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Is an ESOP a Good Retirement Plan?

Updated: Feb 17, 2023

If you are an ESOP participant, you may be wondering if your ESOP is a good retirement plan. Generally speaking, yes. As an employee at an ESOP company, you receive shares of the company annually at no cost to you. Then, during retirement, you will be able to convert those shares to cash that you will be able to spend.

Senior mature female employee owner holding paper ESOP statement calculating retirement funds, sitting at home kitchen table with a cup of coffee. Wine in the background.
Understand if your ESOP will contribute meaningfully to a comprehensive retirement plan.

An employee stock ownership plan (ESOP) is an IRS qualified retirement plan — similar to a 401(K) plan — that holds company stock. It provides employees with an ownership stake in the company as well as an additional form of compensation directly linked to success of the company. ESOPs automatically assign ownership shares to eligible workers each year. This means employees receive company stock each year at no cost.

In 2019, the NCEO analyzed current data and found the average ESOP participant received $6,420 each year in company stock contributions.

To be clear, this is based on average participants in more than 6,200 ESOP companies throughout the United States. Some receive much more than the average stock contribution while others receive much less. So to truly understand if your ESOP will contribute meaningfully to a comprehensive retirement plan, then you should consider the following 4 questions.

How do I know how much is in my ESOP?

While employed, a worker doesn’t actually hold any shares of the company. They are kept in the trust fund and only disbursed once a vested employee is terminated, retired, disabled or otherwise leaves the company. Employees receive a statement each year showing the number of shares and value they own in the trust fund.

EXAMPLE OF ESOP CONTRIBUTES TO RETIREMENT. In this example, 3,230 shares of ESOP stock valued at $203 equal a current value of $655,690. This is wealth you gain for contributing to the growth of your company.
Shares in your company’s ESOP will add up across time and contribute to a healthy retirement.

What are the main benefits of an ESOP?

From a worker’s perspective, walking away with cash for retirement is the main benefit of an ESOP. The workers who walk away with the most cash tend to be those who work at a company for 20 or more years while accumulating shares annually. Employees who work at companies where profits grow consistently will enjoy a corresponding ESOP value growth.

Can ESOP make you rich?

Peak Wealth Planning has worked with ESOP participants in their 50’s and 60’s with balances from $500,000 to $6+ million. These workers stayed at one company for 20 to 30 years and grew wealthy from the company’s annual stock contributions to their ESOP for retirement. Being an ESOP participant assisted these individuals in achieving wealth, and it may do the same for you.

How much retirement income will $1 million in an ESOP generate?

If we follow the 4% rule, a $1 million ESOP – after shares are sold back to the company and reinvested in a diversified investment portfolio – should generate $40,000 a year before taxes in your retirement.

Example of diversified portfolio with 70% stocks and 30% bonds. 25% S&P 500 20% Midcap Fund 15% Small Cap Fund 10% developing International Markets 30% Diversified Bond Fund
Move your ESOP shares into a diversified portfolio when eligible to diversify.

Final thought.

Are you comfortable with your progress towards retirement? Are you confident you’ll know how to handle your ESOP diversification and distribution when the time comes? Do you need help visualizing how your ESOP can contribute to the retirement you visualize for your family?

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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