You have company stock. That’s great! But just like any other financial asset, how you use it makes all the difference. On one hand, this part of your benefits plan is an incentive for you to stay with your company and a reward for your hard work and loyalty. On the other hand, there are implications that could make a difference—positive and negative—to your financial plan, namely taxes, diversification, and risk.
This begs the question: how much company stock should you have? Here are a few things to consider as you weigh the pros and cons.
The Risk Factor
Personal finance gurus often tout the importance of diversification, but how do you adhere to this rule when so much of your wealth is tied up in your company and large portions of your future compensation will come in the form of company stock?
If the company performs poorly or there is an overall bear market, it will depress the stock price and you could be laid off at the same time. Without a solid plan, your personal income, insurance, and portfolio could be blown up all at once. Unfortunately, history has many examples of this happening to corporate executives. Back in 1999 when Enron filed for bankruptcy, more than $1 billion in employee retirement savings simply evaporated. During the financial crisis in 2008, many Lehman Brothers employees experienced the same thing. (1)
To avoid this financial double whammy, most financial advisors agree that your company stock holdings should make up no more than 10% of your total portfolio—and that’s only if your company is stable and in good standing. If your company is experiencing any uncertainty or you have reason to believe the future isn’t bright, it might be wise to push your holdings down to 5% of your portfolio or even get rid of them altogether.
Remember, you may also be invested in your company indirectly through other funds you own, so you may have more assets tied up in one company than meets the eye.
Potential Tax Troubles
Certain investments are taxed differently than others. In this case, knowledge is power and it’s important to understand how your company handles your stock options. For example, if your stock is held inside a qualified retirement plan, such as your 401(k), you won’t pay taxes on the gains until you withdraw the money. But if the stock is provided outside of a 401(k), you will incur capital gains taxes when you sell your shares at a profit. But like anything having to do with taxes, the type of stock you have and how it was given will have different tax rules, so be sure to speak to your financial advisor about your company stock’s tax liability and how the amount of stock you hold will affect how much tax you will owe in retirement.
When to Make an Exception
That said, holding company stock isn’t always a bad thing. And depending on the company, your risk tolerance, and the incentives offered, there are circumstances when exceeding the 10% rule is appropriate.
For example, some contribution match programs only offer to match with company stock. If this is the case (and your company is in solid financial standing), it might be worth the risk to temporarily boost your holdings.
The key word here, though, is temporarily. Once you start moving past the 10% range, it’s time to think about liquidating that stock and diversifying it among other holdings in your plan.
Do You Have Employee Stock Questions?
You likely do. Company stock can get complicated and most employers don’t give their employees an understandable crash course in how to use it. As you can see, there are multiple variables at play here with no one right answer. The key to remember is, the more you have tied up in company stock, the more important it is to make sure the rest of your investments are diversified well.
At Whittenburg Wealth Partners, we can walk you through your unique financial situation and make sure your portfolio is designed to keep you on track toward your ideal future. If you think our firm would be a good fit for your financial needs, easily schedule a no-fee, no-obligation virtual appointment or contact us at 801-839-7050 or austyn@whittenburgwealth.com.
About Austyn
Austyn Whittenburg is a wealth planner and partner at Whittenburg Wealth Partners, a family-owned and family-operated financial and wealth management firm located in Salt Lake City, Utah. Austyn has 7 years of experience as a wealth planner and spends his days helping business owners, emerging successful families, and their ensuing generations simplify their financial lives and discover meaningful solutions. Austyn received a Bachelor of Science in Finance from Brigham Young University and holds the Certified Financial Planner™ (CFP®) and Certified Business Exit Consultant (CBEC®) credentials, his FINRA Series 7 through LPL Financial and 66 registrations through LPL Financial and Stratos Wealth Partners, and his life, health, disability, and annuity insurance licenses. Austyn is active in his community of Herriman, Utah, where he resides with his wife, Ciera, and two young sons, Grayson and Graham.
This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal, or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
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