What would you do?

[Toocold]

I'm trying to figure out my next steps in terms of income, investments and asset allocation. I'd love for you all to tell me about how you would personally handle this. All of these are hypothetical round numbers to make the math easier, so actuals are materially different.

Annual spend: $80k
Current pre-/post-tax stock investments: $1.5M.
Dividend + interest income (from above): $40k
Own house - no mortgage.
Own two rental properties with mortgages: Cash flowing about $6k per year.
Fully max 401k, backdoor roth IRA, HSA, contribute to 529.

Vested stock options of $500k. Any exercising of stock options will be at the highest tax rates. Fortune 100, very stable company.

Options:
1) Cash out stock options and put it into an index fund
2) Cash out stock options and pay down rentals
3) Cash out stock options and buy more rentals
4) Don't cash out
5) Other - You tell me!

Again, this is what you personally would do.

 

[W2R]

Personally? I'd choose (1), cash out the options, and put it into an index fund, and take the tax hit. I'd also cut my spending down to about $45K, but that's just me.

I don't suppose that anyone else here would agree on any of this.

 

[Closet_Gamer]

My guess is that not all of your options are struck at the same price. You're also probably get reloaded with options every year. Given the run in markets over the last few years, your older options are likely deep in the money while the newer ones are less so. By cashing the old ones, you can probably take a sizeable chunk of your gains off the table while leaving a lot of upside with the remaining options.

I would cash out the deep in the money option (perhaps $350k?) and invest it in a mutual fund. Let the rest ride. Repeat next year.

(This is exactly what I do.)

 

[Dd852]

Cash out the options and invest in the broad market. Once you're out, you don't want the financial dependency on the old company's management and results - no matter how stable it seems

 

[growing_older]

I don't like rentals, too much work, so I'd sell those.

I don't like too many eggs in one basket, so I'd pare down the options.

I don't like paying unnecessary taxes, so I'd gradually cash out the options in hopes of minimizing the tax bite. If you are still working and that's the income that puts you in the high tax brackets, I'd be maximizing all the 401k, IRA, etc possible and consider holding the options until I retire to improve the tax impact.

I like a modest lifestyle, so I'd want to see if W2R's 45k is possible, or at least move toward that, and if so maybe ER now.

 

[broadway]

Own two rental properties with mortgages: Cash flowing about $6k per year.

Why? Doesn't seem like much of a return.

How much is your equity in these properties?

 

[Bruceski44]

Why wouldn't you exercise the options, but don't sell them and hold on to the Fortune 100 company stock. Over exposed?

 

[sengsational]

Negotiate a leave of absence for a year, and during that time without W2 income, cash out the options up to fill-up some lower tax brackets. And for that year, enjoy doing something besides working for the man.

 

[gcgang]

1 or 3, whichever you prefer, in the name of diversification.

If your "stable" company became unstable, you'd not only lose $ in your options, you might lose your job.

 

[Jerry1]

I don't know a lot about options, but I'd try to find some way to lower the tax burden on those and let that be what drives my decision. Mind you, if the company was suspect or there was some other reason to bail, that would be a more important factor in the decision. Finding a way to minimize tax on $500K, is worth the effort and some risk.

 

[Aerides]

Your current 1.5 is only yielding 40k per year? I'd look at your AA on that as well, that's rather low especially for the past few years. If that's your 5 or 10 year average, you are either not indexed or overly cautious.

I'd also dump the rentals and invest any equity you have there.

 

[NW-Bound]

He did not count cap gains.

The OP's dividend yield of $40K over $1.5M is 2.7%. It is high compared to the S&P's divy yield of only about 2%.

 

[CardsFan]

As one who lost SIGNIFICANT options when we were "spun off", take the money when you can. There are reasons to hang on, but be careful.

FYI, I was 30 days from options worth several $100k, Lost them, and was required to sell the ones I had within 1 year (I made money, but in 4 years would have had a whole lot more). Trust me, the value of the options factors into the company's costs of disposing of you. And they ARE disposing of you!

 

[Toocold]

Wow. I didn't know that there were so many index'ers on this forum.

On the options, yes, I have a significant amount and they have served me well but now represent too much of my net worth.

Why? Doesn't seem like much of a return. How much is your equity in these properties?

They are SFRs in a super nice neighborhood. It's meant to be passed down to my children. At least they are cashflowing

 

[Mdlerth]

What I would do

Any exercising of stock options will be at the highest tax rates.

That isn't necessarily true. You could exercise the options and purchase the underlying stock at the option price. Hold the stock for a year, and then sell. Any profit would then be taxed as LTCG (20%) instead of as ordinary income at your max (39.6%) marginal rate. You save ~100 large in tax.

The downside is you have to come with cash to buy the stock and park it there for a year. And it's possible the stock price could tank in a year, and your gain could turn into a loss. But if the company is as stable as you say, then it's worth doing, even if you had to borrow the $$ to make the purchase.

 

[Toocold]

That isn't necessarily true. You could exercise the options and purchase the underlying stock at the option price. Hold the stock for a year, and then sell. Any profit would then be taxed as LTCG (20%) instead of as ordinary income at your max (39.6%) marginal rate. You save ~100 large in tax.

Unfortunately my stock options are SARs and NSOs so I get a nice immediate income hit when I exercise. I have been holding off selling my ESPP stocks so that I can recognize long term capital gains.

 

[mh]

I was in a situation similar to yours and I did (1) more or less , putting half in Wellington and half in an index fund - I am completely happy with my decision 4 years later - ask yourself this, if you had 500k in cash would you invest it all in your companies stock ? Or would you go with an index fund or something else ? Your answer to this question should help you decide

 

[brucethebroker]

I don't like rentals, too much work, so I'd sell those.

I don't like too many eggs in one basket, so I'd pare down the options.

I don't like paying unnecessary taxes, so I'd gradually cash out the options in hopes of minimizing the tax bite. If you are still working and that's the income that puts you in the high tax brackets, I'd be maximizing all the 401k, IRA, etc possible and consider holding the options until I retire to improve the tax impact.

I like a modest lifestyle, so I'd want to see if W2R's 45k is possible, or at least move toward that, and if so maybe ER now.

Use a 1031 exchange to move the money from sold rentals into a home (downsize?) you would eventually live in. Rent it out initially (ask CPA for a number: 1 year seems to be a common recommendation.) Then remove renter, and move in. No taxes (recapture/cap. gains) due until you sell it. Live there until you die....or sell later and have prorated capital gains

 

[pb4uski]

I would do 1 to reduce as is necessary to reduce my exposure to the employer to less than 5% of my net worth. Too many people have been burnt by being over exposed to employer stock.

IOW, the potential benefits of diversification exceed the tax cost which is something that will ultimately need to be paid anyway.