As we approach the end of 2019, a common topic for discussion with our Nike clients is around planning for charitable contributions.  Nike employees have many factors to consider if they are hoping to maximize both the Nike Donation Match program and the tax benefits of charitable contributions.

MAXIMIZING THE NIKE DONATION MATCH PROGRAM

In order to maximize the impact to your chosen charity, the first step is to find out if it is qualified for a match.  To check the qualified donation match list, simply log into the Nike Give Your Best website: https://nike.benevity.org/user/login.

Next, consider the matching rules and limitations outlined below.

Nike Donation Match Details:

• Dollar-for-dollar match for charities on the qualifying list

• Double match for donations to charities aimed at youth sports 

• Maximum donation match of $10,000 per calendar year

• Grant of $10/hour for volunteer hours up to a maximum of $1,000/year

Additionally, Nike has participated in Giving Tuesday, which was Tuesday, December 3rd this year.  If you make donations on Giving Tuesday, Nike will make a double match on all qualifying charities.  Thus, planning to make your donations on Giving Tuesday could be a great way to maximize the benefit to your charity.

Once you determine that your charity qualifies for the donation match and the amount you want to give, the next step is to decide how to fund the donation.

WAYS TO FUND THE DONATION

The most common method of funding a donation to charity is by contributing cash.  However, a frequently overlooked opportunity is to make contributions from appreciated investments.  For Nike employees this is typically some form of Nike stock.

There is an additional tax benefit to using appreciated investments for your donation.  All appreciated investments would normally be subject to taxes upon selling the investment, but this can be avoided/minimized if it is first transferred to and then sold by the charity.   The charity receives the investment, sells it immediately and the cash proceeds are used for the charitable cause without tax consequences. 

Since Nike employees and executives typically own many different types of stock, we will explore the advantages and disadvantages of each type in addition to outside options.

1. Nike Stock - This is Nike stock purchased individually, outside a Nike employee benefit.  This can be a good option depending on how long you have held the stock.   The entire market value of the stock can be tax-deductible if considered long term gains (i.e. held for longer than one year).  If the stock is held less than one year you only receive a tax deduction on the “cost basis,” which is the original amount you invested.  If this stock has the most growth (largest gain) of all your investments, then it could be one of the most tax-advantageous options for a donation.

2. Nike ESPP – Nike stock purchased through ESPP has a different set of tax implications and considerations.  Nike allows you to purchase the stock at a 15% discount and that discount is taxed as income whenever you sell the stock.  The discount is also taxable upon donating the shares to charity.  Additionally, the holding period to get the best tax treatment and receive a full deduction for the full market value is longer than normal Nike stock as described in the first scenario.  ESPP shares need to be held for at least 2 years from the grant date and at least 1 year from the purchase date to receive the optimal tax benefits.  Depending on the amount of growth in this stock, it may not be the best stock to utilize since the 15% discount will still be taxable upon the sale and the holding period rules may be challenging to track.

3. Nike Vested Restricted Stock Units (RSUs) and Restricted Stock Awards (RSAs) – RSUs and RSAs generally vest over a 3 or 4-year period.  Once this stock is vested, the stock becomes just like normal Nike stock (see option #1) and therefore should be held for longer than one year before donating it to a charity.  Since the vested shares become the same as option #1, the benefit in donating these shares depends on how much it has grown.  As with other stock, the larger the gain the better as you will avoid higher taxes if used as a donation.  Unvested RSUs and RSAs are not available for donation to charity.     

4. Nike Stock Options – Stock Options are non-transferable and not available to donate to charities.  You may, however, exercise the option and either transfer the exercised stock or cash proceeds to the charity.  This method does not offer a significant tax benefit since income tax is paid on the option exercise.  If you exercised stock options and held them as stock for a long period of time with significant growth, then it could become a beneficial method.

5. Stock in a Different Company (i.e. Amazon, Google, etc.) – Nike employees that have worked for a publicly-traded company in the past typically own sizable amount of stock from their previous employer.  This can be a good way to divest of that stock and diversify without having to pay additional taxes when sold.

6. Other Stock/Mutual Funds/ETFs – If you have other outside investments those can be also be an effective gifting option. These follow the same holding period rules as option #1.  Again, comparing the amount of gain in these investments versus other types of Nike stock is important in evaluating the optimal gifting and tax benefit option.

Once you have made the donation with one of the options above, make sure that you receive a receipt and submit it through the Give Your Best platform within 90 days of the donation.

Other Considerations

• Be mindful of the Nike Blackout period.  If you are an executive that is subject to this restriction, when selling Nike stock during certain times of the year you will want to make sure that you do not donate Nike stock during the Blackout Period.

• Tax Deductibility of Charitable Contributions: Charitable tax deductions changed significantly in 2018 with the recent tax law change from the Tax Cut and Jobs Act of 2017.  Be sure to check with your CPA or Financial Planner to see if your charitable contributions are tax-deductible for this year.  If they are not currently tax-deductible, you still may be able to take advantage of the tax deduction using a strategy known as “bunching.”  See the Human Investing blog post for details on the “bunching” strategy HERE.

• In addition, based on your total income, there may be limitations to the amount of your deductions in any given year.  Limitations are determined by your Adjusted Gross Income on your tax return. If you cannot take the full tax deductions now due to this limit, those deductions can be carried forward for up to 5 years in the future.

As we have outlined above, there are many options for Nike employees to consider when marking charitable gifts to the organizations that are important to them while at the same time maximizing the tax benefits.  These strategies can also be an effective way to diversify your exposure to one stock without having to pay a significant tax bill in the process. 

If you have questions or want to know more about how to plan your charitable giving as a Nike employee, you can schedule time with me on Calendly below, e-mail me at marc@humanvesting.com, or call or text me at (503) 608-2968.

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What are these individuals doing with their clients?

On several occasions we have had a “financial planner” approach us and ask if we could do some financial planning work with their clients. This is a confusing request. The request was not made because there was too much work to do and additional financial planning help was needed. The question was asked because these “financial planners” were not doing (or capable of doing) financial planning. What are these individuals doing with their clients? They are doing meaningful and helpful work, but it is typically isolated to advice focused on a specific product, either investment services or life insurance. They are not equipped (either educationally or structurally within their business) to do comprehensive financial planning, and that has created a gap between the services they are providing and the full financial planning needs of clients. It also begs the question of what clients expect when they hire a “financial planner.” Do they know? Do they know what they don’t know? Do they assume that all financial planners and advisors offer the same range of services?

