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Wealth Planning Challenges Corporate Executives Face

As you climb the corporate ladder, the financial rewards can be lucrative. It can also present some unique challenges for your overall wealth plan. What is the best payout election for your Non-Qualified Deferred Comp plan? How much money are you leaving on the table with unvested stock options if you take the new job offer? How much will you have to pay in taxes when your Long-term incentive reward pays out next year? These are just a few of the many questions corporate executives must answer when planning for their future.  A limited knowledge of your company’s retirement plan, benefits package, performance awards and long-term incentive programs could cost you thousands of dollars in lost income as well as taxes. In an effort to avoid those mistakes, let’s review some of the most common wealth planning challenges corporate executives face.

Determining Your Deferral into Your Company 401k Plan

Have you ever deferred a portion of your salary to your company’s 401k plan only to receive a letter in the mail accompanied with a check the following year that informs you that you can’t defer that much into the plan?  Provided you were under the IRS deferral limits, chances are your company’s retirement plan failed it’s year-end testing.  Asking your HR professional if highly compensated employees can max out their contributions into the retirement plan isn’t often high on the list of questions during an interview with a new company. It should be. The IRS sets the annual deferral limits along with the catch-up provisions. However, your plan also must pass various testing (I’ll spare you the reasons) at the end of the year.  Depending on your company’s plan design, highly compensated employees may not be able to max out the IRS limits.  If you have planned to use your 401k plan to save for retirement and fail to ask the right questions of your employer, you may find yourself having to find new vehicles for saving.

Understanding the Roth 401k

Many companies are now offering a Pre-tax and a Roth 401k option. One of the most common misconceptions I hear is, “I can’t contribute to the Roth 401k because I make too much money.”  The confusion here centers around the difference between a Roth IRA and a Roth 401k. The Roth IRA absolutely has a contribution limit that is determined by your Adjusted Gross Income (AGI).  As a high earner, it is probable that you earn too much to directly contribute to a Roth IRA. However, the beauty of the Roth 401k is that it is not subject to the same income limits.  No matter what your income is, if your company offers a Roth 401k option you are allowed to participate (provided you meet your plan’s other eligibility requirements).  The benefit of contributing to a Roth 401k is that while you must pay taxes on the income now, provided you follow the distribution rules, you won’t pay taxes if you withdraw from it during retirement. This means you never paid taxes on the earnings which is why it can be a significant wealth building tool.  Determining how much to defer to a Pre-Tax 401k vs. a Roth 401k option is another decision point you must consider, but you should at least be aware that you can contribute to the Roth 401k.

Realizing the Risks of a NQDC Plan

Your employer may offer a Non-Qualified Deferred Compensation plan (NQDC) to its highly compensated employees. It’s considered a benefit for corporate executives because it allows you to defer a larger portion of your compensation.  Another benefit is that you can schedule distributions throughout your career – not just during retirement. A NQDC plan differs drastically from a 401k plan, and it’s important to understand the differences.  A 401k plan is considered a qualified plan. As a qualified plan, it must abide by the Employee Retirement Income Security Act (ERISA).  ERISA provides a level of protection that is not afforded to a non-qualified plan. The NQDC plan is merely an agreement between an employer and employee.  There is substantial risk which includes losing your assets in the NQDC plan, especially if down the line your employer files for bankruptcy. When you are early in your career, trying to predict your company’s future in 30 years is challenging.  Knowing how to weigh the risk, plan your deferrals and your distributions can be intimidating even to the most seasoned executive. It’s critical to understand how much risk you can tolerate within your financial plan.  Participation in the plan should also warrant a tax planning conversation as you determine your elections.

Evaluating the Alphabet Soup of Corporate Executive Compensation

Acronyms. Get to know them well. As it relates to the wealth planning challenges corporate executives face, understanding your financial acronyms may be the most important to your financial success.  ESPP, RSU, PSU, and LTIP are just a few that will impact your planning. Equity performance rewards and long-term incentives often come in the form of company stock and have a stated vesting period. The vesting period determines the timing of the payout.  Let’s look at an example of how this impacts wealth planning. Consider if you were offered an $80,000 LTIP (Long-term Incentive Plan) that will pay out in RSUs (Restricted Stock Units), but it has a 48 month vesting period and an additional six month waiting period before you can sell them.  This means you would be able to potentially realize that money in four and a half years.  Will your company withhold a certain amount of your shares to cover your tax bill when the shares vest?  Will you decide to sell all the shares in four and a half years to receive the $80,000, or will you strategically consider a plan to diversify?  These are just a few of the questions you will need to consider in your wealth planning.  We’ll take a look later at what happens to these financial rewards if you decide to leave the company.

