Most of us would like to be able to retire one day and yet modern statistics on retirement preparedness show that there is a big gap between where would-be retirees are and where they need to be to retire comfortably and create reliable income. The good news is that the sooner you start preparing for retirement, and ideally working with an expert to create your own personalized retirement plan, the better your odds of retiring successfully, which brings us to step one.

Create A Plan for Your Retirement

As much as online retirement calculators can give us a decent start on what we’ll likely need to spend in retirement they tend to miss important considerations. One of the most obvious and often missed of those retirement considerations is that when you retire, you’ll probably spend more rather than less as you go through a period of adjustment.

Certainly, I have worked with people over the years that seem like they were born to retire as soon as life and money allowed, but for most people its more of challenge than it seems like at first. Most retirees no longer have children or other dependents at home, unless they are caring for aging parents, and all the time that used to be devoted to work is now wide open. So, what do people do with all that extra time?

Spend.

Dinners out, trips to see friends, indulging in hobbies, shopping, home improvements, etc. Most of us want our retirements to be filled with the activities, travels, and people we love, but we forget that those activities that used to only be available around our work schedule now become how we spend our time and expenses tend to go up as a result, especially in the first few years of retirement.

This is where creating a personalized retirement plan with a trusted financial professional that knows you or will get to know can really help. Sometimes others see us better than we see ourselves and an advisor that understands your spending habits now can help you better budget for retirement, not just for your goals and hobbies, but also for long term care events, poor market performance, and travel plans. That way when you do retire you’ve budgeted and prepared for more of what can happen and you’re ready to have the retirement you want instead of hoping you can retire at all.

Once you have a retirement plan that considers all the medical, personal, and goals-based issues of retirement that are significant for your personal situation it becomes much easier to solve for what kind of income you’ll need to retire comfortably. Without a truly personalized retirement plan you’ll be left with guesswork, and you don’t want to guess with retirement.

Create A Diversified Investment Portfolio That Can Weather Good & Bad Markets

The keyword here is diversified, and diversified portfolios are not as easy to create as they used to be. One of the challenges of living in an increasingly globalized economy is that stocks from all over the world rise and fall together. A collapse of the yen can create headaches for hedge funds that can lead to sell offs in US markets. Bonds, which used to be relatively uncorrelated to stocks, have become more joined at the hip with stocks and are more likely to rise and fall alongside stocks.

All of this means that retirees who want to create reliable income streams through a balanced investment portfolio might need to expand their investment horizons to look at alternative investments¹, annuities², and even life insurance³ as options.

Taking annuities as an example, some options provide for lifetime income, either through an immediate annuitization or via a guaranteed income rider. While not appropriate for everyone, retirees that are looking to create guaranteed income in retirement might want to consider them as an option. That being said because of the options available it is often best to work with a financial advisor when evaluating annuities, so you can ensure you know what you are getting into and that the annuity in question will meet your needs.

An investment portfolio that uses more of the investment options available and is more diversified or that transfers some of its risk to insurance carriers will often be much better positioned to weather difficult market environments, especially for retirees that have consistent income needs. So, make sure you know your goals first and your options second, bringing the two together is how you create income to last a lifetime.

Asset allocation and diversification are investment methods used to help manage risk. They do not guarantee investment returns or eliminate risk of loss including in a declining market.

Guarantees are based on the claims-paying ability of the issuing insurance company. Guarantees apply to minimum income from an annuity; they do not guarantee an investment return or the safety of the underlying investment choices