Imagine going to the doctor

We would postulate that clients outsource the financial planning process as much as they do the financial planning outcomes. More clearly, they trust the expert to guide them through the process and illuminate financial topics that they should be considering as much as making specific recommendations within areas that have already been identified by the client. It is quite similar to what a patient expects of a doctor. The patients brings in a set of identified ailments or existing conditions and expects the doctor to treat these. However, the patient also expects that the doctor will use their expertise to guide them through a more comprehensive physical evaluation that will identify things that are not yet known to the patient. Whether it is in areas of health, legal or business consulting, architecture, etc., we expect the experts to not only address the identified concern but to navigate us through a perplexing and complex topical maze that many of us know very little about. The truly desired outcome normally circles around something like, “help me know what I should know.” There is a lot of trust and vulnerability in that request, and it can get worse as there are many financial incentives that are not in the client’s best interest that have kept the financial planning industry siloed around investment services (stay tuned for much more on that in a later post). Let’s go back to the medical analogy. A patient would never want to go to a doctor who has a drug or pill already identified and is evaluating the condition of the patient by searching for ways to use that drug or pill to treat the patient. Instead, a patient would want a doctor who evaluates the medical situation with an unbiased lens and only uses a drug or pill if it is the most effective way to treat the identified condition.

Truly comprehensive financial planning

Below is a picture that depicts what most financial planning firms look like (the pieces on the right – “Product-focused financial planning”). These firms primarily start with a product and identify ways that their product can help clients reach their financial goals. Their version of financial planning focuses almost exclusively on how investments or life insurance can be used to fund a client’s retirement. They determine retirement funding needs, manage client investments/insurance, and establish and manage tax-advantaged plans (IRAs, Roth IRAs, 529 Plans, etc.). The additional financial planning topics are often neglected or marginally addressed because they are ancillary to the investments and life insurance products (see bottom right of graphic). Many might use the terms “wealth advisors” or “wealth management.”

The picture on the left (“Truly comprehensive financial planning”) is what we propose financial planning should look like. This firm assesses a client’s financial needs from a comprehensive financial planning perspective and realizes that “investment planning” is only one part of financial planning. All of the other aspects are critical in and of themselves, but they also have an impact on the investment strategy and plan. This difference in structure is not a minor variation in mindset or perspective. It is a completely different paradigm that allows for the purest, most comprehensive, and optimal human-centered financial planning. Truly comprehensive financial planners consider all of the client’s financial goals and helps them see the interconnectedness of the various parts as well as the unique behavioral elements that will interact with the plan.

Our standard

We are an ensemble practice that desires to model the purest and most human-centric version of comprehensive financial planning (picture on the left) so that we can faithfully serve the financial pursuits of all people. One way that we address the limitations cited above is to place an importance on hiring CFP® credentialed advisors to work among our other world-class humans. As a first step to CFP® certification, individuals must complete CFP Board education requirements in the major personal financial planning areas, including:

• Professional Conduct and Regulation

• General Principles of Financial Planning

• Education Planning

• Risk Management and Insurance Planning

• Investment Planning

• Tax Planning

• Retirement Savings and Income Planning

• Estate Planning

• Financial Plan Development (Capstone)

After fulfilling the education requirement, candidates must take and pass a rigorous application-based exam that covers the above-listed topics. After passing the exam, candidates must obtain at least 4,000 hours of financial planning work experience and additionally adhere to the CFP Board’s Code of Ethics and Standards of Conduct (including continuing education hours in ethics and content areas required every two years). While other financial services credentials and licenses provide training and permit certain financial product sales, the CFP® certification is recognized as the highest standard in personal financial planning. It provides the education and training necessary to offer comprehensive financial planning services. The CFP® certification is an important foundation, but it is only the first step towards delivering truly comprehensive financial planning.

We will more fully address many other topics mentioned in this post in future pieces as many of the systematic factors identified in the last article touch and extend from what has been explored above. We believe that the ‘human’ part of Human Investing involves both hiring and investing in exceptional humans and offering investment services within the context of the most comprehensive and purest form of human-centered financial planning.

Ryan Halley, Ph.D., CFP® is Director of Planning Practices and Research at Human Investing. He holds a doctorate in Personal Financial Planning from Texas Tech University and an MBA with a concentration in Finance from The Ohio State University. Ryan has his CERTIFIED FINANCIAL PLANNER™ certification. Dr. Halley is also a Professor of Finance and Financial Planning at George Fox University, where he directs a CFP® Registered Program located near Portland, Oregon. He has co-authored a book and has numerous peer-reviewed journal articles. Additionally, he has been an invited professor and lecturer at various universities in the United States, Canada and China.

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We wanted to explore a common question that we hear from our Nike clients: “Is the life insurance benefit offered through Nike a good deal?”  We will explore the hidden costs that exist within this benefit and compare it to alternatives to evaluate whether or not it is a good deal.

The Benefit

Nike provides a basic life insurance death benefit of half your annual salary up to a maximum of $500,000, paid by the company. 

Nike also provides employees with the opportunity to purchase additional supplemental life insurance in an amount up to 5½ of your salary up to a maximum of $3.5 million. 

If you combine basic life insurance and supplemental life insurance, the maximum amount you will receive is 6 six times your salary up to a maximum of $4 million of death benefit.

Nike does provide employees with a benefit credit to purchase up to 1½ times your salary of supplemental life insurance.  The benefit credit is, however, subject to income taxes.

On the surface, the Nike supplemental life insurance sounds like a good deal, right?  Before we can make that determination, we need to look at hidden costs as part of this equation.

Hidden Cost #1 - Imputed Income

Life insurance through your employer with a death benefit above $50,000 is considered a taxable fringe benefit.  The IRS puts a dollar value on this benefit called “imputed income," and the Imputed Income is taxed as wages, making it subject to federal, state, Social Security, and Medicare taxes in the same way that your salary is taxed. 

If you look at your Nike paystub, this item will show up under the category of “Add’l Taxable Other Compensation.” Within that category, you will see a line item called “Imputed Income -Life.”

The taxes that are created from the imputed income create an additional cost to the life insurance coverage that is typically missed and not considered.  The higher your income tax bracket, the more punitive the imputed income becomes.  

Hidden Cost #2 - Premium Age Bands

It is also essential to understand that the premium you are currently paying for your supplemental life insurance will not stay the same and will likely increase over time.  The primary reason for the increase is that premiums are subject to “age bands.”  Age bands provide a set cost for anyone within a 5-year age increment.  For example, there is an age band for ages 30-34, another for ages 35-39, another for 40-44, and continues up to age 70+.  The older you are, the higher the cost in that age band.  The premium cost that you thought was good may quickly become expensive as you reach new age bands. 

The back-up plan

Given the “Hidden Costs” that we shared, how do you know when the supplemental life insurance is a good deal or not?  To determine that, we need to compare it to the possible alternatives.  At Human Investing, we believe that the only appropriate option is inexpensive individual term life insurance. 

