RSUs and Retirement Planning: What You Need to Know‍

Casey Fenton

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December 7, 2023

Imagine walking into your 65th birthday party, not with a sense of impending financial doom but with an air of financial freedom. Your friends and family toast to your health, but you're quietly toasting to something else—wise financial decisions, one of which was incorporating Restricted Stock Units (RSUs) into your retirement portfolio. You didn’t just rely on traditional 401(k)s and IRAs; you tapped into the hidden gem of RSUs and turned them into a pillar of your retirement plan. 

Yes, retirement looks good on you, but not by accident—it's the result of well-calculated decisions. Read on to discover how you can make RSUs a strategic part of your own retirement planning, giving you that extra cushion and peace of mind.

Is It Possible to Include RSUs in My Retirement Planning?

Absolutely, it is not only possible but also often advisable to include Restricted Stock Units (RSUs) in your retirement planning strategy. RSUs represent a form of compensation that has the potential to grow in value over time, making them a powerful asset in your retirement planning toolkit. However, the strategy isn't as straightforward as with more traditional retirement accounts like a 401(k) or an IRA.

The Concept of Vesting

One of the key characteristics of RSUs is the concept of "vesting," where the stock units become fully yours after a certain period or upon meeting specific conditions. Unlike traditional retirement accounts where contributions are yours to control immediately, RSUs require a commitment to your employer for a designated period. Understanding your vesting schedule can help you plan when these assets will be available for you.

RSUs and Asset Diversification

The beauty of including RSUs in your retirement portfolio is that they offer a form of asset diversification. You're not just leaning on bonds, mutual funds, or individual stocks. RSUs provide another channel for potential financial growth. However, they do bring a unique set of risks, mainly tied to the performance and stability of your employer. Your RSUs are tied to your company's stock performance, meaning if the company does well, so do you. Conversely, if the company underperforms, the value of your RSUs may decline.

Liquidity Concerns

Another factor to consider is liquidity. Traditional retirement accounts often have penalties for early withdrawals, but they generally offer a range of investment options that can be sold relatively quickly. RSUs, once vested, convert into company shares, but you need to be aware of any restrictions or blackout periods that may prevent their immediate sale. This may require additional planning, particularly if you aim to convert RSUs to cash or other investments upon retirement.

Role in Holistic Planning

RSUs can and should be part of a more comprehensive retirement strategy. Think of them as one ingredient in a broader financial recipe. Given their unique characteristics, they can't replace the role of a 401(k) or an IRA, but they can enhance your financial strategy by offering another layer of diversification and growth potential.

Incorporating RSUs into your retirement planning can give you added financial security and the potential for higher returns. However, it's essential to align this strategy with your overall retirement goals, risk tolerance, and financial roadmap to ensure it truly benefits you in your golden years.

Are There Any Tax Advantages to Holding onto My Vested RSUs Until Retirement?

RSUs come with their own set of tax implications. Typically, the value of vested RSUs gets added to your taxable income in the year they vest. Some people consider holding onto their vested RSUs until retirement to possibly benefit from a lower tax bracket.

However, keep in mind that RSUs are taxed as ordinary income, not at the lower long-term capital gains rate. If your vested RSUs appreciate after vesting, then selling them later would subject only the gains to the capital gains tax, not the initial value at vesting.

The tax landscape could change, and everyone’s tax situation is unique, so consult a tax advisor for advice tailored to your specific circumstances.

How Much of My RSUs Should I Allot for Retirement Savings Plan?

Determining the right percentage of RSUs to allocate for retirement is a question with no one-size-fits-all answer. It hinges on various factors, such as your overall financial goals, current investments, and risk appetite. However, there are key considerations to help you make a more informed decision.

1. Consider Your Overall Portfolio

The first step is to assess your existing retirement savings plan. Do you already have a diverse portfolio that includes stocks, bonds, mutual funds, and perhaps real estate? If your portfolio is well-rounded, including RSUs can further diversify your investments. However, if you find that the majority of your investments are already in company stock, either through RSUs or other stock options, you may want to consider diversifying.

