Why Having a Plan Matters
Stock-comp is complex; having a plan makes it easier!
Pre-Read: Key Questions This Article Answers
Why is financial planning for tech professionals unique (and sometimes challenging)?
Why is it important that a tech professionals financial plan integrate (i stock-comp planning, (ii) tax planning, (iii) the holistic financial plan, and (iv) the investment portfolio strategy?
How can a financial advisor (like 30-40 Wealth) make planning much easier and more robust?
A Financial Plan Is Your Personal Business Plan
The company you work for has near-, medium-, and long-term business plans; and those plans help align team members and guide business decisions. The same dynamic can/does exist on a personal level. A comprehensive financial plan allows you to better understand/take control of your finances and improve your financial decision making. By knowing both (1) where you are today financially, and (2) what's most important to you/where you want to go --> you effectively have a roadmap to improve your financial decision making and minimize regret. And, conversely, without a plan to guide you, it's easy to make financial decisions that don't support your goals.
Stock Comp Decisioning Is Easier When You Have a Plan
For technology workers, creating a financial plan has incremental complexity due to the inclusion of stock-based-comp. A significant amount of your household income and wealth (or at least potential wealth) is tied up in stock-comp --> and your plan needs to thoughtfully include this stock-comp income/wealth in all relevant areas: (1) Dedicated Stock Comp Plan; (2) Holistic Financial Plan; (3) Tax Strategy; (4) Investment Portfolio
Creating a plan is no easy task however; and us telling you that stock-based-comp adds an extra layer of is complexity is a "Captain Obvious" statement (you're here, reading this after all!). So the better statement/question is: how do you make it simpler? We wish we had a magic bullet (we don't). But what we can do to help is guide you down an efficient path; the first step of which is to focus on creating a financial plan (especially part 2: defining your goals/where you want to go).
When You Know Where You Want to Go; Making Stock-Comp Decisions Is Much Easier
Despite all of its complexity, stock based compensation is compensation. It may be illiquid (Pre-IPO), never ultimately have any value (failed startup), provide quarterly income (public company RSUs), or change your financial life (you picked the right rocket ship!). But with a well-considered plan, deciding what (if anything) to do with your stock comp becomes easier: what decision(s) regarding your stock comp are in the best service of your financial plan and goals?
Let's use a simple example and assume the following:
Household composition. Married couple with two kids living in Austin, TX
Income. Both individuals work in tech making strong salaries ($200k each; $400k total)
Expenses. They live a relatively modest life (e.g. high income, modest spending, strong savings rate) and their kids attend public schools
Assets. They're homeowners (~$1 million house with a 70% mortgage) and have ~$750k in investable assets (mostly retirement accounts)
Stock-comp. One individual works for a company that just had a liquidity event and their stock (via exercised options) and unexercised NSO/ISOs are currently worth $5 million dollars (pre-tax)
Risk tolerance & company opinion. Household has a high risk tolerance and strongly believes in the company's long-term business prospects
What should they do with their stock comp?
It's pretty obvious that we don't have enough information, isn't it? We know a lot about their current situation, but nothing about their goals/where they want to go. And what decisions to make regarding their stock comp can be drastically different depending on their goals:
Do they want a financial independence/eetire early ("FIRE") lifestyle? If so, their relatively modest lifestyle and large asset base (including the stock comp) likely would allow them to retire early and live off their assets. But doing that with the majority of their assets in a single company is far too risky. So despite their high risk tolerance and strong belief in the company, the financial plan/goal-optimal decision would be to divest of nearly all of their stock comp holdings to diversify and de-risk.
Do they enjoy/desire to keep working for many years (retiring in their mid-60s)? If so, their relatively modest lifestyle and strong savings rate likely will allow them to meet most/all their financial goals. So when it comes to their stock-comp, there is a lot more flexibility. Divesting of some and diversifying is still going to be a recommendation. But their high risk tolerance and strong opinion of the company allows them to hold a reasonable portion long-term (and financially benefit if the company performs how they believe it will).
A Financial Advisor Can Help You Create a Plan
At 30-40 Wealth, we specialize in financial planning and wealth management for technology professionals. We (weirdly) love geeking out on stock-based comp! But we also know that it is (annoyingly) complex. At every company stage (Pre-IPO to Publicly Traded), there are a multitude of decisions that you can/should be making regarding your stock comp (even if the ultimate decision is "do nothing"). Further, due to stock-based comp being a significant part of tech workers' compensation -- it also changes how you can/should be thinking about your (1) Holistic Financial Plan, (2) Tax Optimization, and (3) Investment Portfolio Strategy.
If you don't have the time, interest, or expertise (i.e. the TIE rule) to create and optimize your own plan, we'd love to help!
Want to learn more about working with 30-40 Wealth Partners? 🔗 Visit Our Website
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