Retirement Planning for Corporate Executives and Upper Management

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As your profession evolves, your retirement planning needs change. If you are a corporate executive or in an upper management position not only are you highly compensated, you often have access to a different set of company benefit options. You have more variables to coordinate when it comes to your retirement planning.

Making the optimal decision as to when and how you use these benefits can make a huge difference in your future level of retirement security. Below are four things you'll want to do to so you're ready for whatever financial conditions come along.

Increase Your Savings Rate and Consider Your Level of Career Risk

The more you make, the more you’ll need to save to be able to maintain your lifestyle throughout retirement. And if you’re highly compensated you also have to keep in mind the level of career risk you are exposed to.

While in your peak earning years focus on building up excess cash reserves, funding as much as possible into your 401(k) and other benefit plans, getting a financial plan, and keeping your career skills relevant.

Use Deferred Compensation Plans Wisely by Staggering Payout Dates

Numerous variations of deferred comp plans are offered to upper management and corporate execs. These most common name for such a plan is a SERP (supplemental executive retirement plan), but they may also be called top hat plans, excess benefit plans, or benefit equalization plans.

These plans allow you to specify a future date when compensation will be paid out to you. Many folks randomly select payout dates without considering the tax consequences or how this future payout date may fit into their retirement or future career plans. Often they receive a lump sum upon retirement or upon leaving the company. This isn’t always the wisest way to receive this money.

By carefully selecting the timing of deferred comp payouts you can often minimize taxes and create a smoothing of income as you transition into retirement. Ideally, you will stagger out payout dates so that tax consequences are spread over multiple calendar years.

Reduce Exposure to Company Stock

Most corporate execs have a disproportionate amount of their net worth tied to the stock of the company they work for. The stock may come in the form of non-qualified or incentive stock options, restricted stock units, and through employer matching contributions or an ESOP (employee stock ownership plan) inside the retirement plan. Some folks even buy more stock at a discount through an ESPP (employee stock purchase plan).

You don’t want a large portion of your net worth and your future income all tied to the success of one company. Creating a plan to divest of company stock is smart. You must do this. Below is an overview of three types of stock exits to consider.

  • Exercising your stock options - There are two types of stock options, incentive options, and non-qualified options. Each has a different way of being taxed. Work with a tax expert or financial planning specialist to create a strategic exit plan so you sell exercise options while paying the least amount of tax possible.
  • Making a strategic plan to sell shares of stock - If you own stock from RSUs, ESPP investments, or simply because you bought some, you can use covered call strategies to generate income from the stock while establishing price points at which to sell it. This can be a great way for those reluctant to part with shares to create a plan to reduce their risk exposure to a single company stock.
  • Possibly hold shares in employer plans - Stock in an employer plan is the one kind of stock you may not want to exit out of. With stock from employer matching contributions, you have a special distribution option upon retirement, something called net unrealized appreciation or NUA. An NUA distribution allows you to distribute company stock from your retirement plan, pay ordinary income tax only on the cost basis of the stock, and then have the gain treated as long-term capital gains – which are taxed at a lower tax rate than ordinary income.

Use Financial Planning Services

Some companies pay for financial planning services for their executives and upper management through a pre-chosen company. If your company doesn’t do this, consider seeking the services of a fee-only financial planner who has a fiduciary obligation to you.