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How to model Options?
Old 11-11-2018, 04:47 AM   #1
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How to model Options?

Hello All,

My Dow Jones/Fortune 500 Megacorp compensation includes stock options that vest three years out. After age 55, you get to keep them even if you retire before vesting period.
They expire 10 years from grant date. Before executing them, there are no dividends being received.

So what is the best way to model them in Firecalc?

If I add them as part of my portfolio (portfolio changes section) at any value (current, expected, etc) then I think Firecalc will assume I get dividends from them.
If I ignore them, then I will be missing a lot of value in my calculations.

I'm aware of the risk of "counting the chickens too early", but I get a lot of my compensation that way, so not counting them seems an exceedingly conservative approach.



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Old 11-11-2018, 05:42 AM   #2
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I had NQ options and RSUs. When working, I always included the current realizable value as part of the portfolio. This included vested and unvested, and was after payroll tax and income tax. The RSUs actually paid a dividend equivalent but not the options. Either way, I just considered them to be an equity component of the portfolio whose value fluctuated with Megacorp stock. Once exercised and sold, it went into equity index funds. I retained some unvested options after retirement and counted them the same way until finally sold.

It was too big to ignore in the retirement planning picture. I never considered unvested as "counting chickens before they hatch." The only condition was not getting fired. I wasn't too worried about that. This form of compensation is a retention tool. I was more concerned about my own exit strategy.

Retired at 52 in July 2013. On to better things...
AA: 55% stock, 15% real estate, 27% bonds, 3% cash
WR: 2.7% SI: 2 pensions, some rental income, SS later
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Old 11-11-2018, 08:28 AM   #3
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Three years of divs is probably not a big deal (the broad market that FIRECalc uses probably only pays out ~ 2% in divs).

But to account for it, I think you could make your best guess of the value in 3 years, then plug in a lump sum addition to the portfolio three years out on the "Portfolio Changes" tab.

And if these make up a large % of your portfolio, I would definitely recommend exercising as much as you can each year w/o taking too big a tax hit. Diversification is important.

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Old 11-11-2018, 08:49 AM   #4
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I would put them on the Portfolio Changes tab as a lump sum to be added in the year you expect to exercise the options. For the amount to be added, use something like this:

(current market value - strike price)*(1 - future marginal tax rate)

I think that should be the net amount your portfolio value will increase after the exercise.

The only issue I see here is if you plan to hold this stock after exercise and it somehow skews your portfolio from one that's balanced during the first part of your retirement to one that is mostly large cap afterwards. FIRECalc can't really model that type of change.
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Old 11-11-2018, 09:01 AM   #5
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You can put a value on them using the Black Scholes equation. I didn't look up the names, so might be spelled wrong, but if you search, you'll find it.

Edit: spelled it right...
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Old 11-11-2018, 03:57 PM   #6
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Thanks. I added them already as portfolio changes at the day they will vest.

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