Jeremy Taylor, CFP®, ChFC®

I was having a socially distant beer with a friend the other day and the conversation drifted toward the topic of kids. As we were sharing funny stories of what our kids have been up to in quarantine, I mentioned that I can see my son, Greyson, having a future career as a software engineer. The way his mind works, I can see him building the next big thing in software, or in his ideal scenario, gaming. Living just outside of Seattle, one of the nation’s fastest growing tech hubs, I have the opportunity to work with a number of clients whose careers span the tech industry. As startups and established companies alike compete for top talent and devise compelling employee retention strategies, many have turned to offering stock as a benefit or part of the pay structure. With clients in roles at Amazon, Microsoft, DocuSign, SmartSheet and more, I have seen firsthand how stock options can be a blessing, and even sometimes a bit of a curse. As I thought of my son with a job in tech, it got me thinking of the advice I would give him if he’s ever offered restricted stock or stock options.

Diversify over time

I’ve been through many market cycles and there are stretches of time where some companies/industries seem as though they will never go down (Amazon, Apple, Tesla) and shareholders wonder why they should diversify. If history has taught us anything, the 90’s tech boom and corresponding bust was a great example. So was housing in the 2000s. I started in the industry when the tech bubble was coming to an end and saw the impact firsthand. While 2020 is certainly a different time and market, there will always be unknown variables that should affect the decision-making process.

For many of our clients in tech, their job security, salary, benefits and additional ongoing stock/option compensation, all come from the same place. They also often have large amounts of stock built up from prior years. And the longer they are employed, the more and more of their net worth is tied to that one company. Unfortunately, no company is immune to scandal or an unforeseen event impacting that positive stretch. COVID-19 is certainly an example of this. If employees are putting all their career and net worth “eggs” in one basket, they should be prepared for the potential consequences of those actions. And if you choose to have all your money in one stock, you’re essentially saying there is no other company or investment in the world that is better than your employer. That’s saying an awful lot with tens of thousands of options out there.

Your risk tolerance should determine your portfolio

Assessing risk is a big part of the conversation we have with all clients. Some of our younger clients with a higher tolerance to risk will hold larger portions of company stock. If someone at the age of 25 loses money in the market, they have more time to make up for it. With that being said, some younger people are much more conservative, and those feelings should still be taken into account. For clients that are nearing retirement, they don’t have as much time to make up the losses, so diversification is key. Risk tolerance takes many factors including age, time horizon, and general comfort level, into consideration and is not a one size fits all approach. However, the baseline recommendation is to stay away from too much concentration.

Understand capital gains taxes

Understanding capital gains and the taxation tied to stock sales and exercising options is complex and a large part of the analysis we do for these types of clients. There are many factors to consider such as your income fluctuations, tax brackets, the current tax code, impact of election cycles, and so much more.

These components are usually difficult for an individual to decipher on their own. I have seen too many people try to cobble a strategy together and end up having to pay 30-40% in taxes versus “just” 15-20% had they waited a few months. This is often seen in short term (gains of investments held for less than one year) vs. long term gains (held for one year or more). It’s like searching WebMD...I might be able to self-diagnose a medical issue, but at the end of the day, I know I’m not a doctor. I won’t prescribe myself medication or build a treatment plan. There is too much risk going it alone and it’s best to consult a professional.

In a recent blog post,1 my colleague Ed Bradley talks about building up your emergency fund and how to plan for events where you may need a larger cash reserve. Make sure you are always planning ahead because the stars may not align on capital gains and tax rates when you do need to sell some of your shares.

Know when enough is enough

At the end of the day, you have to realize that stock options are in a large way a recruiting and retention tool. I have clients who are able and ready to retire, but they continue to work as they wait for more stock to vest. I have other clients who hate their job, but they stay for stock options and the possible upside of that company. Often, the dangling carrot can create unease and stress. It all sounds good on paper but there is a lot of pressure that comes with this type of wealth. Once you are able to make decisions based on what is best for you and your family, versus your net worth, it relieves a lot of the stress. That’s why we are so hyper-focused on helping our clients reach “financial independence.” This means you are working because you want to, not because you have to.

I’ve always been an advocate for my clients to create balance in their lives. Saving money is important, but you should also enjoy what you work hard for. Life isn’t certain. Whether you enjoy travel, want to purchase a new home or car, or spend money on your passions, it’s important to make sure the stress of work is worth it by balancing savings with spending, giving, etc.

If I fast forward 15 years and am sitting across the table from Greyson, I would tell him no matter your age, it is critical to build a financial plan to know what this all means. What’s the point of building wealth? How are you going to feel fulfilled? What are you going to do with what you save? It would be a shame if he’s lucky to make some serious money in tech but doesn’t have anyone to share it with, or a passion to enjoy. That’s why we focus on helping our clients find clarity around their future path. It enhances the quality of their lives and brings purpose to what they work so hard for.

I hope whatever he does makes him happy but that he’s also able to save some serious money so one day he can extra good care of his parents 😊

1 If 2020 Has Taught Us Anything

Certified Financial Planner Board of Standards Inc. (CFP Board) owns the certification marks CFP®, Certified Financial Planner™, CFP® (with plaque design), and CFP® (with flame design) in the U.S., which it authorizes use of by individuals who successfully complete CFP Board's initial and ongoing certification requirements.

Any opinions are those of Jeremy Taylor, CFP®, ChFC® and not necessarily those of Raymond James. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Past performance does not guarantee future results.