Plan ahead: How to part ways with your company

Your long-anticipated retirement is rapidly approaching. However, before you leave your familiar executive role, there are many financial, lifestyle and other decisions to make to facilitate a smooth transition to your next chapter.

Moreover, your planning will likely require close consultations with family members and professional advisors, so allowing sufficient time for their participation will be critical.

Here’s where to focus attention:

Financial Considerations

A well-thought-out exit strategy will account for how your company’s specific employee policies and regulations impact your overall balance sheet:

Spending, liquidity and asset mix

If you’re a public company employee, you may have had to contend with company stock ownership guidelines, disclosure requirements and trading windows—all of which can impede optimal planning and balance sheet management.

Leaving your firm may provide you with added flexibility. If your level of ownership is such that you no longer have to consider ownership requirements and adhere to restrictive 10b5‑1 trading plans, you may be able to unlock a range of new planning strategies.

A strong starting point for evaluating your liquidity and company concentration is to ask yourself: How much cash do I need to maintain my current lifestyle and accomplish my goals? Then, as you engage in conversations with your professional advisors, you may find you have more planning flexibility and tactical options once you step away from your firm.

Company awards and benefits

Upon leaving your company, you may forfeit a number of awards and benefits, such as an annual bonus, long‑term incentives, life insurance, health benefits, stock options and accrued (but unvested) pension benefits. As you prepare for retirement, review your:

Company stock—Have you been granted incentive equity awards, such as restricted stock units (RSUs), performance stock units (PSUs) or stock option grants, that have not fully vested?

The governing treatment of such awards is typically specific to a given plan, and can vary significantly. However, upon a qualifying retirement, some plans allow either continued vesting of units/shares over the time remaining from the initial grant or pro‑rata vesting based on the time you were actively employed following the grant date. You can find the specific terms of your awards in the plan documents.

Concentration risk—Are you interested in diversifying away from your company’s stock—or do you want to remain exposed to your company’s performance? If the former, you might consider liquidating a portion of your holdings and reinvesting in a diversified portfolio. If retired, you might consider taking out a personal loan secured by company stock and using the proceeds to fund other liquidity needs. If you have not yet retired, any loan taken will likely need to be secured by assets other than your company stock, given pledging restrictions.

Deferred compensation—Does your company plan allow you to defer part of your salary and/or bonus on a pre‑tax basis? These deferred amounts may be allocated within the plan’s investment options, and are withdrawn and taxed at ordinary income rates based on the plan’s elected schedule, subject to compliance with Section 409A. when you either leave the company or retire.

Nonqualified deferred compensation (NQDC) plans do not have contribution limits set by the Internal Revenue Service (IRS), making it possible to defer substantial income. NQDC contributions grow tax‑deferred until they are distributed. This can be particularly advantageous if your aim is to manage taxable income and potentially reduce tax liability during your peak earning years.

Company-sponsored benefits—To what degree do you rely on company-provided benefits? These might include lifestyle amenities, such as private air travel or use of a company car, as well as more critical personal (and family) protections, such as life insurance, healthcare coverage and disability‑income plans.

It may be possible to maintain some coverage after you leave your company; for example, by temporarily remaining on your employer’s life insurance and disability income plans. But carefully assess whether you will need additional coverage and/or if more favorable rates are available elsewhere. In addition, make sure you understand retiree coverage options/limitations and if you will need to arrange for ongoing healthcare coverage for family members.

The Consolidated Omnibus Budget Reconciliation Act (COBRA) gives workers and their families the right to continue group health benefits for 18 months or more (with the entire cost of the coverage now borne by you), so new healthcare insurance may not be needed immediately.

Lifestyle considerations

Think about where you want to live and how you want to spend your time once you leave your company. Visualizing these aspects of your life can set you on the path to articulating clear financial goals with a dollar amount, priority and time horizon:

Primary residence—Are you planning to relocate when you retire? If so, consider access to healthcare providers, proximity to family and friends, climate, living costs and other lifestyle factors. If you maintain residences in multiple jurisdictions, follow all legal protocols if you plan to claim residency for tax purposes in your new state, as this can be a nuanced and auditable process. Also consider speaking with an estate planning lawyer about putting your out‑of‑state home in a revocable trust, so your estate is not subject to probate in multiple states.