1. Alternative investments, such as hedge funds, funds of hedge funds, managed futures, private capital, real assets and real estate funds, are not appropriate for all investors. They are speculative, highly illiquid, and are designed for long-term investment, and not as trading vehicle. These funds carry specific investor qualifications which can include high income and net-worth requirements as well as relatively high investment minimums. The high expenses associated with alternative investments must be offset by trading profits and other income which may not be realized. Unlike mutual funds, alternative investments are not subject to some of the regulations designed to protect investors and are not required to provide the same level of disclosure as would be received from a mutual fund. They trade in diverse complex strategies that are affected in different ways and at different times by changing market conditions. Strategies may, at times, be out of market favor for considerable periods with adverse consequences for the fund and the investor. An investment in these funds involve the risks inherent in an investment in securities and can include losses associated with speculative investment practices, including hedging and leveraging through derivatives, such as futures, options, swaps, short selling, investments in non-U.S. securities, “junk” bonds and illiquid investments. The use of leverage in a portfolio varies by strategy. Leverage can significantly increase return potential but create greater risk of loss. At times, a fund may be unable to sell certain of its illiquid investments without a substantial drop in price, if at all. Other risks can include those associated with potential lack of diversification, restrictions on transferring interests, no available secondary market, complex tax structures, delays in tax reporting, valuation of securities and pricing. An investment in a fund of funds carries additional risks including asset-based fees and expenses at the fund level and indirect fees, expenses and asset-based compensation of investment funds in which these funds invest. An investor should review the private placement memorandum, subscription agreement and other related offering materials for complete information regarding terms, including all applicable fees, as well as the specific risks associated with a fund before investing.

2. Insurance products are offered through our affiliated nonbank insurance agencies.

3. Insurance products are offered through nonbank insurance agency affiliates of Wells Fargo & Company and are underwritten by unaffiliated insurance companies.

Tip #1 – Know what you’re investing for

When you work in tech the big picture is often part of the equation and it is no different when you are planning with your finances.

No one decides to invest in stocks and bonds because they’re fun to own (well no one besides me anyway…) human beings invest because we want our money to accomplish something for us, which begs the question: what do you want your money to accomplish for you?

If I had to answer that question, I am imaging myself and my wife on a 45-foot Catamaran in the Mediterranean, my kids happily in whatever schools they want to go to, and I am mostly worried about where I want to dock my gorgeous sailboat for the evening.

You get the point; money is a means to an end. Having a clear perception of what you are working and investing for is even MORE important than what you choose to invest in. Bad investment decisions are often preceded by fear or greed, but if you are clear about your dream life you will naturally arrive at conclusions. The below example will help illustrate for those of you that like a little math to make it real, but feel free to skip ahead to see the point.

For Example (Warning Financial Math Ahead*): I want my daughter to be able to go to whatever school she wants to and I know the average cost of college tuition for private school in 2024 is $26,978. Now inflation on school costs has gone up an eye popping 169% from 1980 to 2020 (Forbes, 2023) or an annual average of 4.225% per year. So, if my daughter is 3 now and will go to school in fifteen years that means I can pop over to my nifty Wells Fargo College Saving Calculator and input those figures to get $53,457.75 in school costs per year for tuition alone. To be clear that number does not include housing, equipment, or additional living expenses, only tuition, nor does it necessarily reflect in state variations on the cost of tuition, nor does it include the fact that inflation is higher than .04225 lately, but it works for this example. Anyhow, the calculator does let me know I need to be saving $9,187 a year to achieve my goal assuming a 6% after tax rate of return and with the way compounding interest works the sooner I start saving and investing for that the smaller my out of pocket cost will be.

The Point: Start at the end and then work with a financial planning expert you trust to get from where you are to where is most important to you. In the above example you have a clear saving target and that will augment other savings goals to naturally begin creating a financial plan alongside other goals.


Tip #2 – Make Time Work for Your Finances Instead of Working All the Time ON Your Finances

Tech employees are busy people. REALLY busy people. If you are one of those people, you probably don’t want to go home at the end of the day to study financial information and review your stock portfolio. Instead, you’d probably prefer to sit down and eat with your family or just watch television.

This is where assembling your own personalized team of professional financial experts can really start to come in handy. Good financial planning is a robust topic that spans income tax planning and tax mitigation strategies to estate planning and charitable giving. Sure, you can go become an expert on all those things, but since you just spent all week navigating mountains of emails, coordinating with your co-workers about your projects, and trying to figure out why two different departments required your presence for the same meeting, it might make more sense to consider outsourcing your financial planning needs.

Afterall you are an expert in your niche, whether that is UI design, project management, or communication, you are hopefully aware of how important you are on your team. Don’t try to become a master at everything, hire a master so you can focus on Tip #1 above, and they can help you figure out how to get there.


