If you work at Apple and do a good job, you will likely own way too much Apple stock. Good problem to have right? We can talk about not having all your eggs in one basket, but for many of my clients with valuable stock options, they can’t even see the basket under all those eggs. These stock option tips and guidance may apply to anyone reading this who is lucky enough to have been awarded incentive stock from their own employer.
This is not an examination of the value of Apple stock or the company’s future. But rather a financial planning conversation I’ve had with actual clients (names and details changed to shield their identities). Let’s call them Steve and John. He had been working at Apple for over a decade, made a good salary, and had accumulated a large number of stock options.
Steve came in with his partner said the following things
“It is time to get serious about saving for a house, and planning to retire someday.”
“We don’t have much, all we really have is my stock options at Apple. They have done amazing, so I don’t know if I want to sell them.
‘If we sell, we will owe a ton of taxes, and we totally don’t know what else to do with the money.”
“We live off our salaries and save the options. We have enough money to get by, but not really a ton extra to save.”
The Problem with Apple Stock Options:
First off too much company stock is a great problem to have. It is also relatively easy to fix. If you work for a massive company like Apple or Google or Microsoft and have stock options and any other investments you probably own even more of your company stock than you realize. Similar advice will also apply workers at Tesla, Space X even ATT for that matter. If you dig into any other mutual funds, index funds, or Exchange Traded funds you will likely find Apple stock there in most of those holdings. The same goes for Google and Microsoft.
As you keep working for these companies, you will likely continue to accrue more stock options over the year. For most people who work in management, these stock option grant amounts will dwarf other savings or even contributions to your 401(K). If the stock does well, your portfolio will tilt even further to being dominated by this single stock. This can turn into a disaster when/if the crap hits the fan. Just ask anyone who worked at a bank and had bank stock grants during the financial crisis.
Using these options to fund their Financial Plan:
The problem for Steve and John was they ended up being a bit cash poor by holding onto all of their Apple Stock Options. Their net worth was growing each year enough to stay on track for their financial goals. Without touching their options, they just didn’t have enough cash flow to save for a home (they live in San Francisco, where a dump will set you back Million dollars and up). They also were missing out on tax savings from 401(K) contributions. Not to mention leaving thousands of dollars on the table by missing out of a generous 401(K) matching from Apple. This is like free money by the way. EVERYONE READING THIS- YOU ARE CRAZY IF YOU DON’T GET EVERY CENT OF EMPLOYER MATCH!!!
Selling enough Stock Options to Fund 401(K) Plans:
One of the easiest decisions to make was to start selling some of the stock options to give them money to fund their retirement accounts fully. Both Steve and John are highly paid and need to be contributing to their 401(K) Plan. Both will be maxing out the account with contributions each per year. For 2019, you can contribute up to $ 19,000 to your 401(k) plan, $25,000 if you are 50 or older.
Why was this an easy decision? Well, they both can technically repurchase Apple stock in their retirement accounts is they choose to. They don’t, and I don’t recommend that they do. All the same, they could. Also, the tax deduction for contributing to these accounts should more than offset the taxes owed for selling stock options (especially for long term capital gains- stock options held for more than one year.) Then I showed them how much money they were leaving on the table every year by not getting the full company match on the 401(k). It could be millions of dollars over their working lives.
Selling Apple Stock Options to Fund a house down payment:
John and Steve had the goal of buying a home in the Castro area of San Francisco. This was a few years ago, but they figured they would need at least $1.5 million to get a home they could live in for some time. That works out to about $300,000 down payment assuming 20% down. We planned on the selling of Apple Employee Stock Options over three years to “save up” for the down payment on their new home. Selling over a few years helped them strategically minimize their taxes on the options when exercised.
Since we did this, they’ve ended up buying a house in the neighborhood they wanted to live in. Again, we weren’t selling Apple stock just to sell it. We were selling to help diversify their overall investment portfolio. More importantly for this chunk of Stock Options, we were helping them prepare to buy a home.
Still, have more Stock Options Value then when we started:
We’ve been selling off funds for several years. In fact, we set a goal of selling 20% of the Stock Options value each year. That included the money above for 401(k) Contributions and a house down payment. We sell some options, and each and every year Steve is granted more. Pairing growth in the value of Apple Stock over the years with the new stock option he has earned the total value of the Stock Options account has continued to grow even as well sell off a significant amount each year.
Steve and John own way more Apple Stock that would be prudent typically. Usually, an individual wouldn’t have more than 10% of their portfolio in any one stock. This can be difficult to achieve for business owners, or people receive a large portion of their compensation in the form of stock options. While Steve and John continue to own more dollars’ worth of Apple Stock options, over time, they have diversified, and this single holding has become a smaller porter of their overall portfolio.
Each year we review, how many shares Steve has been granted. What else is going on in their lives (aka what they may need money for), and we review taxation. We only sell shares that will qualify for long term capital gains. I try to avoid short term capital gains unless the money is actually needed at that time for some reason.
FOMO Be Gone:
Fear of missing out has been a big challenge for many people I’ve spoken with who own large amounts of their company’s stock options. In this case, APPLE is a very public stock, and people who don’t even hold it will often have an opinion of the company and its value. Millions of us use ipads, iPhones, Apple TV or at least have ventured into an Apple Store. Telling someone you are selling Apple stock likely won’t earn you praise from friends at a cocktail party.
With the confidence inspired by their financial plan, you may notice we are never talking about what the future holds for Apple stock when making these decisions to sell a small portion of their stock options. It is all about what that money will be used for and reducing their risk from owning just one stock. That risk is there for any person holding only one stock.
How could you use your stock options to improve your life?
