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  • Writer's pictureMalissa Marshall, CFP®, MS Tax, EA

When "More Money, More Problems" Becomes Real: Navigating Complex Compensation for High Earners

Peace comes with perspective
Mountains in Nepal - peace follows perspective

The obvious benefit of earning more money is clear: more money.  More money allows you to think beyond basic financial security for yourself and your family, and start making real choices that may have been out of reach until now. Not having to worry can provide you with peace of mind, but beyond that, it can allow you to operate from a mindset of abundance, rather than scarcity, freeing you to actualize your financial and personal goals.

 

But before you achieve such a state of satori, you need to incorporate these earnings and savings into your financial plan, so that you can best leverage them to meet your personal financial goals, as well as focus more deeply on minimizing the taxes you’ll pay not just in the current year, but across your lifetime, in order to move those additional dollars truly work for you.

 

And if that's not complicated enough, the road to becoming a high earner often means that your compensation structure is no longer simply a base salary + bonus, but may incorporate deferred compensation, restricted stock, or stock options – all of which makes it exponentially more complicated to plan for, whether from a cash flow, risk management or tax perspective. 

 

How can you simplify your financial picture sufficiently that you can build out a reliable financial plan as a basis for realizing your personal goals, yet ensure that all the nuanced complexity inherent within it is accounted for?  Understanding your wealth and your life, and creating an elegantly simple financial plan requires working with an advisor with the experience and expertise to create a plan that is truly actionable, and doesn’t just sound good on paper. 

 

Understanding Complex Compensation

 

Depending on what kinds of compensation you have, the strategies to incorporate them into your financial plan will vary. Executives with stock in public companies will have different needs than employees of start-ups that haven't gone public yet, for example; the specific mix of equity compensation you hold will dictate the strategy you’ll need to implement.

 

With equity compensation (RSUs, NQSO, ISOs, ESPPs, etc.), there are four primary considerations that you’ll need to plan for:

 

·        Making sure you clearly understand all the regulations and deadlines you’ll need to meet – the benefits of these awards are too valuable to leave on the table

·        Mapping out the cash flow implications (both inflows and outflows) associated with vesting, exercising and eventually selling shares

·        Understanding the associated tax liability and timing, paying the taxes themselves, and identifying strategies to minimize their impact

·        Being aware of risk management considerations when potentially holding too much company stock, rather than maintaining a well-diversified portfolio

 

Given all of these considerations, equity compensation planning is never a "one and done." Your restricted stock (units) and options will have a vesting schedule, and you'll have to make serial decisions on what to do with them. Whether to exercise, continue to hold, or decide to sell are all questions that will come up every quarter, and you'll need to think about them in the context of at least four broader considerations:

 

·        Your overall financial goals

·        Your short-term cash flow needs

·        Optimizing the timing of exercising & selling decisions from a tax perspective

·        Maintaining a well-diversified portfolio

 

The Role of a Comprehensive, Fiduciary Financial Advisor

 

Given the complexity not only of the discrete compensation elements, but the interplay between them, it’s important to work with an experienced advisor who is committed to the fiduciary standard – putting clients’ interests first.  This means working with a “fee-only” advisor – one who is paid only by you, the client, rather than someone who receives commissions for recommending certain products, whether insurance or mutual funds. 

 

Moreover, because of the complexity of such situations, it’s critical to work with a comprehensive advisor, one who has the expertise to consider all aspects of your financial situation – cash flow, investments, taxes, estate planning, and insurance – and not just one area, as many advisors are only licensed to manage an investment portfolio or sell insurance products, for example.  Making sure that all aspects of your financial life work together in a seamless manner will give you the best possible chance to achieve your life’s goals. 

 

But the Most Important Thing Isn’t the Money

 

The role of a comprehensive financial planner is simple: it’s to understand all the various complexities of your financial picture, have a deep understanding of what you want to achieve, and then connect the dots – offer the most effective strategies for you to achieve your goals. If you’re like most people, you aren’t in fact working for money; you’re working for your family and to create a life you love, and to have the option of using your money to “buy time” in order to do so.

 

The Bottom Line

 

Working with a comprehensive financial advisor can help you start by more clearly articulating what it is you want, whether that's an early retirement, a work-optional mindset, or some other goal that is personally meaningful to you. Understanding the nuances of your compensation, and the available strategies to best take advantage of your awards and options, is one of the key steps for creating a comprehensive financial plan that allows you to live the life you dream of.

 

 

Want to know more?  Schedule some time today to discuss your goals and compensation questions with an experienced professional who can save you time and create personalized, tax-efficient strategies so you can live a life you love.



 

This work is powered by Advisor I/O under the Terms of Service and may be a derivative of the original.

The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.

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