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July 29, 2011

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You have a CFP and you are asking what to do with your company stock? The ideal allocation to company stock is negative. If your industry goes into a downturn then you could lose your job at the same time your employer's stock is tanking. So sell all of that that you can.

For the cabin, I assume some sort of trust would be the best. Trusts are designed for holding assets and passing them to various people.

Even though your mortgage rate is low, the principal (and thus interest) is quite large, so I think putting at least some of your excess cash into paying it down makes sense.

Great job TL! It sounds like you guys are doing a good job of balancing a savings plan for the future AND enjoying the present. I also love that you are taking advantage of all the free education – awesome! I like to work on cars to – that is a handy skill you could turn into a nice side income in the future (restorations of classic cars can be very profitable – especially if you love doing it).

I would (if I were in your shoes) talk to an Attorney about the lake house. For only a few hundred bucks I would definitely do that – it is well worth it.

Everyone else if you are interested in other reader profiles here @ FMF (as I am – I am fascinated with the demographic of this readership) here is link to the rest of the reader profiles:

http://www.google.com/cse?cx=partner-pub-0406877061410411%3A37p2x9q1rt3&ie=ISO-8859-1&q=reader+profile


Wait until fully vested and then sell some of that employer stock if it's too much.

I would pay down the mortgage. You should be able to afford at least double the monthly payments.

As a disclaimer, without knowing anything about the company I'm not trying to ascertain its potential. I choose to hold no employer stock but I can see the argument for holding up to 10% of your portfolio versus the 30% you apparently hold now ($200K salaries x1.3 = $260K non-company stock holdings). If there are required holding periods you could use more advanced strategies such as long term options to mitigate any downside risk of the companies' shares. In the end this is a personal decision.

When it comes to the $2-6K in extra budget, I think you came to the wrong place if you're asking what to spend it on! I would use whatever is left after your vacation to build the larger emergency fund you mentioned. If the balance starts to get over the 12 months down the road, rental real estate could be an option and could offer some tax advantages (making many of your expenses deductions for your small business).

Question #1: you didn’t mention whether you all plan to live in this house for a long time (are you confident you will stay in the area, neighborhood etc.?).
That helps me think about whether I would pay the mortgage down or not.

You mentioned the following, “Should I focus on one goal, or spread it around to many goals and let them build [?]”. Definitely focus on one goal together as a family instead of spreading things around. There is a power in focus.
Personally – I would not prepay the mortgage on such a high principle amount with a low interest rate. I would let inflation eat away at it for a while. But then again if I were in your shoes I would sell the house (retail) and get into something with a lot of equity (distressed property) right out of the gate. That is me though – it appears you all like the house and neighborhood you are living in. Instead I would divert the excess 2-6K to your first goal of paying off the car (don’t want payments on depreciating assets). Then I would hit your second goal of building a 1-year-of-expenses emergency fund (as you mentioned) really hard.

Once you have met those first 2 goals, I think it is probably time for you and your wife to sit down and dream a little bit. You mentioned, “Maybe a trip once a year and a newer car every 3-5yrs, that is about all I can come up with.” Was this a goal you kicked around by yourself or in cooperation with your wife? I would take a week off and go to the paid for lake house (jealous of you BTW LOL!) with just you and your wife – spend some time dreaming about what you want the future to look like. Does one of you want to start a business? Do you want more kids? Do you want to live overseas for a couple years? Do you want to start giving significant amounts of money to charities that are important to you?

Food for thought my friend! Nice incomes – very well done. Put those incomes to good use achieving goals you are both passionate about! Cheers!!!

Link to other reader profiles:

http://www.google.com/cse?cx=partner-pub-0406877061410411%3A37p2x9q1rt3&ie=ISO-8859-1&q=reader+profile

Thanks for all the great comments. I agree with the selling of some company stock. We are somewhat limited on what we can sell, but I do plan to systematically allocate away from both of them.

@Nate - good catch on the house. We used to have significant equity, but we are still above water, just not by a lot. We really like our neighborhood, and the only thing that might get us to leave is a better job opportunity. Even then, we'd only relocate in the metro area we are in. Ties to family and friends are too tight to leave. We will likely start upping our payments when the emergency fund is at 12 months, and the car is paid for.

@ Michael Goode - I' am a CFP, but that does not mean I'm an expert in all areas. I don't practice and really don't deal with financial planning on a daily basis anymore. Yes, I realize our allocation is a little high, but this was a reader profile and wanted to get others opinions on my situation.

