Considerations for corporate executives before retiring

When to retire is something nearly all people struggle with, but for corporate executives, this question comes with some additional considerations.

For starters, their compensation arrangements often come with an added layer of complexity as they navigate everything from deferred compensation and vesting windows to heavy stock concentration and the need for diversification.

But beyond that, for many, their life’s work has been attached to leading and influencing a business, so making the decision to retire can be impacted as much by emotion as by their personal balance sheet.

Harry Drozdowski, family office senior trust advisor at Wealth & Investment Management, Wells Fargo Bank, N.A., shares some key considerations for corporate executives as they consider retirement.

Take inventory of your financials

One common mistake that Drozdowski sees is executives waiting until the last minute to take inventory of what they have.

“It really is an issue of time. They are so busy running a company that sometimes they neglect their own planning,” said Drozdowski. “The sooner they start, the better.”

Like all investors, they first need to evaluate the status of their standard retirement accounts (401(k)s, IRAs, etc.) along with an honest evaluation of their income, debt, and spending. That’s what Drozdowski calls the retirement baseline. From there, they need to create a comprehensive list of additional compensation with operative dates. Examples of this include stock options, restricted stock units, deferred compensation plans, and specialty assets.

“In most cases, this type of compensation has vesting or severance dates that need to be met before the executive can fully access the assets, and in nearly all cases, there are capital gains tax considerations to be mindful of,” said Drozdowski.

Embrace diversification and tax planning

Because many executive compensation plans are stock-based, Drozdowski finds that executives are often over-concentrated in one company or industry.

“This part of retirement planning for executives can be particularly difficult because there is an emotional attachment to the company they work for and a reluctance to sell,” said Drozdowski.

Even so, executives need to consider balancing their portfolio to avoid taking on too much risk.

Working with an investment professional, there are several strategies that can be considered, including hedging or options contracts.

Hedging in stocks is a risk management strategy where an investor takes an opposing position in a related asset or security to offset potential losses from an existing stock holding; whereas options contracts are an agreement between two parties that allows the buyer to buy or sell underlying stocks at a predetermined price within a set time.

Of course, Drozdowski stressed, all of this should be done with taxes top of mind.

“Ultimately, the executive is going to have to pay taxes on that compensation, but they have flexibility on when that happens,” he said.

For example, if an executive has plans to relocate to a state with a lower income tax, it may be prudent to hold off on selling shares until they’ve established residence elsewhere, explained Drozdowski. Or if an executive knows that they won’t be getting a large salary in the future, it may be best to wait on selling until then.

Lastly, Drozdowski said that many executive compensation structures open the individual up to the Alternative Minimum Tax (AMT) system which requires them to calculate their tax liability twice —  first, under ordinary income tax rules, then under the AMT — and pay whichever amount is highest.

Prepare for the future

Drozdowski stressed that beyond crunching numbers, executives should prioritize the estate planning and family legacy conversation ahead of retirement.

“Many of these individuals have a big public footprint, so asset protection through something like an irrevocable trust should be considered,” said Drozdowski.

Some additional questions to ask yourself:

• How do you want to be cared for as you age?
• What do you want your money to do for you and your family in the future (philanthropy, family inheritance, etc.)?

“While people can do all this great wealth planning, they can’t neglect the qualitative planning,” said Drozdowski. “It can make or break those golden years.”