Tip # 3 – Use Your Employee Benefits to Protect Yourself and Your Family

A key part of financial planning for any employee is mitigating the other side of risk. In this instance not the risk of poor market returns, but of something bad happening to you or someone you care about.

Many of us don’t think about the fact that our first line of defense against misfortune is in our employee benefits handbook. Odds are there are a lot of decisions for you to make there from your disability coverage elections to whether you want additional life insurance coverage or have access to an HSA. But which parts of these elections are important?

Well workplace disability insurance coverage is a great test case to make the point. Most of us end up in a default, either 50% or 60% of our income and what I usually hear when this subject comes up is “I’m a safe driver and pretty healthy so I don’t think I’ll need it.”

While I am glad to hear that the tech community drives safe disability claims are often less related to sudden accidents than they are to the hazards of aging and being on a computer all day. Most disability claims end up being connected to musculoskeletal conditions ranging from arthritis to back pain to sciatica. If you are one of the many desk workers suffering from sore hands and an aching back after being on the computer all day you are neither alone nor in the minority.

The whole country is experiencing back pain. A standing desk, ibuprofen, and some morning yoga may or may not be an effective solution. It may also not be an option you as an individual want to have to take if your back, hand, or wrist pain intensifies.

So, does your workplace disability coverage include provisions to replace income if you must work part time because of one of the above afflictions? What about if you can do a similar, but not the same, job? Does it cover bonuses or only base pay?

 In my experience the average person doesn’t know the answer to these questions, but life happens, and ideally, we should know how covered ourselves and our families will be if misfortune occurs. So, if you haven’t already, get to know your benefits, hopefully you’ll never need to rely on them, but if you do you’ll be really glad you know and even happier if you’ve intentionally elected or supplemented them to protect what matters most you.


Tip #4 – Be A Strategist, Put Risk and Your Goals Ahead of Performance

Performance is an oft quoted metric that is much discussed without its very important partners: goals and risks. Successful tech companies have historically been high return vehicles so if your company stock is soaring at 20%+ per year it can be easy to lose perspective and start chasing returns. “But won’t the performance of the Nasdaq 100 beat the S&P US Aggregate Bond Index this year?” you ask. Probably, but that is meaningless to you if you want to buy a house in 2 years and don’t want to have to settle for a home that is 40-50% cheaper because of a market downturn.

For another example, remember that school savings from Tip #1? Well, if the rate of return goes from the previously quoted 6% after taxes to 10%, I can cut my required annual savings from $9187 down to $6730 a roughly 27% savings on how much I have to put away. That can be pretty tempting. However, if I am still that aggressively invested in the college savings account a few years before she goes to college and a significant market pullback does occur? She likely won’t be happy to put off college for a few years and more likely I won’t be happy that I have to write a check from my personal accounts, or worse take out a loan, to cover the difference.

You get the point. Good investment planning is nuanced and personal and a lot less about performance than it is about achieving objectives and managing risks around your personal timeline. So, as you go through the process of creating a personalized financial plan either for yourself or with a professional be sure you’re matching your investments to your goals and not the other way around, and make darn sure you understand the timing, risks, and potential rewards of your investments relative to those goals.


Tip # 5 – Listen to The Right Sources on Anything Financial and Avoid the Flavor of The Month

In tech, innovation is everywhere, and the fear of missing out is almost as pervasive as the next new idea that could catapult a company from being relatively unknown to the next giant of innovation. Highly successful tech companies for example have increased by well over 100,000% since going public and even a modest investment would have made you a millionaire several times over by now. So, I do understand why people get excited about meme stocks, cryptocurrency, and AI, even if we have no idea how (and by who) that will be monetized. At the same time, I feel I need to clarify something about what I do that I often encounter misunderstandings about: ongoing, risk-adjusted investing alongside a investment plan is not gambling. I don’t want anyone to gamble their home, their children’s education, or their financial security on anything.

I absolutely understand that the money we make from investing can help us achieve all those goals and anyone that purchases an investment needs to understand they all have risks, but that doesn’t mean that a successful financial plan is a matter of picking the right horse.