Social Security—Will you wait until your full retirement age to apply? Eligibility to collect begins at age 62, but you will permanently reduce your monthly benefit amount if you apply before you reach full retirement age (66 or 67, assuming you were born in 1943 or later). In sharp contrast, delaying taking benefits until age 70 will increase your monthly benefits by 8% for each year you wait past your full retirement age.

Medicare coverage—Will you be eligible for Medicare when you leave your company? Eligibility begins at age 65; if you retire before then, you may need to arrange for interim coverage. You may also want to purchase supplemental medical coverage once enrolled. (Signing up for Medicare can be complex given the various options, so consider seeking professional assistance in selecting the appropriate coverage.) Be aware: The financial impacts from not enrolling in Medicare on time can be substantial—and impact premiums for the rest of your life.

Estate planning and other protections

Are your estate plans up to date? Before you leave your company, review all relevant documents with your trusted advisors, including:

• Terms and beneficiaries of your will and related trusts
• Account titling
• Beneficiary designations
• Power of attorney
• Planned asset distribution flow among revocable and other relevant trusts
• Status of your lifetime gift and estate exemptions

Life insurance: Do you plan to hold a significant portion of your wealth in company stock or other illiquid assets? If so, life insurance can provide an immediate income-tax‑free source of liquidity for your family to satisfy a tax liability without having to sell assets at an inopportune time.

Directors & officers (D&O) coverage: Do your retirement dreams include joining the board of a business or nonprofit organization? Before signing on, make sure you fully understand the time, financial and other commitments required of that organization’s directors. Equally important is understanding your potential legal exposure. Many organizations offer D&O coverage to board members—but do not assume it’s a given. The market to purchase individual D&O coverage is limited and premiums can be expensive.¹

Retirement plans and taxes

How tax-efficient are your retirement accounts? Those exposed to higher tax rates during their later years of employment—or in retirement—may want to consider looking beyond traditional contributions to retirement accounts, such as 401(k)s, and to make the most of tax‑efficient investment vehicles:

Defined contribution plans—Corporate plans, such as 401(k), are not subject to income phaseouts, making them accessible to most high‑income earners. The plan type and design dictate investment options, eligibility, vesting and employer match. Generally, it’s beneficial to leverage the benefits of contributing to these plans while you are employed .

Defined benefit plans—If you plan to continue working as a board director or independent consultant, you may want to set up your own single-participant defined benefit pension plan to maximize retirement savings through future accumulated earnings. Keep in mind: While these plans allow for higher contributions, they also have greater administrative costs, more complex tax reporting requirements and ongoing funding obligations.

Roth IRAs—Contributions to Roth accounts are made with after‑tax dollars. Thus, they do not lower taxable income in the year the contributions are made. However, qualified distributions from these accounts at a future date are tax‑free. This raises a critical question for executives who are allowed to contribute to Roth‑eligible plans: Is it more advantageous to pay a higher tax bill today in return for tax‑free distributions in the future? Or should you opt to lower your current taxable income through a traditional IRA and pay taxes on distributions in later years? Carefully review your options with your professional advisors.

Tax/decumulation planning—Tax‑advantaged accounts, withdrawal strategies and shifting tax brackets all encourage thoughtful tax planning—while you are working as well as in retirement, when tax‑aware decumulation strategies can be critical.

Philanthropy—Retirement often opens an opportunity to dedicate time or financial resources to organizations or causes about which you care deeply. For example, you might arrange for life insurance proceeds to go toward enhancing your philanthropic efforts. One strategy could be to donate a new or existing policy—whether fully paid‑up or in a premium‑paying mode—and, in return, receive a charitable income tax deduction.

Conclusion

After a lifetime of planning and saving for retirement, our clients often find the actual transition to their next chapter requires more thoughtful decision making than they anticipated. Your J.P. Morgan team can help you evaluate the potential impact of financial decisions you must make before exiting your company, many of which may be irreversible.