Thinking Long-Term for Your HSA

Speaking of acronyms, let’s talk about another one – the HSA. A Health Savings Account, commonly referred to as an HSA, is a savings account that allows you to defer a portion of your salary on a pre-tax basis to save for qualified medical expenses.  Unlike the FSA (Flexible Spending Account), the funds in an HSA rollover from year to year. With a maximum contribution limit of $7,000 annually for a family (if you are younger than 55), this small but mighty planning tool is often overlooked in the wealth planning for corporate executives. The common objection for corporate executives not contributing the max to an HSA is that you don’t have many medical expenses and wouldn’t use it. This is exactly why you should consider it!  If you think beyond the now and the current use for an HSA, it has the potential to be the triple threat of retirement planning.  You won’t pay taxes on the money contributed.  Provided that you use the funds to pay for medical expenses at some point, you won’t pay taxes on the earnings or when you make the withdrawal.  Rising health care costs could create a significant expense for corporate executives that want to retire before age 65 and Medicare.  When thoughtfully used, an HSA could be a solution to this problem.  HSA funds can also be used to pay for long-term care insurance premiums as well as Medicare premiums. Think twice before you overlook the HSA during open enrollment.

Unwinding a Concentrated Wealth Position

The definition of a concentrated wealth position can vary.  For our purposes, we will define it as any position that is more than 10% of your overall investment planning portfolio. As we examined earlier, company stock options can be lucrative. They can also create more risk. The longer you work for a company your chances for a concentrated wealth position increase.  You are likely awarded new performance rewards and incentives in the form of stock options each year which begin to layer on top of each other.  As the rewards vest, you’re faced with the decision of selling, donating or holding the position.  If you are feeling bullish about your company’s future, it’s tempting to hold the position so that you can leverage the future growth. What happens though if the future wasn’t as bright as you thought it might be? If you think it would never happen to your company, consider the following names: Texaco, General Motors and Enron. A pandemic in 2020 also accelerated the bankruptcies of JC Penney, Neiman Marcus, J. Crew, Guitar Center, and Pier One.  Could you afford to lose all the wealth associated with your company stock and still live the life you want to live?  If not, it’s time to consider diversification.  Even if your company never faces bankruptcy, you will still need to understand tax implications of holding or selling your company stock. Planning wisely could save you thousands of dollars in taxes.

Breaking the Golden Handcuffs

Incentives and performance awards are referred to as golden handcuffs for a reason – they are designed to deter you from leaving your current company.  Companies spend a great deal of money to recruit, hire and train employees. Yet, corporate executives are talented individuals and highly sought offer employees so there is a high probability you will have to consider breaking the golden handcuffs during your career. That presents the challenge of understanding what money you would be leaving on the table should you leave your current company. Non-vested awards and incentives are forfeited when you leave, which equates to loss of wealth. If you were participating in a NQDC plan, any vested money you have in the plan could be distributed to you immediately depending on the terms of your agreement.  Realizing the income that you had intended to defer for a later period may create a sizeable taxable event. Negotiating an employment offer with a new company will require you to understand what you are leaving behind. Do not be afraid to ask for a reasonable equity buy out.  Evaluate the terms and vesting period of the new awards the job offer includes. Compare the timing of the wealth pay outs you are leaving behind to the new terms of the wealth you are being offered.  Consider the culture of both companies. More money does not always equate to more happiness or job satisfaction. 

Finding the Right Partners

Often, the best strategy for managing your executive compensation rewards is to not try and tackle it alone. You are a leader for a reason. You know how to identify talent in others, delegate work and ultimately manage the team to produce the overall results you desire to achieve.  Identifying and working with a good team of professionals, including a CPA, a Wealth Advisor, and an Estate Attorney, to manage your wealth should be no different. A proactive team will seek to educate you, involve you as needed, guide you where appropriate and ultimately allow you to spend more time doing what you do best. It leaves you free to do the things you love and to dream about the life you want to lead in the future.

