Employee Owner to Retirement: 4 Commonly Asked Questions

Updated: Jul 8

I recently attended the IL ESOP association chapter meeting in Champaign, Illinois, where I had the opportunity to speak with several employee owners. They were planning to retire in the next five years.

There are four questions that were on their mind:

  1. When should I diversify my company stock?

  2. How do I diversify my company stock?

  3. At what age should I start taking social security payments?

  4. How much retirement income do I need each month?

When to diversify company stock?

In terms of when to diversify company stock, a common mistake is if the stock is doing well to keep all of the company stock as long as possible. If you have enough investments in your ESOP and 401k to generate sufficient retirement income, then it is prudent to diversify your concentrated company stock at each opportunity. Many employee owned companies allow for diversification of 25% of stock at age 55, another 25% at age 60, and then if you retire at age 64 for example, distributions of the remaining stock of approximately 20% a year spread over five years.

How do I diversify my company stock?

Your company human resources department can guide you on how to request diversification of your stock. Usually there is a web site you login to make this request or a form you fill out. Your HR department or ESOP administrator can let you know how many shares of stock you are eligible to diversify. When you elect diversification, your shares are sold back to the company, and a check is mailed to you or your individual retirement account custodian. If the check is sent to you, you will pay tax on the distribution. If the check is paid to your IRA, you can delay the tax until you withdraw income for retirement expenses.

You can set up an individual retirement account (IRA) and select investment funds consisting of stocks, bonds, real estate, and cash to meet both your long term income need and your wealth preservation needs. Having the right mix of stocks to continue growing your wealth to protect against inflation is important. You should work with a financial adviser to find the mix of stocks, bonds, real estate, and cash that is appropriate to meet your retirement income need.

At what age should I take social security?

You can go to SSA.gov and use the social security benefit estimator to project your social security income when you turn 67, which is full retirement age for most retirees. If you take social security early at age 62, your monthly income will be significantly reduced -- usually by hundreds of dollars per month. If you delay social security until age 70, your monthly income will be much higher -- typically hundreds of dollars per month. If you have sufficient income to cover your expenses until age 67 or 70, waiting to take social security can be financially beneficial. Your financial adviser can help you determine what age is best for you to start social security payments.

How much retirement income do I need each month?

Take a look at your monthly paycheck, look at the amount you deposit to your checking account each month. If that monthly deposit, or 'take home pay,' is just covering your living expenses without much leftover, then your monthly retirement income need is equivalent to your current take home pay. This after tax take home pay is the amount you should work with your financial adviser to plan to generate from your investments. If you have a major expense such as a mortgage that will end during retirement or you move to an area with a lower cost of living, you may be able to live on less retirement income from your own investments. If you have rental property income, your spouse has a pension, or you expect an inheritance, you may be able to live on less retirement income from your own investments. A financial adviser can create a financial plan to determine whether your investments and different sources of income are sufficient to meet your living expenses during retirement.

What to do next:

Gather up your social security benefit estimate, IRA, 401k, and ESOP statements, and schedule an appointment with a financial advisor. Your financial adviser can help you understand your diversification options and forecast whether you have sufficient investments and social security to meet your retirement income needs. He can also help you diversify your company stock into an IRA with a comfortable mix of stocks, bonds, and real estate to meet your goals.

Final Thought.

If you are 60 or over, have $2 million or more in investments, and think you may need assistance with any of the areas above, please reach out to me today.

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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 only financial advisor based in Champaign, Illinois.

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