|
|
Stock Options as a percentage of investable assets - what's too high?
12-23-2014, 07:53 AM
|
#1
|
Full time employment: Posting here.
Join Date: Jun 2014
Posts: 518
|
Stock Options as a percentage of investable assets - what's too high?
I've been fortunate to work at a stable megacorp where the stock price has had a nice run up, and I'm sitting on a decent chunk of change of in-the-money fully vested stock options.
My worry is that they now represent almost 20% of investable assets, and it will go up to 25% once the next traunch becomes vested early next year. This is uncomfortably high for me.
Add to this is that if I exercise my options, it will be taxed at the highest marginal tax rates, and I feel I already pay enough taxes to Uncle Sam.
Has anybody else been in this situation? Any advice on how to manage this?
|
|
|
|
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!
Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!
You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!
|
12-23-2014, 08:20 AM
|
#2
|
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Sep 2005
Location: Northern IL
Posts: 26,806
|
It is high, but not sky-high for a stable megacorp, and taxes are a factor.
A couple things to consider, may or may not be worthwhile:
Buy some puts, to protect against a big loss. Go down far enough and it shouldn't cost too much. Less than taxes I'd bet.
Short some % of the stock - this will need to backed by cash or other stock, or pay margin rates, and you miss out on any gains (other than divs).
-ERD50
|
|
|
12-23-2014, 08:23 AM
|
#3
|
Recycles dryer sheets
Join Date: Oct 2007
Location: Sugar Land
Posts: 265
|
I was lucky enough to have some pretty good options (and some not so good $0) from MegaTech. My approach was:
a) Did not consider option value in my AA at all. i.e.; Never treated it as part of my nest egg.
b) Held all of them for full 10 years. I've been retired for 6 years and I think I have two more years of using cashed options to cover living expenses. i.e.; I have yet to draw down from my nest egg.
YMMV,
t.r.
__________________
Life is a Holiday!
|
|
|
12-23-2014, 08:39 AM
|
#4
|
Dryer sheet aficionado
Join Date: Sep 2012
Posts: 33
|
I'm in a similar fortunate experience...
In general I felt uncomfortable having my salary, bonus and a big percentage of my next worth (stock) all tied to my company. I entered into a planned trading plan with a range of price targets I was comfortable with and never looked back. I de-leveraged over time... my view is tax planning is important but not the #1 issue.
Some other reasons I cashed out the in the money options: I also get stock in traunches and was still receiving more each year. If I want I can buy additional stock at a discounted price through an employee stock purchase plan.
Food for thought: Some one asked me what was my sell price target and I really did not have one. They also asked me how much was I willing to let the stock go down before I sold or would I just ride the up and down paper dollars for ever? It was a nice way of saying to me I did not have an exit plan! Also, if someone told me 10 years ago my stock would grow to X dollars would I be happy and sell.. that answer for me was yes.
Finally- it got me to FI faster... paid off mortgage, kids through school and invested in a good ole total stock low cost index fund and am targeting march 2016 to RE... good luck with your decisions
|
|
|
12-23-2014, 08:43 AM
|
#5
|
Thinks s/he gets paid by the post
Join Date: Feb 2014
Location: Williston, FL
Posts: 3,925
|
Start selling the options a little at a time. Even with taxes, you will be making money.
Options sold sooner than the expiration date are worth more that the stock price itself, due to the time value. This time value might help with some of the tax consequences.
__________________
FIRE no later than 7/5/2016 at 56 (done), securing '16 401K match (done), getting '15 401K match (done), LTI Bonus (done), Perf bonus (done), maxing out 401K (done), picking up 1,000 hours to get another year of pension (done), July 1st benefits (vacation day, healthcare) (done), July 4th holiday. 0 days left. (done) OFFICIALLY RETIRED 7/5/2016!!
|
|
|
12-23-2014, 08:47 AM
|
#6
|
Thinks s/he gets paid by the post
Join Date: Jul 2009
Location: North Scottsdale
Posts: 1,545
|
I received stock options for more than 15 years. I would be careful having too much of your net worth tied up in your company options. Remember the folks at Enron?