In fact, a good investment plan and a good portfolio will assume losses, outflows, and can adjust over time for both the good and bad things that happen, so do yourself a favor and be skeptical of investment hype and follow the old adage: if it sounds too good to be true, it is.

But just as bad as following the flavor of the month is following bad advice. Boy if I had a dime for every time someone told me they were going to talk to their very successful aunt/brother/cousin and then do what they did or how they were going to put everything into whatever investment is popular that month, I’d have a heck of a lot of dimes. Don’t get me wrong, there are individuals out there that genuinely enjoy studying finances and can probably point you toward some good possibilities for where to put your money. But they are not fiduciaries and unless they are spending hours getting to know your finances in detail, the best they can do is tell you what they did. Hopefully it goes without saying that what they did may very well not work, or be appropriate, for you.

The sad reality is that bad advice is rampant, sometimes it even gets blasted out onto the airways by some very trusted sources and leads to at best generic decision making and at worst financial catastrophe. So do your due diligence on any source that provides you with financial information and make sure you understand how that source is being compensated for that advice, what the motivation of that communication is, and how qualified they are to be giving you that advice.

Just because someone is successful in their career does not make them qualified to offer financial advice and some very well-known public figures have gotten in a LOT of trouble for offering advice that cost the people that listened to it a lot of money.

By contrast a good financial advisor is completely accountable for the advice they offer, that advice must be specific to that client, and if they fail in their duties of care or competency with regard to their client it can cost them their license, their job, or even lead to hefty fines. Authors and public figures aplenty are only accountable to their publishers and/or bank accounts and friends or family members aren’t trying to mislead you, they just don’t know what they don’t know, but they might not know that they don’t know.

So, when in doubt seek a professional out.

 

*This information is hypothetical and for discussion purposes only. It is not intended to represent any specific return, yield or investment. It is provided for illustrative purposes only and does not constitute a recommendation to invest in any particular fund or strategy and is not a promise of future performance, an estimate of actual returns or of the volatility any client portfolio may experience. Hypothetical results do not represent actual trading and do not reflect the impact of any fees, expenses or taxes applicable to an actual investment.

The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request.

Wells Fargo Advisors is not a legal or tax advisor.

Restricted stock units are stock ownership awards that companies provide to employees in order to encourage clients to stay with the firm and to provide a sense of ownership in the company itself. They generally only become fully “owned” after a specified period of time at which point the employee (aka you) can do what you like with them. However, first there are some things you should know…

What Exactly Are Restricted Stock Units (RSUs)?

Restricted stock units, or RSUs, are a type of stock-based compensation award usually associated with meeting certain key performance indicators set by your employer. Generally, an RSU will “vest” which is to say you will take full ownership of the stock after a certain period of time has passed, usually several years. So, for example, if you work at Intel and have a great year meeting your KPIs then the company might give you the option to receive your bonus in the form of RSUs which will then become yours after 3 years (as an example). However, while it’s always nice to have more stock (or at least I think so) you might be in for a few surprises with your RSUs if you aren’t careful…

Taxation of RSUs

RSUs work a little differently from other forms of stock awards you might be familiar with like employee stock purchase programs, because all of the fair market value of RSUs count as ordinary income in the year they vest. That means that if you have a particularly good year (or possibly if you received a signing bonus in the form of RSUs) and a lot of company stock vests that has appreciated in value you could potentially find yourself paying a lot more in taxes than you thought you would, especially if you haven’t prepared for the additional income.

The good news is that a good financial advisor can help you plan for that extra income ahead of time and possibly even delay or reduce the taxes you pay each year by helping you leverage saving and investing strategies that take advantage of tax deferment or tax-free income ahead of time. Those strategies are nuanced and can range from charitable giving to types of tax deferred investment accounts or even tax loss harvesting strategies. That said maximizing your traditional 401k contributions can help too, but being prepared is the important part.

One more thing: Employees that have been with the same firm for decades may also face a good problem: big tax consequences for highly appreciated investments. While it certainly beats losing money you’ll still want to come up with a plan for how you recognize your gains so that you mitigate taxes where possible.