Individual term life insurance is typically purchased for a set number of years (10, 15, 20, 30 years), and the premium during that time is locked in and guaranteed not to change.  Before you are approved for the policy and the premium cost is determined, you will typically be required to go through a medical underwriting process, including a 20-minute medical exam, blood and urine samples, and possibly medical records from your doctor.

When the Nike Supplemental Life Insurance Benefit is a Favorable Deal

1. Simplicity and Time Savings are More Important than Lower Cost - The supplemental life insurance is easier to obtain than individual term life insurance.  During open enrollment, you can elect up to $500,000 of death benefit just by clicking “yes.”  An amount above $500,000 requires you to fill out a health statement, but that is still much easier than going through the medical underwriting needed for individual term life insurance.

2. Current Medical Issues - If you have any pre-existing medical issues that would either cause you to be declined from individual term life insurance or create cost-prohibitive rates, the supplemental plan may be the best way for you to obtain affordable life insurance coverage since you can avoid the medical underwriting.

3. Coverage Only Needed for a Short Time (Less than 5 Years) – If you think you only need life insurance coverage for a short time, supplemental life insurance can be the right choice since the cost is low for the short-term.  In our analysis, coverage becomes expensive in the intermediate to long-term due to the ongoing drag from hidden fees we discussed.  So how long do you need life insurance coverage?  Generally, income earners need life insurance to replace future income for their family for as long as they were planning to work.  The one exception is if they have saved enough funds to replace that future income for their family adequately.  The best way to determine this is to examine this within personalized financial planning projections.

When the Supplemental Life Insurance Benefit is an Unfavorable Deal

1. You Have Average Health or Better – With individual term life insurance, one benefit of medical underwriting is that you can reap the benefits of being healthy.  The better your health), the lower your cost may be.  Company-sponsored group plans, like the Nike supplemental benefit, base their rate on a broad group that is averaged together, which includes people from excellent health to poor health.

2.  You Need Life Insurance Coverage Over an Intermediate to Long Period of Time (7+ Years) – As we mentioned earlier, our analysis has shown that the cost of individual term life insurance is often much lower than supplemental life insurance by a significant amount.  This shows most prominently when coverage is needed for about seven years or longer.

3.  You Want to Maintain Coverage When You Leave Nike – If you leave Nike, it is challenging to maintain the existing coverage, and portability options are limited.  With individual term life insurance, you can keep the policy with you wherever you go.  Additionally, you will lock in a price based on your health and age when you purchase it. Waiting later to buy it will cost you more since you will be older, and any health issues that might arise during that time may cause the cost to increase further.

It’s Not Too Late to Change

Let’s say that you just completed open enrollment, and you are having second thoughts about the supplemental life insurance coverage you just enrolled in.It’s not too late to change your mind. You can purchase individual coverage and can cancel the Nike coverage mid-year under one of the available exceptions.Simply contact Nike HR and tell them that you have a "Family Status Change," and the status change is "Employee/Spouse/Child/Other Gains Other Coverage."Please keep in mind that we always recommend waiting to cancel any coverage until the new coverage replacing it is fully in place.

Where to Get Individual Term Life Insurance

There are many conflicts of interest in firms that offer life insurance. Therefore, we would recommend that you proceed carefully.  Many firms do not shop the market for the best company that fits you. Since many are affiliated with one specific insurance company, they are motivated by commission payouts and sales targets to funnel you to their affiliates.   We would also recommend staying away from more expensive cash value life insurance products like whole life and universal life insurance.

At Human Investing, we decided to stop selling commissioned life insurance since we felt strongly that it was a conflict of interest. This decision allows us to act as a Fiduciary 100% of the time.  To continue to serve clients well, we instead decided to partner with insurance firms that specialize in the specific type of insurance we believe in and will not try to upsell you on more expensive coverage.  If you would like a reference to one of those firms, just let us know, and we would be happy to share that information with you.

We’re here if you have questions

There is nothing fundamentally wrong or bad about Nike’s supplemental life insurance offer.  In fact, the Nike benefit is a more generous plan than we have seen at other companies.  The real issue is that life insurance offered through employers has hidden costs that can make the coverage expensive. If you have questions or want to better understand how to take advantage of the Nike Life Insurance Plan, you can schedule time with me on Calendly below, e-mail me at marc@humanvesting.com, or call or text me at (503) 608-2968.

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Last week while scrolling through Twitter I came across a tweet from Meb Faber, a thought leader in asset allocation (Meb is someone who I’ve never spoke to but have probably read or listened to 50 hours of his content), it read:

In 2010, five US stock fund managers were nominated for fund manager of the decade. Know how many outperformed this decade?

Zero.

Average underperformance of the five nominees was 5 percentage points per year.

And the winner? 8 percentage points underperformance per year.

— Meb Faber (@MebFaber) October 29, 2019

The tweet was referencing a November 2009 article that outlined the nominees for Morningstar fund manager of the decade (2000-2009). Eventually Bruce Berkowitz of Fairholme Funds, won the award in January 2010. This tweet (and more importantly the facts that substantiate this tweet) lit a fire under me, hitting right between the eyes on a few different ideas I have been ruminating on.

In my role at Human Investing I primarily deal with two groups of people:

• Committee Members and Trustees of Defined Contribution Plans

• Employees who participate in Defined Contribution Plans via group and one-on-one meetings

Meb’s content sparked ideas around how to facilitate positive outcomes as it relates to creating watchlist and fund monitoring criteria (very applicable to committees) and performance chasing/market timing (especially prevalent among plan participants).

Going beyond the character count

Prior to diving into to each of these thoughts it’s probably wise to present a deeper evaluation of Meb’s tweet. The key word here is “tweet”, as opposed to a white paper or long form article. His 280 characters caught some attention (including mine) and is not factually incorrect as it relates to using the S&P 500 as his benchmarks. I imagine if Meb was having a conversation with the fund managers in a room their rebuttal would probably include arguments like; “compare us to our category peer group and benchmark instead of the S&P 500” and “the objectives of our strategies perform better in a market environments like 2000-2009 compared to 2010-2019”. Both criticisms are fair points that we can flush out later.

The five funds nominated in the Domestic Equity space (let’s call them the fab five) were; Fairholme, Fidelity Low-Priced Stock, FPA Cresent, Royce Special Equity and AMG Yacktman. The charts and tables below illustrate the performance for the last two decades:

January 2000 through December 2009

All five of these funds outperformed the S&P 500 and Russell 2000 from 2000 to 2009.

