Solving Unique Retirement Challenges for Corporate Employees

I was recently joined on?Upticks?by?Falcon Wealth Advisors?Co-Founder and COO Cory Bittner, CRPC?, to discuss how our team can help solve some of the challenges corporate employees face as they plan for retirement. Many of our clients have worked at large public corporations, and serving this type of client is one of our specialties. A summary of my conversation with Cory is below.

Jake:?Thanks for joining me today, Cory. I would like to discuss four topics that will be especially relevant for people who have had decades-long careers at large public companies. As you know, for many of our clients, it’s not a matter of?when?they want to retire, but?why?they want to retire.

Many of these clients had enough money to retire years ago, which means conversations with them focus on why or why not they should consider retirement. We don’t try to encourage or dissuade any client, but rather aim to help them make the right choice for them. What types of conversations do you have with people who are considering retirement?

Cory:?I like to remind clients that retirement is not an age or a number in your account. In addition to having a financial plan that will help guide clients into and through retirement, I also encourage them to have a plan to stay active and engaged in retirement. It’s important to think about not only how you will spend your?money?in retirement, but how you will spend your?time.

According to the Wharton School of the University of Pennsylvania, where you and I have studied, retirees who give the most back—whether it’s through charitable donations, volunteering and more—tend to be the happiest in retirement.

Jake:?Yes, I’ve learned from a coach that when you’re feeling frustrated internally, a helpful thing you can do is focus on the external by giving and providing kindness to others. Doing so reflects back to you and can lead to you feeling better.

I’m not crazy about the word “retire” because it sounds so final. In reality, retirement should be a new, fulfilling chapter. It’s fun to meet with clients who are retiring and help them think about all the ways they can spend the 40+ hours a week they previously devoted to work. They’re able to give that time to their family, or a charity, or to a new business they want to create—or to any number of places.

We encourage people to think about what their purpose in retirement will be?before?they retire. As you regularly say, Cory, what are you going to do at 10 a.m. on a Tuesday?

What’s interesting is that a lot of our clients who are working love their jobs, even if the job is stressful. Oftentimes their identity is wrapped up in their job and it’s a huge part of their purpose in life. What do you tell someone like that as they contemplate retirement?

Cory:?I encourage them to think about their long-term plan beyond their job and how they can feel complete in retirement without their career. Like you said, it’s important to think about these big questions before you retire.

Jake:?It’s not easy to think about what the next 5, 10 or 20 years look like, but it’s important. The harsh reality is that sometimes large corporations will tap you on the shoulder and invite you to leave if they need to cut their budgets—even after you’ve given blood, sweat and tears to that company. These large companies go on after you retire. That’s why it’s important to have that perspective and make the right choices for?yourself.?If you want to take planning your purpose in retirement to the next level, I’m happy to refer you to a retirement coach who specializes in helping people manage the emotional side of retirement.

Let’s now talk about the financial piece of the puzzle. The second topic we will discuss today is company stock awards and how they vest. Sometimes referred to as “golden handcuffs,” many companies will offer shares of company stock in the form of options, restricted stock, etc. if you stay working at the company for a set period of time. These shares may not vest if you were to retire or move to another company before that set period of time ends.

Many executives receive stock awards every year, so retiring often involves being comfortable with leaving some money on the table through unvested shares. What do you tell clients who want to retire but are apprehensive about leaving before all their shares fully vest?

Cory:?I remind them it’s likely they will be leaving money on the table regardless of when they retire, and I encourage them to think about “how much is enough.” Our team at?Falcon Wealth Advisors?can use our knowledge and technology tools to help clients determine how much money they will need to maintain their current lifestyle in retirement. The two questions a client in this situation needs to ask themself are “Do I have enough?” and “Have I had enough?” Whether you’re happy or unhappy in your role is a huge factor as you contemplate retirement.

Jake:?And you could make a case that anyone who has a salary and retires is walking away from money. When you look at it that way, all retirees leave money on the table. As you alluded to, we have software that can show a client what their financial plan will look like if they retire versus what it will look like if they stick around to let their company stock vest. At some point, our clients in these situations have to weigh if their time is more valuable than the money they’re walking away from.

A tip for people who would like to retire: consider tactfully asking your supervisor or HR team if there is an opportunity for you to agree on an exit package. It’s possible the company would allow you to depart and keep the company stock awards before they were supposed to vest. The reason companies sometimes do this is because it allows them to replace you with someone earning a lower salary.

Our third topic is tax planning. Is there an ideal time for people to retire, from a tax planning perspective?