I always exercised any options that had vested and moved them into other assets. There was always another grant that year to replace what was exercised. What was not vested or not in the money stayed in the account and was only counted towards net worth if they were in the money and would vest within the time frame I had left at the company ( I was on contract).
Some companies do not allow the purchase of derivatives (puts, calls, collars, etc) in stock that is granted as part of an option plan.
__________________
FIRE'D in July 2009 at 51...Never look back!
|
|
|
12-23-2014, 08:51 AM
|
#7
|
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Mar 2013
Location: Limerick
Posts: 5,633
|
My DW has been in this pleasant situation and we've chosen to take some off the table each year. We've paid more in taxes than we like, but that is what it is and there is no magic tax break. We reinvested the money to diversify our holdings along with paying off the mortgage and our kids college bills.
One thing we did a couple of times when the price was down but still above water, was to exercise the options and hold on to the stock, except for enough to cover taxes. We then held on to the shares which have since appreciated nicely, but now will be taxed at the capital gains rate.
Sent from my iPhone using Early Retirement Forum
|
|
|
12-23-2014, 08:52 AM
|
#8
|
Thinks s/he gets paid by the post
Join Date: Dec 2009
Location: Alberta/Ontario/ Arizona
Posts: 3,393
|
Quote:
Originally Posted by Senator
Start selling the options a little at a time. Even with taxes, you will be making money. Options sold sooner than the expiration date are worth more that the stock price itself, due to the time value. This time value might help with some of the tax consequences.
|
I think these are employee options and thus not sellable to a third party. Only can exercise and sell the shares.
I also had a large number of employee options which were all cashed out after I retired for after tax proceeds in the 8 figure range. At one point they probably would have represented about half of my investable assets. You might want to cash a few out but if you think your employer has good prospects you should keep some ( most?) for a bigger payout. That's what I did and it really paid off.
Really depends on your risk tolerance.
|
|
|
12-23-2014, 08:55 AM
|
#9
|
Administrator
Join Date: Jan 2008
Location: Chicagoland
Posts: 40,518
|
Quote:
Originally Posted by ERD50
It is high, but not sky-high for a stable megacorp, and taxes are a factor.
|
+1
You need to read the agreement carefully to see if you are subject to any restrictions or conditions regarding hedging and selling.
Options are a nice leveraged investment, changes in the quoted price result in much bigger % changes in the value of the options, so selling may deprive you of considerable increases in future value. Of course, the opposite is also true.
|
|
|
12-23-2014, 09:03 AM
|
#10
|
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Apr 2013
Posts: 11,078
|
I cashed mine out every few years when the price was up. I had a special problem in that Megacorp had handed out many shares in an ESOP account. Cost was zero to me cost basis a couple bucks, but at one time the equities were close to 60% of net worth. When I was able to roll that into an IRA I did. Slowly sold off the Megacorp shares.
Had I really wanted to roll the dice I could have not done the IRA, had a great NUA. In the back of my mind I kept thinking Enron. In hindsight the NUA would have been better by a large 6 figure number, but it could have gone the other way.
Sent from my SAMSUNG-SGH-I337 using Early Retirement Forum mobile app
|
|
|
12-23-2014, 09:09 AM
|
#11
|
Thinks s/he gets paid by the post
Join Date: Oct 2011
Location: Philadelphia
Posts: 1,360
|
A bunch of years ago I was in the happy situation of having lots of deep, in-the-money options. I did all the tax hand wringing, built models, didn't sell…and then left over $400K on the table when the market moved down at the same time I was leaving the company so I had to sell. Options are leveraged assets…exciting on the way up and exciting on the way down…
So…building on that experience…I've developed a few rules which I'm using now that I'm once again deep in the money on options:
1) Even vested, in-the-money options don't go on my balance sheet. They don't "count" until they are sold. I know this is artificial, but it reduces a mental barrier to selling them.
