk when it comes to your equity compensation and the volatility of company stock. Avoid making decisions based on emotions. Instead, have a solid plan in place that anticipates potential market selloffs.
4. Diversify. Tying too much of your personal wealth to the fate of your company’s stock is risky. Consider selling a portion of your equity compensation and diversifying your portfolio. While you may incur some taxes, that may be preferable to putting all of your eggs in one basket.
5. Consider hedging strategies. Implementing a hedging strategy will limit your upside potential, but can help protect the value of your equity compensation from serious downside risk.
You have worked hard to earn your equity compensation. Therefore, I urge you to take time to develop a strategic plan to protect these valuable assets within the context of a detailed financial plan.
Do you have a financial planning issue you would like us to feature in our next Financial Intelligence guest post? We would like to hear and learn about your most pressing financial questions. Feel free to submit questions for us at bdragovics@freedomtrailfinancial.com
Securities offered through Commonwealth Financial Network ®, member FINRA/SIPC, a Registered Investment Adviser. Advisory services offered through Freedom Trail Financial, LLC are separate and unrelated to Commonwealth