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January 2010 through October 2019

In contrast to 2000-2009, these fund managers underperformed compared to the S&P 500 and Russell 2000 since January 1, 2010. Some lagging significantly more than others.

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For Committee Members

So What?

“Okay Andrew predicting which active manager will be the best performer is hard, but I already knew that. All our committee has to make decisions around data points like historical returns or if the fund manager got fired/retired.”

I hear statements like the one above a lot. Ultimately, I think about that statement and the data presented above through a scenario like the following.

Imagine it’s Q1 2010, you’re on a committee and are looking to replace the Large Cap Value manager. My guess is Fairholme (FAIRX) might have been at the top of your list (I don’t blame you!). However, now that we are almost 10 years after the fact, it’s easy to see that FAIRX would have not only been the worst choice of the 5 managers of the decade, but it also happened to be one of the worst performing funds in the Large Cap Value category. In other words, you bought a lemon.

So how do you implement and maintain a process that avoids decision making like this? There’s no “right way” but a few thoughts are:

• Have a quantitative and qualitative approach to fund monitoring and selection. It shouldn’t surprise us that a fund manager thrived from 2000 to 2009 and struggled from 2010-2019 or vice versa in the US equity markets. This would be like expecting a world class marathoner to also win the 100M dash. Historical returns obviously matter when evaluating a manager, however utilizing other quantitative metrics that account for risk-adjusted returns and utilizing qualitative metrics to truly understand what the fund is trying to accomplish essential to an excellent monitoring process.

• Have watchlist criteria that does not force your committee to be market timers. An article a few years ago references bottom quartile funds actually having better performance than top quartile funds on a forward-looking basis. By implementing monitoring criteria that are too strict, committees can handcuff their decision making process forcing fund changes that may be short sided and harmful to the plan.

• Do you want to have active managers in your retirement plan menu? Remember, as a plan committee member you are making decisions on behalf of all plan participants and giving them an opportunity for excellent outcomes. By deciding to remove active fund managers you remove decision structures like Q1 2010 example above. Sites like SPIVA make a fairly compelling case for this approach.

What Now?

• Go grab your Plan’s Investment Policy Statement and read it cover to cover. Does your plan currently have the structure and process in place to make prudent and defendable decisions?

• Have your plan track the investment changes that it makes to review how the decision worked out 3, 5 and 10 years later. This can often shed light on parts of your process that may be broken.

• Make qualitative notes about a fund/managers objectives. Imagine if a fund’s goals is to capture 80% of market upside and 50% market downside. Understanding that strategy should impact a committee’s process vs. a traditional equity strategy.

For Retirement Plan Participants

So What?

When conducting a group or one-on-one meeting with participants, I’m often asked about the investment options for their 401(k). My canned answer to the question goes something like this:

“Asset Allocation based funds, like Target Date Funds for example, are a great solution for many investors as they provide diversification across core asset classes and a glide path that aligns with your age/retirement goals. If you’re someone who is looking to be responsible and at the same time look at this account as little as possible, Target Date Funds accomplish both goals. If you are looking to build your own model or use additional choices there are X number (typically around 10 to 15) additional choices that allow you to accomplish that. If you have questions, I’m happy to be a resource in the fund selection process.”

For the most part, this post won’t be applicable to you as a plan participant if you simply default/select a Target Date Fund. However, if you are someone who is trying to create a more customized portfolio by selecting individual asset classes, consider these thoughts that relate to market timing and fund selection in a retirement plan:

• One could argue that someone’s savings rate and tax status of savings rate (Pre-Tax, ROTH, After-Tax) are more important decisions than asset allocation. Granted, being invested in equities over a long period of time matters a lot! Assuming you are invested appropriately, what I’m talking about is decisions like how much to be invested in small cap vs. mid cap vs. international. Stick to the basics and the rest will take care of itself.

• Trying to select outperforming asset managers can almost feel like trying to time the market twice. There are numerous studies that speak to how average investors behavior is…. not great and honestly, it’s understandable. Investing is often emotional when you are stomaching short term losses for long-term benefits. If we can stack hands and agree that staying invested through all market conditions is hard, is it fair to say that choosing top performing managers in addition to staying invested adds another layer of hard?

What now?

• Have your own personal Investment Policy Statement. If you are going to own active managers in your portfolio have a policy for why you choose to own or remove the manager. For the record, I believe that for certain investors it makes sense to utilize active managers, especially those with specific niches like ESG, specific risk tolerance, etc. While using active managers begs its own blog post, I’d be happy to grab coffee, jump on a call or email to talk further.

• Put the right amount of effort and energy into variables that move the needle most. Five years ago I was meeting with an executive of a manufacturing company with an annual profit sharing contribution between 10-15%. We got into a conversation about asset allocation and the ideal ratio of US equity to International equity. About 10 minutes into the conversation I looked at his balance and noticed that all $500k of the funds in the portfolio had been invested by the company. I paused the conversation and said Martin (we’ll call him Martin) have you contributed to this plan before? He responded that he didn’t know he could. This is an extreme example, but an example nonetheless, to make sure you do the necessary due diligence on the items that truly move the needle (savings rate, tax, planning, high level asset allocation) prior to getting into the weeds.

HERE’S THE FULL PICTURE

When I saw Faber’s tweet for the first time my mind was racing with so many questions: where’s the data behind this? How does this factor into my thoughts on active vs. passive investing? Did we ever own any of these funds in our plans (no)? How can committees make great decisions for participants? What were the fund flows associated with this time frame? What’s the best way to write a blog post about this and is Tom Brady the greatest quarterback of all time? Put simply there was a lot going on.

What I’ve landed on aligns with how ERISA requires retirement plan Fiduciaries to think; regardless of your outcome have a process that allows you to substantiate a decision, document that process and make that process repeatable.

The piece of information that I’ve held off until now, is how these funds performed over the full 20-year time period (see below). Does this mean stop everything you’re doing and invest it all in the AMG Yacktman Total Return? No. Point to point returns are ultimately a poor way to judge fund performance. Chart crimes happen all the time because people try to craft a narrative that aligns with their own biases. Don’t fall victim to chart crimes do your own research or engage with someone who is a Fiduciary (all the time) to help you figure it out.

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Let’s return to an observation that we shared in last month’s introductory post. Do you remember the administrator who asked the peculiar question, “Isn’t financial planning a dying profession?” This question caught us a bit flatfooted at first as we wondered how anyone could work in a business context for the past two decades and think that financial planning is a dying profession. 

It’s a growing career field.

There are many ways to measure where an industry might be in its lifecycle, but since we were planning a program whose goal is to place students in jobs after graduation, the closest statistic we could measure this statement against was the projected job growth within the industry. According to the Bureau of Labor Statistics Occupational Outlook Handbook (OOH), employment of financial planners is expected to increase by 7% from 2018 to 2028. This is moderately higher than the average for all occupations, which is just 5%. Most professions that are dying do not have a projected job growth rate that is 40% higher than the overall growth rate. 

