This year, demographers tell us, the massive wave of baby-boomer retirements will begin, and the impact will be felt on everything from corporate-succession planning to condo sales. One likely ripple effect will be a mad rush to the offices of financial planners, as executives who spent a lifetime accumulating wealth hastily devise strategies for tapping it.
Advisers say procrastination is the norm, for many reasons. During a person’s peak earnings years, and with a proper asset-allocation plan in place, there may be little to do but sit back and watch the money pile up. But the transition from sitting on that nest egg to cracking it open can be wrenching. It requires you to take a hard look at your mortality and prioritize goals that may range from travel and vacation homes to providing financial assistance or a legacy to loved ones. For some, simply maintaining a decent standard of living for decades beyond retirement age, with health and vitality an open question at every stage, will be a challenge. Given all that, it’s no wonder the unexamined portfolio seems most worth having.
As C-level executives approach retirement, however, advance planning is essential. That’s because, as U.S. Trust managing director Mitchell Drossman notes, “senior executives typically have most of their wealth tied up within the four walls of their companies, in the form of deferred compensation, stock options, restricted stock grants, and related vehicles.” Senior executives and, in particular, “proxy people,” as Drossman terms them (because their positions and compensation are significant enough to be outlined in their firms’ proxy statements), should begin actively planning their retirement two to five years before they intend to leave. During that time, they will essentially transition from highly compensated employees to more traditional (that is, diversified and reasonably liquid) investors.
They may also enter retirement as more sober investors. “Executives are often guilty of overconfidence,” says Susan Hirshman, managing director and wealth strategist at JPMorgan Asset Management. “Studies have found that executives tend to repeatedly overestimate the actual performance of their company stock and of their own portfolios. Once they sit down [to plan], they may find that they aren’t doing as well as they thought they were” (see “Falling Short” at the end of this article).
“CFOs tend to enter retirement with very concentrated stock positions,” agrees Ellen Rinaldi, a principal at Vanguard Group’s advice brokerage and retirement-services group. They may have accumulated shares, grants, and options at just one or two companies over many years, she says, and often feel a sense of loyalty that prevents them from diversifying as broadly and as early as they should. Drossman says it’s not unusual for a proxy person to possess 10 years’ worth of equity-grant letters, each one laying out a variety of stock options, restricted stock, and other goodies that generally can be classified under federal tax laws as either nonqualified or incentive. “That amounts to 20 tranches of retirement funding,” he says, “built around a carrot-and-stick approach to personal and corporate performance. You need to look at those grant letters carefully, review the terms of your company’s equity compensation plan document, and devise a plan, or you get whacked.”