2) I try not to sell an option until the stock price is 2x the strike price…that way I've wrung a lot of the leverage out of the option.
3) Each year at the vesting date, I calculate the % of my gain I can take off the table and the % of my upside that comes off the table by selling. If you have 10K total options outstanding, a $1 move in the stock price is worth $10k. If 1000 of those options are $10 in the money, you can take $10K off the table while only sacrificing 10% of the upside. I have found that I can get 80-85% of my gains off the table while only sacrificing 10-15% of the upside which also helps overcome the fear of missing out on higher moves.
4) I remind myself that I get "reloaded" with options annually…so my total exposure to the upside movement will stay about even as new options replace the ones I've sold. I also remind myself that the other variable is needing to leave the company when the stock price is low…most people don't get to keep the options after leaving the company.
5) You only pay taxes when something good happens. I grit my teeth and take the punch. Not having moved these assets onto the balance sheet helps how this feels as the only thing the balance sheet ever sees is the post-tax gain.
My $0.02. Lots of other strategies out there. Remember, this is a high class problem.
__________________
Luck is when Preparation meets Opportunity.
FIRE'd 1/1/24
|
|
|
12-23-2014, 10:54 AM
|
#12
|
Thinks s/he gets paid by the post
Join Date: Jul 2012
Location: Texas
Posts: 3,024
|
I was also fortunate enough to deal with this problem for 15+ years. I'm retired now, but still holding some vested options, the last of which will be exercised and sold next year. I was always concerned about being too concentrated in Megacorp stock. My basic objective was to get the money into the balanced portfolio as quickly as possible after vesting, but without sacrificing potential gains or creating additional problems (mainly tax).
After having peaked around 30%, I worked it down to 15% of investable assets and then exercised and sold whatever amount I got each year as new grants. But I also tried to be opportunistic with price. I'd exercise more if the stock was at a peak, and less if it appeared to be poised for a recovery. I also tried to time exercises to keep it from pushing me into a new bracket or some other undesirable tax consequences. It's definitely no simple task to balance all this.
Most of my exercises happened around year 5 or 6 (10 yr options). I had some expire after having been in-the-money earlier. So again, my goal was to keep the exposure reasonable (~15%), get it out as soon as practical, and put it to work in the balanced portfolio. This seemed to work out OK for me.
__________________
Retired at 52 in July 2013. On to better things...
AA: 85/15 WR: 2.7% SI: 2 pensions, SS later
|
|
|
12-23-2014, 11:34 AM
|
#13
|
Thinks s/he gets paid by the post
Join Date: Aug 2010
Posts: 1,088
|
We have some that are due next March. I set up some customized collars in a different brokerage account so I feel no violation of the rule not to short your own company stock.
The collar trade will cost me some 'premium'. If stock continues to go up, I will keep paying premium but retain most of the overall profit. If stock tanks, I will at least recoup most of the the profit thru the short leg of the trade.
I will exercise those after 1/1/2015. So just few more days now.
|
|
|
12-23-2014, 12:58 PM
|
#14
|
Full time employment: Posting here.
Join Date: Jun 2014
Posts: 518
|
Good suggestions, all!
I also have a ESOP but cash that out as soon as I purchase stocks at a discount. I'll look into deep out of the money puts and see if there are any rules against it.
Managing deferring comp %, exercising stock options, new vestment of stock equity, and annual bonues sometimes feel like playing whack-a-mole.
|
|
|
12-23-2014, 01:32 PM
|
#15
|
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Nov 2010
Location: Sarasota, FL & Vermont
Posts: 36,204
|
The way I figure it the cost of lack of diversification could far exceed the tax cost of being well diversified.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.
