Those employees who have earned stock options as part of their compensation package have additional challenges in optimizing their wealth plan. Dealing with options is like playing three-dimensional chess. You need to think about and plan for the following:
- What has been the trend in the Company's stock price and what is its fair value?
- What are the expiration dates by which you must make critical option exercise decisions?
- Are there tax consequences on the option income that may drive you into much higher tax bracket, reducing your after tax return?
- How will you coordinate the tax consequences of your stock option exercise decisions with other tax oriented, cash flow and investment decisions? These decisions include items such as the sale of stock, IRA distributions, starting date for Social Security and the after tax impact of other employment.
It is impossible to know how the future stock price will align with the expiration date of various options. Therefore, HCM believes it is important to focus on the return requirements of your wealth plan. If proceeds from the option exercises are an important aspect of your overall retirement plan, the exercise should be timed, if possible, to deliver the returns calculated as part of your financial planning process. Once these objectives have been achieved, it is wise to diversify some or all of the near-term risk the options represent.
HCM's Stock Option Evaluator™ was designed be used in conjunction with our Tax Bracket Analyzer™ to help those with options make better decisions.