So why was such an odd question posed? 

It is evident that we were not talking about the same profession. But how could that be? If the respective profession were changed to nursing, it would not be confused with pharmacology. Architecture wouldn’t be confused with lumber production. Those professions (and most all others) are rather clearly defined by name and distinguished from other professionals. Why such confusion involving the work of financial planners? 

In last month’s blog, we proposed a long list of systemic factors that have impaired financial planning outcomes and distorted the way in which financial planning is done. Near the bottom of that list was a perilous factor whose proximity near the end of the list was not indicative of diminished importance. In fact, it’s the focus of this month’s post and one that will provide the foundation on which subsequent pieces will be built. It is an overarching paradigm that has played a significant role in creating the current culture and systems of financial planning—a culture that we believe has weakened the full potential of financial planning outcomes and circumvented most clients’ primary needs. 

Here’s the factor:

Investment services silo while human-centered financial planning is comprehensive in nature. 

In other words, using the term financial planning to represent what is instead solely the investment services function. Historically, most all financial services have been addressed in silos. An individual would have a bank for all savings and cash management functions, go to a stockbroker for non-retirement investing, use a Human Resource office to establish and fund a retirement investment plan, use an insurance agent for all insurance needs, have a Certified Public Accountant for tax preparation, contact a realtor and mortgage banker for housing and property purchases and funding, and hire a lawyer to address any legal matters. Most of these professions still exist and serve valuable market functions.

Comprehensive financial planning uses aspects of most all of these job functions in the implementation steps found within a financial plan, with the critical element being the integration and interaction of all areas of financial management. No financial area stands on its own. 

More misconceptions.

However, the investment services silo structure remains different from all of the others — it has experienced radical transformation, leading us to agree with this questioning administrator if he had in mind a stockbroker when we said “financial planning.” Indeed, the historic profession of being a stockbroker is largely dead. Consider the progression of tax-advantaged investment accounts (primarily for retirement and college funding), the evolution of mutual funds and exchange-traded funds, the broad access to information, the speed of technology, and the automation and machine learning tools surrounding asset allocation. The world of investment management has morphed from being one of stock picking and asset selection to one of managing diversified investments across asset classes in tax efficient ways in order to fund future goals with optimal risk/return profile portfolios.

The confusion surrounding this topic also led to this administrator’s next question, which was, “Don’t robots already do financial planning?” (It should be noted that this is not one person’s perception and inquisition—we are asked a variation of this question all the time). See, the misunderstanding here is based on the same paradigm. If financial planning is defined as asset allocation and building an efficient investment portfolio that considers a client’s risk profile, then, indeed, robots (algorithms and machine learning) have replaced humans to a considerable extent. 

This is good, right?

Well, that’s not really the critical question. It is far less about the industry being right than it is about the involuntary need to stay relevant by keeping up with the break-neck pace of change. In other words, the speed of change has altered the industry right in front of our eyes without much deliberate architecture. The system changed. Go back with us to last month’s post about the state of the industry. In that article, we stated a purpose for the blog series as defining what we see as wrong with the industry. 

A major part of the complexity is that it is not any one thing. Nothing big is wrong. It is smaller pieces that are broken, and those small pieces accumulate into a perception of confusion and mistrust and suboptimal financial planning outcomes. The practice of investment management and investment managers all around the world have provided valuable services to clients as they work towards growing financial assets to meet future financial goals. This is good. But it has created a world where it is now virtually impossible for the marketplace to distinguish between a “financial advisor” and a “financial planner.” No matter what term the industry uses, the profession is filled with financial planners who almost exclusively do investment services work.

This is a long way from comprehensive financial planning.

Investment planning is only one piece of financial planning, and ignoring the other components leads to suboptimal outcomes. Again, it is not about semantics (what we call ourselves), but it is instead about substance and structure. 

In our next post, we will begin to build a picture of how we view the most comprehensive and purest form of human-centered financial planning. Here’s a teaser…if you like puzzles, you’re in for a treat! 

Ryan Halley, Ph.D., CFP® is Director of Planning Practices and Research at Human Investing. He holds a doctorate in Personal Financial Planning from Texas Tech University and an MBA with a concentration in Finance from The Ohio State University. Ryan has his CERTIFIED FINANCIAL PLANNER™ certification. Dr. Halley is also a Professor of Finance and Financial Planning at George Fox University, where he directs a CFP® Registered Program located near Portland, Oregon. He has co-authored a book and has numerous peer-reviewed journal articles. Additionally, he has been an invited professor and lecturer at various universities in the United States, Canada and China. 

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In our introductory post to this series last month, we mentioned that we intend to identify and call out a long list of systemic factors that have impaired financial planning outcomes and have distorted how financial planning is done. We will share what we believe are solutions to these obstacles and ways we think the industry needs to address these challenges to offer clients the most comprehensive and purest form of human-centered financial planning.

Times of disruption create the most significant opportunities for progress.

These moments do not come easily and virtually never come without a cost. But the advancement is the cause that makes it worth it. The world’s greatest transformations and progressions have followed similar patterns. In our effort to push forward, we will most likely step on some toes and create some uncomfortable conversations. It is inevitable, but hopefully it can be done in respectful ways that lead to eventual breakthroughs. Our purpose is not to undermine, isolate, or hurt anyone. We intend to create dialogue, with our ultimate goal of influencing and improving the financial planning process.

The best outcomes will arise from collaboration.

In our effort to ascertain and convey these systematic factors and challenges, we probably have some of it wrong. There are likely better (and undoubtedly) alternative solutions to those we have conceptualized. We also appreciate that there are many perspectives on the same situation. We have asked a bunch of questions of ourselves, and more questions develop as proposed solutions are created. Technology is changing everything. The world changes at a pace that makes it challenging to keep up and stay intentional about everything we do. Even as we process the current state of our industry and share a small list of insights pertaining to what we believe are progressions in our service to clients, we are actively looking to continue to change as things evolve. We do not pretend to have it perfectly illuminated and have the one best operational model in place. What we do know and are driven by is that clients’ needs and interests must be at the center of everything we do, and there is room for improvement in this initiative. The industry can get closer to this ambition, and any step in that direction is a step worth taking (and perhaps a feather worth ruffling). Thank you for taking a seat at this table.