Retired Jan 2012 at age 56
|
|
|
12-23-2014, 01:39 PM
|
#16
|
Moderator Emeritus
Join Date: May 2007
Posts: 12,890
|
I do not consider non-qualified stock options part of our investment portfolio anymore. I see them as an unrealized source of income that can be tapped when the price is right. It's only when we exercise the options that this money shows up on our balance sheet.
|
|
|
12-23-2014, 01:40 PM
|
#17
|
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Nov 2009
Posts: 6,679
|
Quote:
Originally Posted by MRG
I cashed mine out every few years when the price was up. I had a special problem in that Megacorp had handed out many shares in an ESOP account. Cost was zero to me cost basis a couple bucks, but at one time the equities were close to 60% of net worth. When I was able to roll that into an IRA I did. Slowly sold off the Megacorp shares.
Had I really wanted to roll the dice I could have not done the IRA, had a great NUA. In the back of my mind I kept thinking Enron. In hindsight the NUA would have been better by a large 6 figure number, but it could have gone the other way.
Sent from my SAMSUNG-SGH-I337 using Early Retirement Forum mobile app
|
I used NUA to cash out my company stock when I ERed back in 2008. Nearly all of the stock's value was NUA so the tax bite, while still considerable, was not too bad (about 20% state and federal combined). At the time, I had about 1/3 of my investments in taxable accounts, 1/3 in the company stock, and 1/3 in the rest of the 401k.
__________________
Retired in late 2008 at age 45. Cashed in company stock, bought a lot of shares in a big bond fund and am living nicely off its dividends. IRA, SS, and a pension await me at age 60 and later. No kids, no debts.
"I want my money working for me instead of me working for my money!"
|
|
|
12-23-2014, 01:54 PM
|
#18
|
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jan 2006
Location: Rio Grande Valley
Posts: 37,931
|
Quote:
Originally Posted by Toocold
I've been fortunate to work at a stable megacorp where the stock price has had a nice run up, and I'm sitting on a decent chunk of change of in-the-money fully vested stock options.
My worry is that they now represent almost 20% of investable assets, and it will go up to 25% once the next traunch becomes vested early next year. This is uncomfortably high for me.
Add to this is that if I exercise my options, it will be taxed at the highest marginal tax rates, and I feel I already pay enough taxes to Uncle Sam.
Has anybody else been in this situation? Any advice on how to manage this?
|
IMO - 20% is no big deal. If you don't want it to go higher, then you might need to trim some.
I didn't pay high marginal tax rates because I exercised and held my qualified stock options for at least a year before selling. It worked out for me. I know a lot of other folks got screwed using this approach, but then again I didn't work for a dot.com company.
A lot of people advise to limit investments in a single stock to 5% of investable assets. But if I had done that, I wouldn't have been able to retire early. The basis for my company stock was so low, that what I originally invested was small compared to my other investments, and I felt I could let it ride and hope to get lucky. My gamble worked out well.
__________________
Retired since summer 1999.
|
|
|
12-23-2014, 01:56 PM
|
#19
|
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jan 2006
Location: Rio Grande Valley
Posts: 37,931
|
Quote:
Originally Posted by FIREd
I do not consider non-qualified stock options part of our investment portfolio anymore. I see them as an unrealized source of income that can be tapped when the price is right. It's only when we exercise the options that this money shows up on our balance sheet.
|
That is a sensible way to view it. It is not part of your net worth until you actually exercise the option. IMO normal "diversification" rules do not apply if you don't actually own the stock.
__________________
Retired since summer 1999.
|
|
|
12-23-2014, 04:18 PM
|
#20
|
Recycles dryer sheets
Join Date: Apr 2008
Posts: 483
|
Just a follow up to a previous post. I exercised options after I retired each year when they were about to expire. SS came back at me saying I earned over the maximum for those years after age 62 (we claimed early) and were reducing my SS benefit. I fought back saying it was deferred income. They ultimately agreed. The stock options (W2 income) allowed me to fund IRA's for my DW and I for the first three years of retirement.
|
|
|
|
|
Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
|
|
Thread Tools |
|
Display Modes |
Linear Mode
|
Posting Rules
|
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts
HTML code is Off
|
|
|
|
» Recent Threads
|
|
|
|
|
|
|
|
|
|
|
|
|
» Quick Links
|
|
|