Planning for an Early Retirement with Your Stock Options

Are you dreaming of an early retirement? If you start planning now, it may not be out of reach. While you should develop an investment strategy early on, one benefit that often gets overlooked in retirement planning is employer-offered stock options. Learn more about leveraging your stock options and how they can help you in the long run.

How Does Stock Option Investing Work?

Some employers offer stock options as part of an employee benefits package. This type of benefit allows the employee to buy shares of a company’s stock at a specific price for a set period of time. If you’ve been offered stock options by your company, they may be one of two types:

  • Incentive stock options (ISO)
  • Non-qualified stock options (NQSO)

Stock options are a type of equity compensation that is typically contingent on a vesting period, meaning you must work at a company for a certain amount of time before you’re eligible. Restricted stock units (RSU) are similar to stock options in that they are typically contingent on a vesting period and are valued based in terms of company stock, but company stock is not issued at the time of the grant and might be settled in stock or cash.

Using Stock Options to Plan for Early Retirement

Many employees plan to use their stock options to help fund their retirement. If you’re receiving equity compensation at your current job, make sure you understand all the rules and conditions of your plan. For example, your employer may require you to work at the company for a certain number of years or set minimum retirement age. Will you need to forfeit your shares at retirement or can you continue vesting?

Managing Risk

The more diversified your portfolio is, the better equipped you’ll be to manage risk. This is a big issue with many employee stock options. Because the investment is in one single company (your employer), it’s vulnerable to market fluctuations. You can make educated predictions, but you never truly know how the company’s stock will fare in the future.

Fortunately, you can balance out your company stock with other retirement planning measures. It’s often recommended to take advantage of any employer-offered retirement plan, such as a 401(k) or 403(b), and make the maximum contribution each year, or at least enough to receive any company match. Many people also consider a traditional or Roth IRA. By diversifying your savings for retirement, you’ll likely be less exposed to risk.

Each employer is different, so familiarize yourself with the retirement provisions in your equity compensation plan. For example, you may only have 90 days to exercise your stock options once you retire. Or you may be required to forfeit employee stock options if you have a conflict of interest, such as taking on consulting work for a competing company. Talking with a professional financial advisor can help you figure out the best ways to navigate your stock options after separating from service with your company.

Tax Implications

Each type of stock option or equity compensation has different tax rules for the timing and type of income. However, there will usually be an ordinary income component included on your W-2 and a possible capital gain or loss when sold. Incentive stock options may also have an alternative minimum tax impact. It is important to do tax planning so you are not surprised by your tax bill since your withholding will not always cover the additional tax due. There could be estimated tax penalties if you have not paid enough throughout the year.

Get Expert Assistance with Planning for Early Retirement

Backed by Moneta, the Hadary Team offers strategic comprehensive financial planning for individuals with stock options or employee stock purchase plans. As an independent registered investment advisor (RIA) and fee-only fiduciaries, we use our expertise to provide you with comprehensive advice. To learn more about planning for an early retirement with stock options, book an appointment with Erin Hadary and her team.

© 2022 Moneta Group Investment Advisors, LLC is an SEC registered investment advisor and wholly owned subsidiary of Moneta Group, LLC. Registration as an investment advisor does not imply a certain level of skill or training. All rights reserved. The information contained herein is for informational purposes only, is not intended to be comprehensive or exclusive, and is based on materials deemed reliable, but the accuracy of which has not been verified. Examples contained herein are for illustrative purposes only based on generic assumptions. Given the dynamic nature of the subject matter and the environment in which this communication was written, the information contained herein is subject to change. This is not an offer to sell or buy securities, nor does it represent any specific recommendation. You should consult with an appropriately credentialed professional before making any financial, investment, tax, or legal decision. Past performance is not indicative of future returns. All investments are subject to a risk of loss. Diversification and strategic asset allocation do not assure profit or protect against loss in declining markets. These materials do not take into consideration your personal circumstances, financial or otherwise.

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