Ryan Halley, Ph.D., CFP® is Director of Planning Practices and Research at Human Investing. He holds a doctorate in Personal Financial Planning from Texas Tech University and an MBA with a concentration in Finance from The Ohio State University. Ryan has his CERTIFIED FINANCIAL PLANNER™ certification. Dr. Halley is also a Professor of Finance and Financial Planning at George Fox University, where he directs a CFP® Registered Program located near Portland, Oregon. He has co-authored a book and has numerous peer-reviewed journal articles. Additionally, he has been an invited professor and lecturer at various universities in the United States, Canada and China.

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The Nike Deferred Compensation Plan can be a powerful way to lower your income taxes and save additional pre-tax funds above and beyond any 401(k) contributions.

With open enrollment approaching, we wanted to share the 5 most common mistakes we see with Nike Executives.

1. Ignoring Profit Sharing Contributions from Nike

If you earn over $280K (2019) in combined Salary & PSP, then Nike makes profit sharing contributions on your behalf directly into the Deferred Compensation plan even if you do not contribute to the plan.  These contributions are often viewed as insignificant, but they can quickly accumulate to a sizable amount.  We commonly see these contributions ignored and left invested in the default, which is cash, and thus miss out on multiple years of potential growth.

2. Forgetting about Evergreen Provisions

Evergreen provisions mean that any elections you make in the previous year will continue to roll forward each year if you do not participate in open enrollment. For example, if you decided to defer 10% of your salary last year and do not participate in open enrollment, you will automatically be re-enrolled at 10%. Deferred Compensation plans are more rigid than 401(k) plans and you cannot change your salary deferral to the Deferred Comp Plan mid-year. The takeaway is that if you want to make any changes to deferral percentages, sources or distribution options it is important to participate in open enrollment.

3. Not Having a Strategic Plan for Distribution Option Selection

In the Nike plan you have the option to select a distribution schedule in which the funds are paid out after leaving Nike. The options range from Single Lump Sum or Installments over 5, 10 or 15 years. It is important to remember that distributions are initiated soon after you leave Nike regardless whether it is voluntary, such as retirement/job change, or involuntary, such as being laid off/fired. The distributions are subject to ordinary income tax so if you receive a large distribution in a short period of time it may push you into a high tax bracket and create an unnecessarily large tax bill.

This is where detailed financial planning and tax projections can help minimize the tax impact. Planning out year by year the combined amount of these distributions with other anticipated income sources is crucial to managing your tax bracket and maximizing this benefit. Once you have elected a distribution option you can change it, but there are very specific rules outlined by the IRS that you need to follow. All changes need to be made at least 12 months in advance of leaving Nike, so it is important to do any planning ahead of time.

4. Misunderstanding the Investment Time Horizon

Determining an appropriate mix of investments is impacted significantly by the time frame for when distributions are needed.  Investments in stocks can be volatile in the short-term but can provide a greater return than safer short-term investments like cash or bonds over a long period of time (10+ years).  Funds in a deferred compensation plan are often mis-categorized and lumped together with more aggressively invested retirement funds like 401(k)s and IRAs. 

The time horizon for Deferred Compensation Plans are very different than IRAs and 401(k)s.  For IRAs and 401(k)s, you are not required to take distributions until the year you reach age 70 ½, and those distributions can be spread out over the rest of your life.  On the other hand, Deferred Compensation plans have a much shorter time frame since they are initiated after leaving Nike and have a set distribution schedule of between 1 and 15 years.  Due to the shorter time horizon with a Deferred Compensation plan, we believe it is prudent to have a more conservative investment mix than other retirement accounts and to incorporate it into your financial planning projections to determine the best mix. 

5. Missing Out on the State Income Tax Strategy

An often-missed state income tax strategy exists with Deferred Compensation plans. If you select the lump sum or 5-year distribution option, the state of Oregon will still tax your Deferred Compensation distributions regardless of what state you live in at that time of distribution.  If you move out of Oregon to a state with no/low income tax rates (i.e. Washington), it is advantageous to select a 10 or 15-year distribution option to avoid Oregon state income taxation.  If there is a possibility that you will move out of Oregon after leaving Nike, make sure to evaluate the local taxation compared to Oregon and plan accordingly.

We’re here for you if you have questions

In summary, the Nike Deferred Compensation Plan can be a very advantageous benefit from a savings and tax perspective but due to its unique rules and IRS requirements it is most effective when incorporated within a customized financial plan.  If you have questions or want to better understand how to take advantage of the Nike Deferred Compensation Plan, you can schedule time with me on Calendly below, e-mail me at marc@humanvesting.com, or call or text me at (503) 608-2968.

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2020 has put a wrench in most plans. As a recent graduate, you were likely excited to make career moves, grow your friend circle, move somewhere new, and maybe even get your own pots, pans, and plants. Instead, you are living at home with your parents.

According to 2015 data from the Census Bureau, some 82 percent of American adults think that moving out of their parents’ house is a “somewhat,” “quite,” or “extremely” important component to enter adulthood. For those of you currently living at home with your parents, hopefully this post resonates with you.

Some of you may be choosing to live at home, but many of you have no other option. Do you find yourself vacillating about moving back home? Or maybe you are considering spending your savings just to get some space from your family? Regardless of the specifics, have you thought about the impact that saving money on rent can have on your future? Maybe this is a great opportunity for you to start saving money like a millionaire.

For illustrative purposes let’s consider Sophia, a fictitious 23-year-old. She had other plans for herself, but she is living at home for a variety of reasons. She wakes up grateful for safety and shelter, but she is also human and feels a little nostalgia for what this year could have been. Let’s run some numbers on the potential financial benefit of living at home to make her day a little brighter.

Doodle credit: Rachelle Locey

Let the savings begin

If Sophia were not living at home, she would be spending $1,100 a month in housing expenses. After 12 months of living at home, she could save $13,200 that would have ‘normally’ been spent on her rent/wifi/utilities/parking.

Please note: It’s understandable if you’re not able to save $13,200 while living at home. Whether living at home allows you to save $13,200 or $3,000, the benefit is huge for your future financial wellbeing.

Sophia is comforted by these additional savings in her bank account today. She remembers someone (like Uncle Mike or her economics teacher Ms. Anderson) explain inflation, the stock market, and compounding interest. Now what is a girl to do?

Because Sophia is living with her parents, she saved $13,200 of extra cash that she can invest in the stock market.

here’s her 5 step game plan

One year of savings, Thirty years later

**This chart assumes a 7% annualized growth for her investment over time. The 7% is based on historical data of S&P500 returns. **

By living at home, Sofia has safety, shelter, and savings. She also has significant savings for not only today, but also for the future. If you are living at home, please be thankful for your dishwasher and applaud your future self because the financial trade-off is immense.

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“Isn’t financial planning a dying profession?”