2. The Rule of Thumb: 10–15%

A general rule of thumb financial advisors often suggest is to keep your investment in any single company, including your employer, to less than 10–15% of your overall portfolio. This is to prevent overexposure to a single asset, which can be risky if that company faces financial troubles. So, if your RSUs make up a large portion of your portfolio, you might consider selling some once they vest and reinvesting the proceeds in other types of assets.

3. Understand Vesting as a Timeline

Your RSU vesting schedule is, essentially, a timeline for when these funds become available. It provides a built-in timetable for when you can start converting these RSUs into other investments. You could choose to sell a portion of your vested RSUs every year to reinvest in a diversified retirement account, thus incorporating them into your longer-term retirement plan.

4. Risk Tolerance and Market Conditions

The stock market is ever-changing, and it can be particularly volatile when economic conditions are unstable. Your comfort level with risk should play a significant role in determining how many of your RSUs to allocate for retirement. If you are risk-averse, you might opt to sell a more considerable portion of your RSUs as they vest to invest in safer, more stable assets.

5. Consult a Financial Advisor

For a decision as crucial as retirement planning, it's often beneficial to consult with a financial advisor. They can help you scrutinize your current portfolio, consider your long-term goals, and determine how RSUs can fit into the bigger picture.

Allocating the right proportion of your RSUs for retirement isn’t a decision to take lightly. It involves a deep dive into your current financial landscape, a clear understanding of your investment goals, and a willingness to adapt as market conditions change. Make sure to periodically review your allocation choices to align with your retirement vision, making adjustments as needed.

Will There Be Legal Implications for Using My RSUs for Retirement?

Yes, there could be legal implications when incorporating RSUs into your retirement planning. These implications are often laid out in the RSU grant agreement, a legally binding document that spells out the terms and conditions under which the RSUs are awarded to you. However, the legal landscape extends beyond just the terms of the grant agreement.

1. The RSU Grant Agreement

The first place to look for legal guidance is the RSU grant agreement you receive from your employer. This document outlines critical terms such as the vesting schedule, selling restrictions, and what happens to your RSUs if you leave the company before retirement. Any deviation from the terms specified could result in legal complications, so it's crucial to understand these terms fully.

2. Employment Status and RSUs

Your employment status has direct legal implications on your RSUs. If you decide to leave the company, are laid off, or are terminated, different conditions may apply. Some companies have clawback provisions that enable them to reclaim vested or unvested RSUs under specific circumstances, such as if you go to work for a competitor. Always review these conditions and how they could impact your retirement planning.

3. Insider Trading Concerns

If you're in a position that grants you access to non-public information about your company, selling your RSUs could potentially be scrutinized under insider trading laws. This is particularly relevant if you're a high-ranking executive or have significant decision-making power within the company. Make sure you're aware of any trading windows or blackout periods that may apply to you.

4. Regulatory Changes

Legal implications aren't static; they evolve as laws and regulations change. For instance, changes in tax laws could affect the way RSUs are treated, requiring you to adapt your retirement planning accordingly. Keep an eye on regulatory updates and consult a legal advisor to ensure ongoing compliance.

5. Seeking Legal Counsel

Given the complexity of equity-based compensation and its legal ramifications, consulting a legal advisor who specializes in this field can be invaluable. They can help you navigate your RSU grant agreement, advise on the legal aspects of your retirement planning, and ensure that you're in compliance with all relevant laws and regulations.

Are There Any Restrictions on Selling or Transferring Vested RSUs after Retirement?

Once RSUs vest, they generally convert into common stock that you can sell at your discretion. However, some companies impose blackout periods or other restrictions on when you can sell. These restrictions are often aimed at preventing insider trading and usually apply to high-level executives rather than rank-and-file employees.