Cory:?Retiring in the early part of the calendar year gives you some flexibility around taxable income. But at the same time, here in the Midwest, it can be tough for people to retire during the winter. It’s more difficult to go out and enjoy your newfound freedom if it’s 10 degrees outside.

Jake:?Indeed. And in regard to tax planning, if your company’s 401(k) plan allows for it, it may be worthwhile to max out your contributions in the early part of the year before you retire. Same goes for your health insurance deductible.

I would prefer it if a client retired in the first or second quarter of a year. Doing so gives us an opportunity to tax plan around your company stock awards and other earnings and assets. If you wait until the end of the year and you’ve already collected a salary all year, we have fewer tax planning options.

If you have company stock in your 401(k), I recommend learning more about?net unrealized appreciation, which allows you to pay capital gains tax rates on the stock appreciation (not the basis, that is still taxed as ordinary income), rather than ordinary income tax rates—which are typically higher. Retiring earlier in the year makes it easier to take advantage of?net unrealized appreciation.

Cory:?Yes. If you own company stock, it’s worth asking your fiduciary wealth advisor if net unrealized appreciation makes sense for you and your situation.

And speaking of timing, if you retire in the early part of a month, your health insurance through your employer will typically cover you for the remainder of that month.

Jake:?And that leads into the fourth topic I want to discuss today. It’s important to have a plan for health coverage before you retire, especially as many of our clients retire before becoming Medicare eligible at age 65.

I find it interesting that clients who have plenty of money still don’t want to pay $1,000-$2,000 a month for healthcare in retirement. They simply don’t like spending that much money on healthcare after having health insurance through their employer for decades. What do you tell a client who wants to keep working in large part because of health insurance—even though their financial plan supports them retiring and paying for their health coverage?

Cory:?If someone says they don’t want to retire because they don’t want to pay for health insurance, I will wonder if that’s a bit of a cop-out. While that’s a legitimate factor, I think it’s also possible this person may not have yet thought about what their purpose will be in retirement, and they have trepidation about encountering that unknown.

Jake:?And it’s ok to admit you’re scared about retiring. We should also note there are many people who can’t afford to pay for health insurance in retirement, which is a whole other topic. But I’ve found people really dislike paying for health insurance in retirement, even if they can afford it.

I would remind people in this position that health insurance in retirement is just another bill in life that we don’t necessarily enjoy paying, like the electric bill or filling up our gas tanks. I would recommend they view health insurance as a utility. Not having the right health coverage and having a large, unexpected medical bill can do permanent damage to your financial plan.

If you do have to purchase your own health coverage in retirement, our team at?Falcon Wealth Advisors?can connect you with a health insurance agent who can shop the open market and help you choose the right coverage. Even if you know you’re going to use?COBRA?in the early part of your retirement, I still think it’s worthwhile to have a general idea of how much health insurance will cost in retirement.

Cory:?And I would rather spend money on healthcare than taxes. Let’s imagine you have a few million dollars in a traditional IRA. Regular readers and listeners know the government requires investors to begin withdrawing Required Minimum Distributions (RMDs) from pretax retirement accounts—like traditional IRAs—beginning at age 72. These RMDs start at about 4% of the portfolio’s value and increase as you get older. Investors have to pay ordinary income taxes on these distributions.

So here’s my point: I think I would rather retire at, say, 60 and use money from my traditional IRA on healthcare costs rather than continuing to work and having to use that same money later in life to pay income taxes. It’s not fun to spend money on healthcare or taxes, but I think I would rather spend it on the former, especially if it allowed me to retire earlier.

Jake:?Well said. And that highlights why financial planning and tax planning are so important to us at?Falcon Wealth Advisors. If you would like to learn about everything we have to offer and how we can help you prepare for retirement, please contact our team today. I especially encourage you to contact us if you worked at a public company that has been purchased and you have decisions to make around your company stock. You can reach me directly at?[email protected].

Clients choose to work with us to enhance their financial literacy and explain exactly what?their?financial plan means to?them.

?Hightower Advisors, LLC is an SEC registered investment adviser. Securities are offered through Hightower Securities, LLC member FINRA and SIPC. Hightower Advisors, LLC or any of its affiliates do not provide tax or legal advice. This material is not intended or written to provide and should not be relied upon or used as a substitute for tax or legal advice. Information contained herein does not consider an individual’s or entity’s specific circumstances or applicable governing law, which may vary from jurisdiction to jurisdiction and be subject to change. Clients are urged to consult their tax or legal advisor for related questions.