Keep the suggestions coming....

Hi TL,

You are paying about $12k a year in interest income... seems like paying down your mortgage faster wouldn't hurt.

Your stock options that are vested are in the money. If these are ISO and not NQ options you may consider exercising with the intention of waiting one year before selling and therefore getting tax treatment of long term capital gains. I think you should look at taking some money off the table with your options but also need to factor in the tax consequences, which could be significant at your household income level.

With the earnings of you and your spouse I imagine you can be looking at saving $80 - 100K after tax every year which can build up a nice cash reserve to pay down your mortgage and look around as to where to deploy your cash. If you both can maintain these jobs for 8-10 years while also continuing to grow your career you will be well into the 7 figure net worth range.

From the value of your house I guess you are living closer to the coast than in the Midwest? I'd say follow your hobby but try not to pay too much for new cars and see what you can do finding deals for used cars, it may be more fun and save you money in the long run.

-Mike

Great profile! Very inspiring!

@TL,

You referred to stocks and vesting but didn't say options. I am assuming these are option grants and not actual stock grants. If that is true then I mostly disagree with the sentiments here about reducing that exposure unless they have vastly appreciated, and I do mean vastly. Here is why.

Suppose you have a stock option grant for 5000 shares at 20 dollars. The stock is now worth 24 dollars lets say. That's a 20% increase in value and it makes your 5000 shares worth $20,000 dollars. That's not chump change. Seems like a lot of risk to let that sit there and a 20% drop in the value of the stock would wipe out all the gains, so that is the risk that would be mitigated by selling now. However assuming you believe the long term prospects of your company are reasonably good and the options you are holding have expirations that are reasonably far into the future, say 4 years or more), then these options are giving you upside growth potential for zero option cost that you cannot get anywhere if you exercise and sell the options.

If you sell those options you get 20K which you will pay tax on so lets say it leaves you with 15k which is probably too much if the are NQ options because you pay full income tax including payroll on NQ options. So with 15K you go buy a different stock and it goes up 20% you will gain 3K. However if you continue to hold those same options at the 24 dollar stock goes up another 20% you gain 24K.

In order to get that kind of leverage you would normally have to buy your own options which would have significant option premiums and a much shorter time window than your company offered options. The premium would slowly erode and be lost money on normal options but there is no eroding premiums on your company options. You are being offered a leveraged share in your company performance for zero cost to you.

Now yes, your downside is larger holding those options on their accrued gains because a smaller move will wipe out those gains. Thats why I said if the options have vastly appreciated, lets say 50-100% or so then you have a huge move to protect that you may be concerned about losing. The upside potential of the options is still accurate as I laid out above but the leverage is not quite as substantial because of the huge gain in position you would be protecting and the cost of losing that gain might be more significant to you.

I have had this exact same discussion with people I work with because I have a fair number of NQ options. And as it happens the strike price is around 20-21. I have received grants spreads out over a number of years. Many people sell as soon as they vest. At 22, 23, 25, whatever the price. That's free money and they don't want to lose any of it. I explained this whole leverage thing to them and how I had no intention of selling a share prior to at least 30. They did not find my mathematical analysis of the upside versus downside trade off compelling. The thought of losing the smaller gains was just too much. Now if I didn't believe in the longer term future of my company that would change everything. And of course there are no guarantees. I recently sold the very first chunk of these options at over 35 dollars per share and still hold significant quantities. The price has dropped back to around 30 now but that changes nothing in my thinking.

This leverage and risk versus reward cannot be repeated by me anywhere else without significant costs and increased financial risks.

What if my stock had gone down to 15. It did. It went to 13 in the 2008 financial crisis. Changes nothing about my strategy and didn't make me think I was wrong. Of the people who were selling at 23 they said oh I wish I sold more and told me don't you wish you had sold. I said no! Why? cause if I had even though I would have made a few thousand. I would have given up my free leverage risk reward option. Had I sold at 23 I would have made money then but I would have given up the option to get the upside when/if they return to the former path. Nothing about the company in specific was being damaged by the financial crisis so they came roaring back, from 13 to 35 over about 3 years. Had I sold at 23, I would have appeared to have come out ahead for a year or so but would have actually been behind because I later sold at 35.