Upon retirement, your ability to sell or transfer RSUs will generally follow the same rules as when you were employed. However, always consult your grant agreement or your company's HR department for any post-retirement restrictions that may apply.

Tips for A Stress-free RSU Retirement Planning

Successfully leveraging your RSUs for retirement doesn't have to be a complex or stressful endeavor. With the right approach and a solid strategy in place, you can make the most of this unique form of compensation. Here are some key tips to help you achieve a stress-free RSU retirement planning experience.

  • Start with a Comprehensive Financial Plan: Before diving into specifics about your RSUs, begin by creating a comprehensive financial plan. Evaluate your financial health, consider your retirement goals, and identify your income streams. Once you have a clear picture of your overall financial landscape, it becomes easier to figure out the role RSUs will play in your retirement planning.

  • Keep an Eye on Vesting Schedules: Never underestimate the importance of your RSU vesting schedule. This schedule dictates when your RSUs become fully yours to sell, transfer, or hold. Use this schedule to plan your financial moves, and set reminders to reassess your strategy each time a batch of RSUs vests.

  • Diversify Your Portfolio: While RSUs can be a valuable asset in your retirement planning, putting all your eggs in one basket is rarely a wise move. Diversification reduces your overall risk. So, once your RSUs vest, consider selling a portion to invest in other assets like bonds, mutual funds, or real estate, unless your investment strategy or advisor suggests otherwise.

  • Tax Efficiency is Key: RSUs are subject to taxation, both when they vest and when you eventually sell the shares. Familiarize yourself with the tax implications and consider strategies like tax-loss harvesting or strategic selling to maximize tax efficiency. Consulting a tax advisor who is knowledgeable about equity-based compensation can be invaluable.

  • Consider Life Changes: Major life events such as marriage, buying a home, or having children can significantly affect your financial landscape. Revisit your RSU retirement planning in light of these life changes to ensure that your strategy remains aligned with your evolving needs and goals.

  • Monitor Company Performance: Since RSUs are tied to the fate of your employer, keeping a close eye on your company's performance is crucial. If you notice red flags or promising trends, it may be time to reassess how many of your RSUs you want to retain and how many to sell or diversify.

  • Consult Experts: Lastly, don't hesitate to consult financial and legal experts for personalized advice. RSUs can be complex, and generic advice may not be entirely applicable to your unique situation. A team of advisors can provide customized strategies that consider all variables, including tax implications, your financial standing, and your retirement goals.

Planning for retirement with RSUs doesn't have to be a source of stress. With these tips, a solid strategy, and perhaps some expert advice, you can pave the way for a secure and comfortable retirement.

Retire With Confidence through Your RSUs

Incorporating RSUs into your retirement planning can be a rewarding yet complex endeavor that requires careful consideration, strategic planning, and timely action. It's not merely about having an additional asset; it's about leveraging that asset effectively to work in harmony with your broader financial landscape. From understanding the legal ramifications and tax benefits to making well-informed allocation decisions, each step brings its own set of challenges and opportunities. 

But remember, you don't have to go it alone. Armed with these insights and with the guidance of financial and legal experts, you can navigate the intricacies of RSU retirement planning, making this unique form of compensation a cornerstone of your secure financial future.

Want more info? Feel free to browse Upstock’s blog on RSU and the vast array of topics that it touches on. You may also take a peek at our learning materials page here for a summary of how RSUs stack up against other equity compensation models you might be offered.

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ABOUT THE AUTHOR

Casey Fenton

Founder, Upstock & Couchsurfing, AI and Equity Innovator

Casey Fenton, the founder of Upstock & Couchsurfing and an AI and equity innovator, has revolutionized how we perceive and implement equity in the workplace. His foresight in creating platforms that not only connect people but also align their interests towards communal and corporate prosperity has established him as a pivotal figure in technology and community building. Casey speaks worldwide on topics including ownership mindset, worker equity, With Upstock and Couchsurfing, he has demonstrated an unparalleled expertise in harnessing technology for the betterment of community interaction and organizational benefits.

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