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This Time It’s Personal

Retirement planning isn't easy, which is why so many executives put it off.

Taxes are, of course, a major source of such whacking. Tax treatments will vary for nonqualified versus incentive options. Exercising a nonqualified option is a taxable-compensation event and will leave you paying tax on the gain at ordinary income rates, which run as high as 35 percent, plus FICA taxes.

Incentive (or “qualified”) options, in contrast, are not considered a taxable event when exercised (although they do call for an adjustment when calculating the alternative minimum tax), and the difference between the exercise price and the price of the newly acquired stock when ultimately sold is taxed at the 15 percent capital-gains rate, assuming you’ve held the shares for a year from exercise and two years from the date of grant. But even so-called incentive stock options that are not exercised within three months of retirement must then be treated as nonqualified options for tax purposes, which could take a bigger bite out of the gains — a big reason why anticipating your retirement is key to financing it.

That’s just one example of the complexities that await those retiring with portfolios that consist of far more than an IRA and a fervent hope that Social Security doesn’t collapse. The first bit of advice from advisers, of course, is to hire an adviser, and in this case they’re probably right. Conventional wisdom holds that you tap taxable assets first and let tax-deferred accounts such as IRAs and 401(k)s continue to grow, ultimately reaching into them in this order: annuities, IRAs, employer 401(k) accounts, Roth IRAs, and Roth 401(k)s (unlikely to apply to near-retirees since they just went into effect this year). Within each class, tap the more expensive first, so that you draw down an IRA with a higher expense ratio earlier and allow a less costly one, such as a stock index fund, to continue to (one hopes) build.

But that boilerplate advice can’t take into account the many personal goals, obligations, and predilections of any given retiree. While retirees will have plenty of decisions to make, and paperwork to consolidate, even a seasoned finance pro should get outside help. Just as a trial defendant who represents himself is said to have a fool for a lawyer, so, too, in most cases, does a high-net-worth individual who takes a do-it-yourself approach to retirement planning risk an unhappy outcome.

Scott Leibs is a senior editor at CFO.

Falling Short

While C-level executives tend to be high-net-worth individuals, and would thus seem to face rosy retirements, they aren’t immune to a common misperception: that their nest eggs are larger than in fact they are.

A 2005 survey (by the MainStay Investments unit of New York Life Investment Management LLC) of more than 1,200 middle- and high-net-worth Americans, some in retirement and others approaching it, found a consistent gap between how much money respondents expected to have in retirement and how much they were likely to have based on their current savings regimens and existing assets.

Optimistic assumptions about their amount of home equity, anticipated inheritances, and their ability to “catch up” on retirement savings in the final years of their working lives emerged as reasons for the overconfidence. Also playing a role was anticipated life expectancy. While people generally expect to live longer, few realize that for a healthy couple in their 60s, there is a 50 percent chance that at least one member will live to 92 or beyond. That presents a longer time horizon than most people plan for. Even among people who have been retired for five years or more, fewer than one in four attempt to match savings to that kind of longevity. — S.L.

Preretirees 1–5 years in retirement 5+ years in retirement
Projected savings $1.58 million $1.22 million $1.31 million
Likely savings $988,400 $758,200 $808,600
Projected income* $7,100 $5,600 $5,400
Likely income* $4,700 $4,300 $4,300
Current income* N/A $4,200 $4,900
*Monthly, in retirement
Source: 2005 MainStay Investments survey of 1,200 people aged 50–90 with at least $100,000 in assets.

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