Planning Risks Associated with RSUs

Sometimes the biggest risks of owning RSUs are rarely mentioned, but painfully obvious: the company’s stock price itself. If you are like many of the clients I work with and you work for a larger technology company then there is good and bad news and both are the same: the value of your company stock is likely to be volatile. In fact, most company stock is volatile. The good news is that sometimes that volatility works for you and those restricted stock unit awards result in big gains for you and your family.

On the other hand, sometimes those stock awards can act like a lead weight on your investing portfolio and because RSUs are taxed as ordinary income you could effectively have to pay income taxes on money you no longer have. Capital gains losses can still be taken if the fair market value of your RSUs exceeds its current value, but capital loss write downs won’t make up for the income taxes you have to recognize, so talk to your advisor about the potential benefits of diversification and risk mitigation strategies sooner rather than later.

Tech employees tend to see big swings in the value of their RSUs as do the employees of small capitalization firms that may not be as recognized as larger firms. Regardless it is always important for you as the employee to understand the risk associated with holding a large amount of your company’s stock.

Remember the longer you have been with the firm and the more RSUs you’ve accumulated the more tax consequences and often the more risk you will face as more and more of your overall investing profile becomes focused in your employer’s stock. If you decide you want to be heavily invested in the firm you work for that is one thing, but make it a choice and make sure you understand that choice.

How Do You Make the Most of RSUs?

·       Review the rules and regulations around restricted stock units at your company to make sure you understand your vesting schedule, the key performance indicators that determine your stock awards, and the rules relating to how and when you’ll be awarded the RSUs.

·       Understand the tax consequences of your vesting schedules and make plans ahead of time to prepare for those taxes or to lower your reportable income in the year they will be recognized.

·       Be intentional with your investment profile’s risk tolerance and diversify RSUs when you need to align with a level of risk that is appropriate for your life circumstances and your preferences.

·       When in doubt engage a tax or financial planning expert to assist you with preparing for your RSUs and help you make the most of them.

 

The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request.

Diversification does not guarantee investment returns or eliminate risk of loss including in a declining market.

Most employees at Tech firms will have access to some combination of restricted stock units, employee stock purchase programs, employee stock ownership programs, equity awards, disability and life insurance, stock awards, annuities, pensions, deferred compensation, Roth and/or traditional 401k accounts, education allowances, and probably much more.

So how do you use all these financial tools to create that amazing retirement goal of sipping mojitos on a warm sandy beach? The answer is it depends, and when in doubt it is always a good idea to engage a financial planning expert, but hopefully the techniques below will get you started.

Technique #1 – Create A Strategy Around Your Roth 401k Account

Roth accounts are an often-discussed financial planning tool that allows you to put after tax dollars into a retirement account that then grows tax free and gives you a tax-free source of income in retirement. While that is extremely useful for controlling your tax situation in retirement it is part of a bigger tax picture both of retirement and life beforehand.

Yes, it is advantageous to put money into a Roth 401k so that you have a source of tax-free income in retirement but when you do those deposits and how you invest that account will have a big impact on how successful your Roth strategy is.

Mathematically if we assume the same tax rate there is actually no account growth advantage to investing in a traditional vs a Roth account provided both earn the same return and tax rates don’t change. Strategically it can make a LOT of difference, however. Here are some tips for getting more out of your Roth account:

Consider making your Roth account more aggressive than your other accounts and intend to keep them invested the longest. This makes sense because you have already paid taxes on these funds, so the longer they sit, and the more aggressively invested they are, the more tax-free growth you will potentially accomplish.

If you want to reduce your risk consider doing this in your traditional accounts so that your overall profile aligns with your risk tolerance but your Roth accounts make up the focal point of your growth strategy. This strategy is designed to allow your Roth accounts to achieve the most growth while allowing you to reduce risk overall, just remember that more aggressive strategies will fluctuate more, which may require you to invest those assets for longer. Don’t aggressively invest any assets you plan to draw upon within the next 3-5 years. Patient investors have more time to ride out volatility.

