Integrating Executive Compensation Into Your Retirement Plan
By Daniel Baumgartner & Petra Peters
Building a retirement plan can be complicated in any context. However, when you’re an executive, it becomes even more complex. Your retirement plan doesn’t consist of merely a salary and a 401(k); you also must consider deferred compensation, performance-based bonuses, and various stock options.
How do all these elements fit into your retirement plan? There’s no singular answer, but our investment advisors can help you develop a strategy tailored to your needs.
Understanding Common Types of Executive Compensation
Executive compensation packages are highly individualized. Here’s a look at some common types of compensation and how we might help you integrate them into your retirement plan.
Deferred Compensation Plans (DCPs)
Highly paid executives often agree to defer some of their compensation (their salary, bonuses, or both) until a later date. Usually, they opt to receive that deferred compensation in retirement.
If you have a DCP, it can serve as a valuable supplement to your 401(k) or other retirement plan. By carefully timing distributions, you may be able to reduce the tax you owe.
Restricted Stock Units (RSUs) & Restricted Stock Awards (RSAs)
RSUs and RSAs are two of the most common types of equity compensation. Both are subject to a vesting schedule, but once vested, they can be sold to fund your retirement.
Non-Qualified Stock Options (NQSOs)
NQSOs are a common type of compensation for executives and other employees. Your employer gives you the right to purchase company stock at a specific price.
If you choose to exercise your NQSOs, you have a few options for integrating them into your retirement plan. Some executives opt to sell their shares and then put the proceeds into a tax-advantaged account like an IRA. If you hold your shares for at least a year after exercising your NQSOs, you’ll be taxed at the lower long-term capital gains rate.
Bonuses and Performance-Based Awards
Bonuses and performance-based awards can be integrated into your retirement plan, although the exact method depends on the type of compensation. Some employers offer Supplemental Executive Retirement Plans (SERPs). Because these plans function similarly to many other retirement plans, they make it easy for you to save bonuses and withdraw them during retirement.
If your performance-based awards are in the form of company stock or stock options, you may choose to keep them in your portfolio or sell them if diversification is a concern.
The Importance of Risk Management
In any retirement plan, risk assessment and mitigation are essential. However, executives headed toward retirement face unique risks—namely the concentration risk that comes with heavy reliance on employer stock.
In many cases, an investment advisor may suggest diversifying the portfolio, but this is something that should be done with care. The diversification process often looks something like this:
- Creating a strategy for diversification
- Creating a timeline to implement that strategy
- Gradually selling exercised options and vested shares
- Carefully reinvesting proceeds into different asset classes
This strategy may sound logical enough, but it’s not uncommon for executives and their investment advisors to encounter unexpected roadblocks.
As an executive, you likely have a strong emotional connection to your company, and your investment in it is more than financial. That connection may make it difficult to sell company stock. Remember that this strategy is about creating a stable portfolio to see you through retirement; it’s not about losing faith in your company.
Need Help Integrating Your Executive Compensation Package Into Your Retirement Plan?
Most executive compensation plans are designed to support a comfortable retirement, but that doesn’t mean it’s easy to integrate your compensation package into your retirement plan. When your investment advisors have extensive experience working with executives, you won’t have to worry about building a retirement plan on your own.
At Terra Nova Asset Management, we prioritize building relationships with our clients and making a meaningful difference in their lives. We aim to create investment strategies that bring your financial vision to life.
Does it seem like we may be a good fit? Reach out to us directly at 212-355-1234 or ppeters@terranovausa.com for the New York office (Petra) or 855-248-6630 or baumgartner@terranovausa.com for the New Jersey office (Daniel). You may also contact us here to schedule a meeting and we’ll get in touch with you soon!
About Daniel
Daniel Baumgartner is a founding partner of Terra Nova Asset Management LLC, a partner-owned investment advisory firm that manages individual portfolios for clients. Daniel has extensive experience in marketing, development of special U.S.-investment products, as well as customer acquisition and relationship management. His ultimate goal is to make a difference in his clients’ financial lives through honest investment advice. He strives to provide high-touch, personalized service and enjoys getting to know a client’s personality as it relates to their financial circumstances before crafting the right solutions. As money is a very personal subject, Daniel takes his responsibility as an advisor very seriously, forming long-term relationships with clients based on trust.
Daniel received his degree in finance and international business from New York University. Outside of the office, he is a hobby landscape, street photographer, and has a great interest in U.S. and European history (16th-19th centuries), believing it helps him answer the question “Why is something the way it is?”
About Petra
Petra Peters is a founding partner and the Chief Executive Officer of Terra Nova Asset Management LLC, a partner-owned investment advisory firm that manages individual portfolios for clients. Petra has decades of experience in the banking industry, asset management, overseeing the administration of individual accounts, and designing and advising specialized funds tailored to the requirements of international private and institutional clients. With extensive knowledge of both Europe and the U.S., she’s able to provide advice and services beyond the typical investment advisor. Petra desires for her clients to live a financially care-free life so they can pursue their passions, and she values their trust and gratitude. Creating invaluable friendships formed over years of partnership, some clients even consider her part of their family.
Petra’s interests outside of work include classical music, history, travel, charities, motorcycling, and golf. She is also on the board of a German charity.