Article by: Jennifer Fensley, CFP®️,CRPS®️

If you would like to learn more about CapSouth Wealth Management please visit our website at www.CapSouthWM.com  If you would like to have a conversation to discuss this article further, I’d love to chat. 334.673.8600.  capsouthwm.com/services/financial-estate-planning/

CapSouth Partners, Inc., dba CapSouth Wealth Management, is an independent registered Investment Advisory firm.  Information provided by sources deemed to be reliable.  CapSouth does not guarantee the accuracy or completeness of the information.  This material has been prepared for planning purposes only and is not intended as specific advice. CapSouth does not offer tax, accounting or legal advice. Consult your tax or legal advisors for all issues that may have tax or legal consequences.

The “If/Thens” of Financial Stewardship

Financial Stewardship is often described with words such as planning, management, attention and care. All good words. All right on point. The key, though, is how do you make it a topic worth spending your time on? Well, it’s all in how you package it. For example, I’ve really come to enjoy if/then statements. The perfect combination of hypothesis and conclusion. My family uses them on me all the time:

Son # 1: “If I get a full scholarship, then you have to buy me a new car.”

Son # 2: “If I make this shot, then I get to stay up later.”

Son # 3: “If you can’t guess what number I’m thinking of, then I get to keep your guitar.”

Son # 4: “If I eat twenty goldfish at one time, then you have to play basketball with me.”

Wife #1: “If you don’t put up these clothes, then I’m going to…” (You get the point.)

As you can see, conditional statements can cover a wide variety of subjects. That said, most of the above center around time and money – two things folks seem to always want more of.  And while I can’t provide you with more time, I can offer a few suggestions on the financial side. (See what I did there? Now you’re interested in financial stewardship.) So, here’s a quick list of financial if/then statements you may find valuable:

  1. If you don’t contribute to your 401K, then you might be missing out on the employer match.

Some employers will put a matching contribution into your 401(k) if you’ll just – contribute. That’s called free money, by the way. Technically, it’s called an employer match, and if you want as much of that free money as your employer is willing to give, then max the match.  For example, if they match 50% of your contribution up to 6%, then consider putting in 6%.  Disclaimer: Don’t stop paying your bills or putting food on the table in order to put money in your 401(k), but do consider taking advantage of this employee benefit if offered. The employer match is often a discretionary match, meaning, it’s up to the employer’s discretion to offer it or not. So, if you’re eligible for an employer match, look into it. You’ve heard the expression, “There’s no such thing as a free lunch?” Well, this is pretty close.

2. If you want to know where your heart is, then check your credit card or bank statements.

Warning: If you look, then you will surely find. Every dollar you make is going somewhere, right? Take ownership of that. You have the authority, if not the responsibility, to account for every dollar that comes in. Let’s be honest, not every purchase is accounted for or was part of your financial plan, now is it? It’s likely, as you have at least a passing interest in financial stewardship, that you have a good accounting of where your money is going. But life happens, and thanks to the marvel of auto-pay for example, you may have unwittingly fallen victim to subscriptions to music and video services, magazines, jelly of the month clubs, etc., that you weren’t even aware of…but that your kids were. (This may or may not have happened to me.)  And each and every month, they’re helping themselves to your dollars (the auto-pay…and your kids, too, possibly). And be aware, fraud is a big business. As in billions with a “b” in 2020. One report suggests that over $117M of that originated from social media scams alone. There are different rules with debit and credit cards as to how much of a fraudulent charge you may be responsible for, so check those statements for charges that may not be yours. Time is important here. Review often and report right away.

3. If you don’t model financial stewardship for your kids, then who will?

Please discuss financial stewardship with your kids. If you don’t model it for them, then culture will. The same culture that brings us such family friendly hits as Miley Cyrus, Howard Stern and The Bachelor. As part of our client experience, we engage in an Honest Conversations® exercise that highlights what clients value most out of life and serves as the foundation for their financial plan. More often than not, how financial stewardship was modeled for them when they were young is the impetus for how they model financial stewardship for their kids. It was either discussed as a family concern, or it was never discussed and deemed none of the kids’ business. I would encourage you to model financial stewardship for those you have influence with and bring them into the conversation (as age appropriate) thereby establishing a healthy appreciation for money and a head start on financial stewardship.

4. If you’re working and NOT saving for retirement, then what’s wrong with you?

I’ll spare you the grim statistics on the percentage of Americans who are nearing retirement and aren’t prepared for it. On second thought, let’s talk about it. In a 2019 GOBankingRates survey1 of 2000 respondents, 64% reported they will likely retire – broke. Here’s an even harder to believe statistic, 48% didn’t care. What? Here’s the deal. Your retirement is not your government’s responsibility, nor is it your employer’s.  It’s yours. So make a plan. Age is not an excuse, by the way. You’re never too young to be introduced to the value of planning and preparation. As a matter of fact, the younger the better!  Insurance is typically less expensive, your investment time horizon is likely longer, and your margin for course correction is typically much greater. Seek wise counsel. If you were only able to remember a single thing written in this article, then remember those three words:  Seek. Wise. Counsel.

