Sep 15, 2022
Understanding severance packages (Part 3 of 5)
Part 3: Stock awards and investment portfolios
Whether you’ve been at your place of employment for one year, one decade or your entire career, being dismissed from your job is never easy.
Aside from the emotional aspects of upending your daily routine and leaving colleagues you’ve become close to, your sense of identity may also take a jolt as people are often defined – rightly or otherwise – by what they do for a living.
As you weigh your options for next steps, such as finding another job in your field, trying a new career path, starting your own business, or retirement, there are important financial considerations related to being let go.
In our five-part series on severance-related issues, we’ll explore several key areas pertaining to your finances that you should know about, in case you find yourself in this challenging position.
In this article, we discuss things to consider about stock awards and your investment portfolio.
Managing your stock awards
Many companies offer long-term incentive awards to key employees. Such awards often consist of stock options, restricted stock and/or performance-based restricted stock. For some people, stock awards represent one of the largest assets on their personal balance sheet. Therefore, it’s wise to create a strategy to unwind these stock positions once you’ve learned your role at work is being eliminated.
The awards have vesting schedules that may be accelerated based on the criteria in your severance package, and some awards may expire worthless. To maximize after-tax value, it’s important to account for this in your financial plan and understand the cash flow and tax implications of your stock strategy.
When restricted stock or performance-based stock awards are released, the award’s fair market value is taxed at ordinary income tax rates and reported on your pay stub. For tax purposes, your holding period begins once the shares are released to you. Consequently, selling shares immediately after release should result in negligible capital gains tax.
If you sell within 12 months, any gain is taxed at short-term capital gains rates (i.e., ordinary income tax rates). Waiting 12 months to sell after shares are released means any gain will be taxed at long-term capital gains rates (federal and potentially state).
Finally, understand the impact of additional released company stock on your portfolio’s concentration in that stock. If you’re entering retirement, we recommend limiting concentration in a single stock to no more than 10% - 15% of your investment portfolio, to keep yourself adequately diversified.
Maintain an appropriate investment portfolio
A well-constructed investment portfolio is key to long-term financial success, and should reflect any stock awards you may receive. Your portfolio is critical to building and preserving wealth, and should be designed to fit your cash flow needs, time horizon, risk tolerance and tax objectives. We believe that successful investing requires a long-term perspective and disciplined approach that avoids short-term emotional mistakes.
A comprehensive strategic asset allocation should form the foundation of any portfolio. At your workplace, most of your investment assets might be concentrated in the company 401(k) plan, with limited investment choices. After your separation date, you may roll these assets into an IRA with many investment choices to help achieve an optimal asset allocation. While having this flexibility is nice, it can be overwhelming to sift through all the possibilities and arrive at a suitable portfolio. Different life stages and other circumstances will dictate your desired mix of investments, cash flow planning and how to minimize tax.
At CI Private Wealth, we offer investment management services using sound investment disciplines that are carefully coordinated with customized financial planning. Our goal is to enhance your wealth and protect your capital over the long term. Through ongoing monitoring and evaluation, periodic tactical shifts and flexible managers, we can help you take advantage of investment opportunities while mitigating risks.
We’re here to help
Over the years, our team has helped many corporate executives and professionals make decisions about their severance and navigate this complicated, often overwhelming process. We’ll develop a personalized strategy, including investment recommendations, to help you make the most of your severance package and position your finances for long-term success.
If you have questions regarding your company stock awards and investment portfolio, please contact a CI Private Wealth advisor today.
Other topics in this series
- Severance and deferred compensation
- Pension plans
ABOUT THE AUTHOR
Lisa is a Partner and Wealth Advisor at CI Brightworth and has served as chairwoman of CIPW’s Business Development Committee. In addition to working with clients, Lisa has published three books, Girl Talk, Money Talk. The Smart Girl’s Guide to Money After College; Girl Talk, Money Talk II. Financially Fit and Fabulous in Your 40s and 50s; and CI Brightworth’s first book, Building Your Wealth Inside Corporate America. Lisa has been featured in The New York Times, The Wall Street Journal, YahooFinance, CNBC.com, and many more, and frequently speaks at seminars across the country.
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