A first-year undergraduate student majoring in Financial Planning approached me after class one day and asked what he thought was a very simple question – “What’s the difference between a financial planner and a financial advisor?” Simple answer? Not really. 

As I was working to establish a CFP Board Registered Program at a university, an administrator asked me the following few questions as part of his vetting process: “Isn’t financial planning a dying profession?” “Don’t robots already do financial planning?” “Who is going to hire a 23- year-old financial planner to help them with their finances?” These came from a smart individual who had a strong record of professional success. What was he talking about? 

I was speaking with a long-distance friend the other day who told me, “I’m sure glad that my financial planner doesn’t charge me a fee each time we meet but, instead, she only takes a very small percentage from returns on the investments I have with her.” Did this financial planner appropriately disclose compensation methods? I am sure she did. Did this friend understand the true cost of what he was paying for financial planning services? Obviously not. 

“We don’t trust you.”

Several years ago, I was at an annual conference for a large financial planning organization. The conference organizers planned an innovative and unique keynote session where they invited a panel of strangers gathered randomly and spontaneously from off the streets outside of the meeting venue. This group of individuals was diverse and clearly represented many demographic and socioeconomic classes. They were asked a variety of questions about their need for financial advice and desire for help with the money management tasks of life. It was evident that this group was readily willing to admit their lack of financial knowledge and self-efficacy when it came to money-related topics and behaviors.

Then came the curve ball. The panel was told that the room of people (nearly one thousand) who were in front of them were all financial professionals. They were asked another simple question – “Would you hire any of these individuals to help you with your personal finances?” Every one of the panelists said “no!” When asked why, they all said in their own words a message that sounded like “we don’t trust you.” Did these individuals need help managing their financial decisions? You bet. Were they looking to the financial planning industry to fill that role? No. Before you dismiss this as a case of non-target-audience identity for financial planning services, let me introduce you to another conversation. 

“I can’t get objective advice anywhere!”

Recently, I found myself in a conversation with the leader of a local company. He had come to our financial planning firm as a prospective client for planning services. Given the fact that he had been affluent for a significant number of years and was nearing the latter part of his working years, I inquired about his experiences with financial planning in the past and what brought him to our company. His answer was firm and without deliberation – “I can’t get objective advice anywhere!” Was this individual the ideal financial planning client? Pretty much. Why is it so hard to get objective advice? 

So, what is the difference between a financial planner and a financial advisor?

Do you know? Could you explain it to this young and eager student? Is there a difference? We would argue that it does not matter. The core issue is about substance and structure – not semantics. People are looking for a service and not a job or profession title. Why do we continually encounter situations like the ones we have described? Why all the confusion around the discipline of financial planning and why the lack of trust and objectivity? Why is this not a prevailing theme of most other professions (think doctors, lawyers, architects, teachers, pharmacists, engineers, etc.)? It does not take much more than a quick look at the culture and system of the industry to find the dilemma. 

There is a long list of systemic factors that have impaired financial planning outcomes and distorted the way in which financial planning is done. Here are a few: 

• Products over services 

• Business models of financial planning firms and compensation structure for planners 

• Career status and prestige based solely on sales achievements 

• Role of incentives (Charlie Munger was right when he said “Show me the incentive and I’ll show you the outcome”) 

• Conflicts of interest that are not transparent 

• The need for and confusion surrounding “fiduciary” 

• Measures of success and effectiveness tied to a book of business 

• Academic preparation/credentialing/pathway to profession 

• Focus on money content and education while overlooking behavior 

• Technology/Machine learning and the loss of the human 

• Investment services silo instead of comprehensive financial planning 

• Individual planner model instead of team approach 

Restoring confidence in all of us

We are going to be publishing a series of blog posts that highlight and elaborate on these dynamics that have contributed to the rationale for the questions that are mentioned above and the current state of the financial planning profession. In other words, we are going to define what we see as wrong. See, it is not any one thing. Nothing big is wrong. Big things tend to be addressed with swift action through market response or regulation. It is smaller pieces that are broken and those small pieces accumulate into a perception of confusion and mistrust and suboptimal financial planning outcomes. 

We will not stop at identifying problems but, instead, will share what we believe are solutions to these obstacles. We will elaborate on how we do financial planning and define its effectiveness by addressing these challenges to offer our clients the most comprehensive and purest form of human-centered financial planning. It is exactly why our core purpose is to faithfully serve the financial pursuits of all people. That is a big ambition, but it is precisely what individuals and families need, and it is our highest ideal for financial planning. We believe it is a mission worth pursuing.

Ryan Halley, Ph.D., CFP® is Director of Planning Practices and Research at Human Investing. He holds a doctorate in Personal Financial Planning from Texas Tech University and an MBA with a concentration in Finance from The Ohio State University. Ryan has his CERTIFIED FINANCIAL PLANNER™ certification. Dr. Halley is also a Professor of Finance and Financial Planning at George Fox University, where he directs a CFP® Registered Program located near Portland, Oregon. He has co-authored a book and has numerous peer-reviewed journal articles. Additionally, he has been an invited professor and lecturer at various universities in the United States, Canada and China. 

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@emilegt

We have all been told to save for retirement.  We need the “Magic Number” before we can retire.  What about having debt during retirement?  Most retirement planning calculators ignore debt and debt payments can limit the amount of future income and can wreak havoc on retirement.  A comprehensive financial plan considers debt in the retirement equation providing a tool and process to fully answer the retirement questions.

Studies Show Debt is Increasing for those Entering Retirement

More of us than ever before have debt going into retirement.  A study by Lusardi, Mitchell and Oggero entitled “Debt Close to Retirement and Its Implications for Retirement Well-being,” quotes numerous findings demonstrating that those nearing retirement have increased borrowing at all economic levels.  Based on a 2015 NFCS survey of persons from age 56 to 61, 37% had mortgages, 11% had home equity loans, 14.6% still had student loan debt, 29.6% carried auto loan debt and, 36.4% had credit card debt with a balance paying interest.  And more concerning, 23% had what they called, “expensive credit card behavior” meaning, “paying the minimum only, paying late or over-the-limit fees, or using credit cards for cash advances.”  

Debt is a Presumption of the Future

When we take out debt, we presume that we will have future income that will both cover living expenses and the additional payments we promise to make.  We effectively reduce our future income.  For the retiree with adequate income and assets, debt might be okay.  The retiree that has cash in an account to purchase a car that takes a no interest loan might come out ahead.  And at any time, they have the power to pay off that debt.  However, often debt is a decision that can cripple future living.