5. If you think Social Security is going to take care of your living expenses during retirement, then you’re wrong.

Read most any recent article on Social Security and you’ll discover the uncomfortable truth. If changes aren’t on the horizon, then Social Security won’t be either. Reserves are projected to last until 2037, or so, unless significant changes are made. Still, Social Security is certainly worthy of your consideration, and we can assist with a strategy tailored to your plan. It’s a part of your retirement strategy, but it shouldn’t be your retirement strategy.

6. If you’re investing in the stock market and aren’t adhering to a financial plan, then you may be taking more (or less) risk than you need to.

We believe a well-designed financial plan is a vital component in reaching the financial goals you have for you and your family, and your investment strategy should support the goals within your plan. Your investment strategy is a tool – it’s not the plan itself. Once we determine how our clients want to live their one best financial life, we devise a plan, with a corresponding investment strategy to help them get there. And we prefer you not take any more risk than is necessary to accomplish your goals. So what happens if the amount of return that’s required to reach your goals is more than you’re comfortable with? That’s when priorities and tradeoffs are made. Rarely does financial stewardship or living one’s best financial life happen by accident. It requires action.

If you don’t know how much risk you should be taking to accomplish your goals and objectives, or maybe you’re not even sure where to start, then start with an Honest Conversation. We can have one.

7. And finally, if your son wants you to play basketball with him, then by all means – play.

They don’t stay 12 for very long, do they.   

If you would like to learn more about CapSouth Wealth Management please visit our website at www.CapSouthWM.com  if you would like to have a conversation to discuss this article further, I’d love to chat. 334.673.8600.  

by: Billy McCarthy, Wealth Advisor

164% of Americans Aren’t Prepared For Retirement | GOBankingRates

CapSouth Partners, Inc., dba CapSouth Wealth Management, is an independent registered Investment Advisory firm.  This material has been prepared for planning purposes only and is not intended as specific advice. CapSouth does not offer tax, accounting or legal advice. Consult your tax or legal advisors for all issues that may have tax or legal consequences.

This article contains external links to third party content (content hosted on sites unaffiliated with CapSouth). CapSouth makes no representations whatsoever regarding any third party content/sites that may be accessible directly or indirectly from this article. Linking to these third party sites in no way implies an endorsement or affiliation of any kind between CapSouth and any third party, including legal authorization to use any trademark, trade name, logo, or copyrighted materials belonging to either entity.

Young Professionals

Young Professionals and Retirement Planning

Young professionals have a lot on their minds these days. Perhaps furthest from mind is a retirement saving and investment plan, and maybe even further – estate planning. However, the earlier you start saving, investing, and planning, the better.

Setting money aside for the future can be easier said than done. After considering your rent or mortgage, student loan payments, other expenses, and trying to have just a bit of fun, the thought of investing and planning for retirement can seem ominous.  On top of all those factors, COVID-19 and the associated global recession have added much economic uncertainty.

Fear not, though – it’s not that bad!  Here are a few basic principles to get you started:

Become A Disciplined Saver

The optimal savings rate to meet retirement needs is often 15% or more of gross income. That may not be practical for you just yet, but the important point is to make savings a priority as soon as possible.  Compounding interest and time are your friends. The key is to begin saving at a consistent rate within your budget and to increase that savings rate when you can.

One of the best ways to stick with your savings plan is to develop automated savings strategies, such as having contributions made directly to your 401(k) or your investment account. Many 401(k)’s offer an automatic increase feature to bump your deferral up 1% each year so you don’t feel the increase as much.  On this note, we normally recommend contributing a percentage to your 401(k) rather than a dollar amount. This way your contributions increase along with your pay raises – when undoubtedly your lifestyle and retirement income needs increase as well.

Max the Match

Maybe the number one guideline in 401(k) investing is to max the match.  Many employers offer a matching formula by which, for example, they might match 50% of your contribution up to 6%.  That’s free money!  All you must do is save 6% of your pay towards your own retirement (which you should be doing anyway!), and your employer will give you another 3% of your pay towards your retirement. 

Due to the pandemic, many companies suspended or reduced their 401(k) matching contributions to save cash and avoid layoffs. Although such a move slows one’s accumulation of retirement funds, the bigger long-term damage is done when an employee stops contributing to the 401(k) if the employer stops matching.

