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6 Questions ESOP Participants Should Ask

Updated: Feb 17, 2023

Companies that have ESOPs tout them as a great wealth building tool for employees. If you participate in an ESOP, here are the questions you should ask your employer.

Rear view of a businesswoman raising her hand at esop education event. She wants to ask something.
Do you have questions about your ESOP?

1. What % of my salary will be contributed to the ESOP each year?

This amount can vary from year to year, but ESOPs that have been around for a while should be able to provide you an estimate. You can ask your HR department or fellow employees what they have received each year. The higher percentage of salary contributed to your ESOP, assuming the company does well, the quicker your retirement nest egg will grow.

2. What has been the share price appreciation for the past ten years?

While no one can predict the future, if you have an idea of the average annual growth in value of company stock shares during the past decade, you can use that rate to estimate future share price growth. This will impact your overall wealth and retirement nest egg.

3. How long do I need to work here to be vested in my ESOP shares?

Most companies have a minimum number of years you have to work for the value of shares to remain with you as a participant in the ESOP plan.

4. At what age(s) am I eligible to diversify a portion of my ESOP shares?

Many companies will allow you to sell back up to 25% of your shares at age 55, another 25% at age 60, and the remaining shares over five years when you actually retire from the company. Companies spread out buying shares back from employees so they can plan to have the correct amount of cash available to buy back shares.

5. At what age can I retire and sell back my remaining shares?

The IRS requires that ESOP plans allow participants to retire no later than age 65. Many companies spread share repurchases over several years following retirement to manage the cash obligation across time.

6. Will my ESOP fund my retirement?

ESOP participation can be a great wealth building tool. If your company meets its share repurchase obligations, you could wind up with a significant nest egg for retirement. However, you should not rely solely on the ESOP to fund your retirement. It is important to also fund your IRA and 401k in case the company runs into financial difficulties or you change careers.

The graphic below shows a hypothetical retirement income of $40,000 a year before tax from $1 million of accumulated ESOP, IRA, and 401k balances. You should consult with your trusted financial advisor to forecast your retirement income.

Example of how $1,000,000 in retirement investments may generate $40,000 annual retirement income based on a 4% withdrawal rate over the course of your retirement.
This graph relies on the 4% rule which may or may not provide sustainable retirement income for your unique investment situation.

Final thought.

Do you have written financial goals? Is stress causing you to re-think your investment strategy? Are there significant changes happening in your life?

Peak Wealth Planning meets with clients in Champaign and Chicago, Illinois, as well as in Colorado near Denver, Winter Park, and Fraser.

If you have a net worth over $2 million and need help from a wealth manager, the Peak Wealth Planning team can assist you.

Peak Wealth Planning specializes in helping high-net worth individuals and families plan for the future.

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About the Author

Peter Newman is a Chartered Financial Advisor (CFA) and president of Peak Wealth Planning. He works with individuals nationwide that have accumulated wealth through company stock, ESOP shares, real estate, or running a business. Peter applies his unique background to help clients achieve their specific goals and enjoy peace of mind.

Peak Wealth Planning provides concierge services to meet your wealth management needs. Services include: financial planning, investment management, esop diversification, retirement income, insurance, and estate planning advice. Peak Wealth Planning is a fee-based financial advisor based in Champaign, Illinois, and Fraser, Colorado.



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