Debt in Retirement Limits Lifestyle

Of course, a debt payment means higher total expenses, but it doesn’t stop there.  Debt usually means more expense due to the added interest.  Additional debt and interest require higher retirement distributions.  Higher distributions from IRA accounts increase taxable income and can increase the likelihood Social Security income will also be taxed.  And for many, the result of the compounding expenses due to debt eventually lead to the need for a cut to lifestyle and live on less. To the 23% with “expensive” debt behavior in the study, even more expenses come due to late payments and higher interest costs which further the cycle of limits on lifestyle.

Financial Planning Answers the Questions

While some debt might be considered “okay”, most we know is not.  How do we know?  The answer comes in a financial plan.  It pulls together all the other pieces of the story and provides a structure to answer the question.  A financial plan provides possible options, strategies and answers.  It is a tool and process that fully answers the retirement equation.  Do I have enough for retirement, including debt?

Want to create your financial plan today?

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@markusspiske

On July 31st Jerome Powell, Chair of the Federal Reserve, announced the Fed Rates are to be cut by a quarter-percentage point, its first reduction since 2008. The decision to cut rates was made “in light of the implications of global developments for the economic outlook as well as muted inflation pressures.”

WHAT DOES THIS MEAN FOR THE INVESTOR?

• Investors holding bonds before the rate cut greatly benefit. Bond prices rise as yields fall, making the bondholder money with a decrease in the interest rates.

• Good news for those who are looking to borrow money. A cut should mean a decrease in the cost of mortgages, auto loans, and credit cards. Thus, encouraging consumers to spend and sustain the expansion of economic activity.

• A possible decrease in the yield for those who have dollars deposited in savings accounts.

AS FOR THE US ECONOMY?

With any changes to monetary policy, there tends to be a lot of talk about what will happen next and what this means for our economy. Where will we end up? The last few times the Fed cut rates, in 2008 and before that 1996 and 1998, the results varied:

• The last time the Fed cut rates was December 16, 2008, where there was a market decline as the S&P 500 continued to fall by of over 25% by March 9, 2009.

• While the cuts in 1996 and 1998 managed to positively impact the economy and drive up the S&P 500 more than 20% in the following year.

What will the impact of the Fed cuts be this time around? I am reminded that prognosticators often have a poor aptitude in predicting what’s next. There is a correlation between the Target Federal Fund Rate and the 10 Year Treasury Rate, providing an example for us of how hard it is to predict what’s next.

In an October 2018 survey conducted by the Wall Street Journal, more than 50 economists predicted where they thought the 10-Year Treasury yield go in 2019.

Did any of the analysts guess correct? No, not one was close. With the Fed’s recent announcement, the delta continues to grow between their assumptions and reality. As of August 1st, the yield for the 10-Year Treasury Note was below 2%.

Sources: WSJ Survey of Economists (predictions); Tullett Prebon (actual)

What does this say about our ability to predict the future of the stock market, interest rates and the next “10 Hot Stock Picks For 2019”? Betting our financial future on radio personalities, financial websites, and even economists can be emotional and folly. Building a financial plan provides a solid foundation for one’s financial future, rather than basing it on intuition and predictions.

HOW CAN WE HELP?

Are you interested in trading in guesswork for a disciplined process, or learning more about comprehensive financial planning (we call this hiPlan™)? Please call us at (503) 905-3100 or let us know about your needs.

Further Reading

Here’s what that Fed rate cut means for you, CNBC

Federal Reserve, Press Release on Rate Cut.

Bloomberg, Why Are Economists So Bad at Forecasting Recessions?

WSJ, Some Investors Had Hunch Yields Were About to Fall.

REFERENCES

Chilkoti, A., & Kruger, K. (2019, June 9). Some Investors Had Hunch Yields Were About to Fall. Retrieved from www.wsj.com

Board of Governors of the Federal Reserve System (2019). Federal Reserve issues FOMC statement [Press release]. Retrieved from: https://www.federalreserve.gov/newsevents/pressreleases /monetary20190731a.htm

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In 2018 Nike opened Restricted Stock Units to their already generous benefit line up.  Now employees have the option of choosing either Stock Options, RSUs or, a combination of the two. 

The following content provides guidance—and highlights the benefits and drawbacks of each option choice.

RSUs (Restricted Stock Units)

An RSU is a grant of stock units that, after a specified vesting period, provides an employee with a pre-determined amount of company shares.  The vesting schedule for RSUs varies by company.  At Nike, the vesting schedule is typically 3-4 years.  You do not receive the stock until you are vested, but once vested the stock is yours and will always have value unless the stock price goes to $0.  

Many consider RSUs to be a less-risky investment. However, it is essential to remember that the realized value of your vested grant may increase or decrease depending on the movement of the stock price.  Once the stock vests, you may choose to either sell the stock immediately or hold it.  RSUs are taxed as ordinary income equal to the market value of the stock at the time of vesting.  One crucial planning consideration is that the actual tax due on the RSU is often higher than the amount of tax withheld at vesting.  This leaves many RSU option owners with an unpleasant surprise at tax time. 

At Human Investing, we help our clients plan for the additional they will need to set aside for taxes, thereby avoiding end-of-year tax surprises. Tax planning and anticipating future tax liabilities are important for both RSUs and Stock Options.

Nonqualified Stock Options

Nonqualified stock options differ from RSUs as they are an option to buy Nike stock at a specified price, called the grant price.  Nonqualified stock options can provide a considerable upside if the stock grants are held during a time of substantial growth in the underlying stock.   

The downside is that if the stock price does not rise above the grant price, the options will be worth $0 at vesting.  Another piece to monitor is that stock options expire if they are not exercised within ten years, leaving the owner without benefit.  When a stock option is exercised, it is taxed on the grant price as ordinary income.  If held for a qualifying period, there will also be a tax on long-term capital gains on the difference between the grant price and market price at the time of sale.

Making Your Choice

Ultimately, considering the following questions has the potential to improve your outcome.  Questions like:  How high is your risk tolerance?  What is your confidence in how the stock will perform in 3, 5, and 10 years?  Is your portfolio diversified or highly concentrated in company stock? Are you looking to retire or leave the company? 

While RSUs can provide more predictable income and tax planning, if you separate from the company, you will lose any RSUs that are not vested.   

Stock Options must be vested upon separation and are generally required to be exercised within 90 days of separation from employment.  This is a risk depending on the stock price at the time of departure.  There is one exception to this rule when you turn 55, but additional criteria apply.

Both Stock Options and RSUs are great benefits and a great way to build wealth. At Human Investing we walk our clients through these choices with a close look at their situation.  We help our clients to determine the best course of action with all their benefits with a comprehensive financial plan we call hiPlan. 

Want Us To HELP? Let’S TALK.

You can schedule time with me on Calendly below, e-mail me at marc@humanvesting.com, or call or text me at (503) 608-2968 to take your next steps.

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