See unlike a stock you can sell these options at 23 and then buy them back at 15 for the ride up to 35. They are given by the company one time and cannot be purchased anywhere on the market in their same capacity. Even the stock I sold at 35.5 makes me feel like I am giving up something I can't get back. I only sold about 5% of my position but I am well aware that the free leverage that it offered has now been traded in for cash and I can never get that free leverage back on those 5%.

I encourage you to think long and hard about how to handle this stock if it is in the form of company granted options. Through all of my ups and downs of my personal company stock option portfolio there has never been a time when I questioned the soundness of the strategy I have laid out here. Even if it went down to 15 and never came back I would not change my opinion of the strategy. Even though I could have sold at 23 and made a few bucks, the potential upside is so huge that the loss of the smaller gains is not worth it to take even if you end up losing them all in my opinion. Had I take all those sales at 23 I would probably have make 40K or so on my portfolio. It is currently worth well above 6 figures vested with another good chunk yet to vest. As I said before, the only thing that would change my mind is a change in my view of the long term prospects for the company.

>Anyone have experience diversifying out of the concentrated >stock positions? I’m open to suggestions. Or should I >leave it, and ramp up my taxable investments to balance it >out?

I wouldn't leave it as you already depend on the company for your income, but I wouldn't sell immediately either as there are potentially nasty tax implications:
You could get hit with AMT, you may have to pay the higher short term capital gains rates, you could lose thousands selling on a down day.

I would meet with a CPA and formulate a plan to sell off the stock over the next few years. Minimize the tax implications and price difficulty by selling at different times thus dollar cost average your sales.

The proceeds could do a lot of things - help build up the emergency fund, the kids college funds, and since you are contemplating a semi-early retirement you may also want to have some investments outside retirement accounts that you can access at any age.

If you are going to invest outside sheltered account the tax efficiency is important, Mike at the oblivious investor has some good articles on the topic such as:
http://www.obliviousinvestor.com/investing-in-a-taxable-account/

>Should I focus on one goal, or spread it around to many >goals and let them build. What are these goals? Maybe a >trip once a year and a newer car every 3-5yrs, that is >about all I can come up with.

If you want to accomplish a lot of things make them automatic- if you automatically transfer the $ it will just happen without the need for focus. You could easily increase the 401K contributions, 529 contributions, and set up automated transfer to put $ into a vacation fund, an auto fund, and an investment account. And if you still have some extra $$ you could send it my way for all this excellent advice :-).

-Rick Francis

@Apex - they are actual stock. Both of our companies grant restricted stock. I have been paying the taxes out of pocket versus selling shares to cover taxes. This may not be the best for diversifying out of the stock, since it accumulates faster, but we had the money available and it allowed us to buy shares at no fee. This was also during the heights of the recession, so I effectively was able to keep shares that have now grown by about 300% since the end of '08, versus having them sold to pay for taxes.

@Rick -- I currently do my own taxes, but I do like the idea of working with a CPA on some of the more complex issues. I have recieved a few referrals, and am goin to investigate for next years return. I also tend to agree with the "automatic" approach to savings. I'll lkely just allocate our additional income to the current buckets and maybe an additional amount to the mortgage.

@TL,

I wondered about that but don't find restricted stock grants to be that common so was thinking it was more likely options. Given that it is actual stock then nothing I said about leverage applies obviously so standard diversification strategies apply taking into account tax ramifications.

However long term capital gains are still at 15% and who knows if they will be able to remain there so it may be ok to just take the hit now for a good chuck and diversify out of some of the position.

You should reduce your employee stock exposure. Sell some every year since you are accumulating more every year right? Take advantage of the 15% long term capital gain tax rate and sell all the stocks that are long term.

Sounds like you guys are doing great!

@ TL,

Great info. Your story sounds eerily similar to my wife and I, except for the kids part (so far). I am currently getting my MBA and am looking at going into corporate finance/financial services. I would love the opportunity to chat (via e-mail or phone) about your job and experiences as I am constantly trying to learn more about the industry. I do not want to post my e-mail address for all to see (it is my name), but if you'd be willing to chat I think FMF can forward it on to you and I would be fine with him doing so.

Great profile. I have one suggestion on the cottage, especially if it is shared by siblings. Find the book "Saving the Family Cottage", by Stuart Hollander, et al. It is from NoLo, and like most of other NoLo works it truly addresses the legal and emotional quandries of the cottage situation.

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