How Post-Vesting Periods Play Havoc with Unplanned Retirement

By Chuck Steege. After recently being acquired by an out-of-state company, all headquarters personnel are at risk of being let go. At age 60, Eileen faces unplanned retirement along with many of her colleagues at the high tech company where she works.

Perhaps you recognize high-potential employees who fit Eileen’s description.   A few years ago, her financial planner helped to complete a comprehensive plan focused on retirement. Company stock represents a substantial part of her assets. Scenario planning was done to identify when she can retire, how much she needs and what would happen under certain assumptions. Based on the scenario planning, her current age of 60 is a little premature for retirement.

Eileen has been accumulating performance share grants over the last few years:

Original Plan: Performance shares granted without considering Post-vesting Requirement

post vest image 1

**see example comparing original and post-vesting share value.

The Dilemma of Post-Vesting Holding Period

In 2013, the company instituted a two-year post-vesting holding period on new performance share grants.   That means that while she received additional grants, she will now experience a gap – from age 60 to age 64, when her performance shares have vested but are not yet fully available for sale.

New Plan: Post-vesting with additional 20% in number of shares granted [1]

post vest image 2
Silver Lining?

Eileen has been focused on liquidity rather than total share value. Her concern is replacing current income for the years between now and age 64. Her stock administrator acknowledged the gap and pointed out the silver lining in the post-vest holding period.

Her new grant amounts are 20% higher than in previous periods to account for the post-vest holding period. The administrator redirected Eileen’s focus to a short-term liquidity gap that would result in higher overall compensation value in the end.

Eileen’s potential retirement at 62 takes in these considerations:

  • As long as she ultimately declares her exit as “retirement,” her grants are expected to continue vesting.  The shares granted in 2014 and 2015 may vest and be subject to the same post-vesting periods. The shares are expected to vest in 2017 and 2018, and cannot be sold until 2019 and 2020, respectively.
  • If she retires prior to expiration of the post-vesting period, her financial planner will help her make up the shortfall from her other assets. Still, she has the potential to have a higher eventual value from her performance shares;
  • Eileen lives a good lifestyle, including a second home in Florida. She wonders if she should sell it to address the income gap;
  • Her 401(k) and IRAs will remain untouched until later. Her planner has recommended that she not tap her Social Security until age 70 in order to maximize her lifetime benefit;
  • Consulting work is an option to partially bridge the “no income” gap created by the extended post-vesting holding period. She has built a credible reputation in her industry network, so consulting is a viable option.

Eileen faces an unplanned retirement and will look at alternative sources of income and assets to bridge the gap. Still too young and thinking it unwise to immediately tap into her 401(k) or IRAs, her second home is an asset that could be used to meet several years of income needs. Her planner can construct a multi-year income and expense matrix to carry her into age 70, when she has full access to her retirement accounts, Social Security and other assets.

Chuck Steege banner

[1] There are various calculation methods companies use to discount fair market value, thus compensating the executive for lack of marketability. These methods vary widely, and for the purpose of Eileen’s 2-year post-vest example, we’ll use this simplistic assumption of 20%.
The name, likeness and circumstances in this example are a fictional composite of facts from executives similar to actual SFG Clients.

More from Categories