8 Ways to Integrate Equity Compensation Into Your Retirement Planning

Summary: Morgan Stanley at Work shares eight tips to help you make the most of your equity compensation as you save for, near, and enter retirement.

Equity compensation can be an incredibly valuable workplace benefit—whether it’s in the form of stock options, restricted stock units (RSUs), or an employee stock purchase plan (ESPP), equity offers you a way to share in your company’s success. 

But what about your own long-term goals? According to a recent survey, 60% of stock plan participants would like retirement planning information¹—more than any other financial topic. Yet not everyone thinks about using their equity compensation as a tool to build wealth for retirement. While there are many factors to consider, from vesting schedules to taxation to market volatility, you can build financial strategies for the future with your company equity as a key component.

Let’s start by looking at a few important considerations for your equity compensation at each stage: saving for retirement, nearing retirement, and entering retirement. 

1. Get involved and stay engaged.

The first place to start is a simple one: Consider taking advantage of any retirement and equity benefits available to you at work, and know the details of each. That means not just participating in your 401(k) or other employer-sponsored plan, but understanding contribution limits, company matches and automatic features, as well as exploring retirement savings plans outside the workplace, like Individual Retirement Accounts. Understand the rules and requirements of your company stock awards and explore the ESPP if one is offered. Remember, like all investments, the value of the underlying shares of your equity compensation may fluctuate in price.

2. Think about retirement with every equity compensation payout.

When you receive a payout, it’s OK to treat yourself to something you’ve always wanted or perhaps start that long-awaited home improvement. But it’s also a good time to give your retirement savings a boost. Consider contributing a percentage point more of your salary to your workplace retirement plan or IRA or funding an investment portfolio dedicated to generating retirement income.

3. Be aware of overconcentration.

One of the most important aspects of building a portfolio that includes equity compensation is balancing your ownership of company stock against a well-diversified overall financial strategy. Your investment portfolio includes stocks you own as part of your workplace retirement savings account, your personal investments, and more. A diversified portfolio can help you balance risk and potential reward, whereas overconcentration in any single asset (including company stock) can leave you too dependent on a single asset and overly exposed to market volatility. As a general rule of thumb, keeping no more than 10–15% of your investable net worth invested in a single stock may make sense, although this may not be the best strategy for your own individual needs. You may wish to consult with a Financial Advisor about an asset allocation that makes sense for your specific situation.^2,3

4. Know where equity compensation fits in.

With retirement in your sights, it’s important to have a clear picture of how much income you’ll need to support your lifestyle. Decide what role you expect your equity compensation to play here: Do you see it as a critical piece of the puzzle, or as a nice cushion to supplement your other income sources? Or could you even retire early by using your current equity compensation holdings as a bridge until you can tap into other assets, like your 401(k) and Social Security benefits? A Financial Advisor can help you answer these questions and more.

5. Tie up any loose ends long before you set your date.

Before you enter retirement, there may be some actions you need to take or requirements you need to satisfy with your equity awards. While an employee stock purchase plan (ESPP) will likely end when your employment does, stock options or RSUs may be subject to different vesting schedules as you near retirement, post-termination exercise periods, and length-of-service or age-at-retirement requirements (see below). Make sure you understand and plan for these conditions, or you may risk forfeiting shares or not being able to sell shares when you’d planned to.

6. Brush up on the language of equity compensation and retirement.

Get familiar with these terms, and find out how they might affect you: 

• Vesting schedule. Often issued when you're awarded an equity compensation grant, it details when and how you receive the award. Usually based on a set time period, but can also be based on metrics like stock prices or earnings.
• Post-termination exercise period. The period after your service with an employer ends during which vested options must be exercised before they expire, commonly 90 days.
• Age-at-retirement and length-of-service requirements. As with some retirement benefits, some equity compensation plans may require employees to meet minimum age and-or service thresholds in order to exercise options and use equity compensation in retirement.

7. Enjoy the income, but don’t forget about taxes.

You should always factor in the impact of taxes as you plan for retirement, but it’s especially important do so when you’re actually entering retirement and your sources of income will be changing. If you sell shares of your equity holdings to generate retirement income, there will likely be tax consequences—whether that’s owing ordinary income taxes, capital gains taxes, or both. This may be a key time to work with a tax professional, who can help you plan the timing of any stock sales to spread out the tax burden, as well as with a Financial Advisor, who can help you manage withdrawals and retirement cash flow.

8. Do what matters most to you.

When you’ve retired from a company after many years, determining what to do with your shares can be a complex—and perhaps even emotional—decision. Just remember that once you retire, you deserve to enjoy the fruits of your labor. Now may be an opportunity to use your equity compensation for something that’s meaningful to you, from travel to philanthropy to funding a passion or new business venture. 

1. ESPP Participant Survey Results 2021, Morgan Stanley at Work 
2. “Top 10 Financial-Planning Rules That Everyone With Stock Options Needs To Know,”  available at https://www.mystockoptions.com/articles/ten-financial-planning-rules-everyone-with-stock-options-needs-to-know. Accessed 6/2/2021
3. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.

The source of this Morgan Stanley article, Remember Equity Compensation When Planning for Retirement, was originally published in April 2022.