You may want to consider investing more in the Roth in low-earning years or in years when you have more tax write offs. If you have a business on the side that is in the startup phase, or own properties that might enable significant depreciation it might be time to double down on your Roth accounts where possible. This technique enables you to take advantage of low incomes years & life events like semi-retirement, business expenses, layoffs, or periods of extended leave by paying fewer taxes overall on your investments in low income years.



Technique # 2 – Consider Taking Advantage of a High Deductible Healthcare Plan and Open an HSA



Health Savings Accounts are essentially investment accounts in which an employer will often make or match employee contributions and whose funds can be invested. They are also triple tax advantaged in that contributions to these accounts are tax deductible, the accounts grow tax free, and withdrawals are tax free if they are used for qualified medical expenses. This can make them incredibly useful savings vehicles for retirement when you will more than likely experience the largest medical expenses and in my experience many technology companies offer them.



Funds can also be used for your spouse as well as any dependent children even if the whole family isn’t covered under the high deductible healthcare plan, so if you have a well-maintained health savings account it may benefit not just you but the whole family.



However, they are not right for every household, so here are some tips for making better use of an HSA account if your employer offers them:


Weigh the advantage of being able to invest and save into a tax deferred account with the additional costs you’ll incur in the meantime. If your household has a tight budget, or your children, yourself, or your spouse have ongoing medical conditions that require consistent care and you regularly max out deductibles each year these plans might not be for you.

Maximize your contributions and make sure you can plan to maximize those contributions. Having a health savings account does no good if you don’t invest the funds in line with your retirement and healthcare goals or if you don’t maximize the benefits or employer matches you receive for the account. If you are going to have it, make sure you use it.

Take advantage of catch-up contributions when you can. Statistically, most of us will be in our prime earning years once we hit our mid-fifties and the same is true of tech workers, so make sure you tax advantage of your higher contribution limits once you hit age 55.

Technique #3 – Lay a Strong Insurance Planning Foundation by Balancing Your Benefits w/ Your Protection Planning Needs

Employee benefits packages are often the first line of insurance planning, but we might not know how much insurance we need to have and for who. Do I need the extra term insurance? Is the cheapest place to get insurance through work? Do I need things like critical illness and short-term disability?

Especially in technology firms, and particularly if you are highly tenured or an executive at your company, you may have all kinds of additional insurance options that may or may not make sense for your situation, but here are some ways to tell what benefits you might want to elect:

How much insurance do you need? In my experience answering this question is more of an art than a science and depends in part on how much risk you are comfortable with, but here are some things to consider:

How much income do you need to replace for yourself or your spouse if one of you passed away prematurely?
How would that impact your savings goals for college?

How would it impact your goals for retirement?

What would it cost to hire a professional to do what your spouse does?

How much is left on the mortgage?

What are the most tax efficient ways for you to cover your insurance needs?

Permanent insurance options will not only potentially cover you for life but might also give you the option to invest the funds that are in your insurance policy. Generally permanent policies are not available in employer plans, but because of the expenses of coverage it may make sense for your household to utilize both to give yourself the advantages of both term and permanent coverage.

Who most needs the insurance coverage?

If one member of your household is responsible for most of the income, make sure your life and disability coverage is comprehensive and will replace all the income needs for the whole family.

Don’t forget to elect coverage for stay-at-home spouses. The work that stay-at-home parents do for their families could cost a small fortune to replace, so make sure if your employer makes elections to cover your spouse that you talk through the options with your significant other.

Ultimately you want to make sure you are getting the most out of your benefits because many of the largest parts of your compensation are often tied up in benefits. Utilizing them wisely can save you, and your family, a lot of time, money, and heartache.

When in doubt ask an expert or if you think you are ready contact our team by clicking “contact us” above.



The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request.



Traditional IRA distributions are taxed as ordinary income. Qualified Roth IRA distributions are federally tax-free provided it has been more than five years since the Roth IRA was funded AND the owner is at least age 59 ½ or disabled, or using the first-time homebuyer exception, or taken by their beneficiaries due to their death. Qualified Roth IRA distributions are not subject to state and local taxation in most states. Distributions from Traditional and Roth IRAs may be subject to an IRS 10% additional tax if distributions are taken prior to age 59 ½.



Wells Fargo Advisors is not a legal or tax advisor.