Diversify Savings And Investments

It is important to remember that life happens…and often before we reach age 59½. Qualified retirement accounts such as your 401(k) are functionally locked away until you attain the age 59½, so that money may not be available in the event a cash need arises.  So, before you get excited about being able to max out your 401(k), consider diversifying your investment vehicles and saving some of those funds in a retail investment account or an individual Roth IRA. 

Roth contributions are made after tax and allow tax-free growth and withdrawals in retirement. They also typically allow penalty-free withdrawals up to the amount contributed. This provides some liquidity as well as an excellent tax benefit for accounts that appreciate substantially.

Having a growth mindset is central to building a good retirement plan while young. With many years until retirement, a young investor’s accounts should be weighted toward stocks, with enough diversification to protect against poor-performing stocks or industries. You should remember that success in the stock market comes over the long haul and you likely have time to ride out cycles and downturns. With a long time horizon and relatively low income in comparison to your later career earnings, young investors are in a unique position to realize the benefits of these vehicles.

Have Honest Conversations and Make a Plan

Begin early with efforts to identify your values and develop associated goals for your life.  This can be an even more important conversation when a spouse or prospective spouse comes into the picture.  How will you view and handle money?  Will you pay for your children’s education?  Do you want children?  Is travel and recreation of great importance to you, or would you rather spend those resources on a larger home?  Why are those different goals important to you?  

These are just a few examples of topics that often arise in our card game exercise called Honest Conversations®.  This engaging activity is an invaluable way to explore and identify values, to develop goals, and to begin a solid plan to provide guidance and a lens through which to view decisions as they are faced in the future.  Having that solid plan in place can also provide more confidence in your investment allocation, incentive to maintain or increase your savings rate, and peace of mind as you move forward towards accomplishing those set goals.

Estate Planning – Not Just for the Old and Wealthy

Estate planning may sound like an intimidating term that does not apply to you, but there are basic applications that you (along with everyone else) should consider:

  1. Durable Power of Attorney for Healthcare – As an adult your parents no longer have the legal right to access your medical information or to make decisions on your behalf.  Having a simple document drafted ahead of time to allow your parents, your spouse, or another individual to assist in these matters can provide for a smoother experience should injury or illness occur.
  2. General Durable Power of Attorney – Similar to the healthcare document referenced above, you should consider this document to allow your appointee to handle your financial and business affairs on your behalf in the event you become incapacitated.  If this gives you pause, the document can be drafted as a “springing” document that will spring into action at the time of your incapacity.
  3. Advance Directive for Healthcare – Often thought of as its predecessor, the “living will”, this document allows you to make selections as to your preferences for your treatment in the event of either a terminal illness or permanent unconsciousness.  You will be able to choose if or when you would like food, water, life support, etc., and you will have the ability to name a Proxy.
  4. Last Will and Testament – As you begin to establish yourself financially, you will likely own a home, vehicles, and other assets.  A basic will can direct where those assets flow at your death, as well as name who will handle your affairs for you.
  5. Asset Titles and Beneficiary Designations – It is important to note that your will only directs assets as a last resort.  Account titles and beneficiary designations will override any language in your will.  A house held in Joint Tenants with Rights of Survivorship will flow to the other tenant.  A 401(k) account with a listed beneficiary will flow to that beneficiary – even if you are estranged from that person and “meant” to change it.  Make sure to periodically review your documents!  We recommend an estate review every three to five years, or more often as needed.

Make it a Great Start

There are no do-overs in life.  You cannot replace the power of starting young with a disciplined savings and investment strategy, a long-range plan for life and retirement, and attention to the important not-so-fun legal considerations along the way.  Our goal is to help you identify and live your One Best Financial Life®, and that is even more valuable and rewarding when you get a head start. 

If you would like to learn more about CapSouth Wealth Management please visit our website at www.CapSouthWM.com  or if you would like to have a conversation to discuss this article further, I’d love to chat.  (678) 272.7555

by: CapSouth Wealth Advisor, Scott Fain, CFP®

www.capsouthwm.com/our-team/scott-fain/

CapSouth Partners, Inc., dba CapSouth Wealth Management, is an independent registered Investment Advisory firm.  This material has been prepared for planning purposes only and is not intended as specific advice. CapSouth does not offer tax, accounting or legal advice. Consult your tax or legal advisors for all issues that may have tax or legal consequences.

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