4 Actions That Senior Executives Retiring in 3 Years Should Take Now

We believe that everyone should have a personalized retirement plan to help secure their financial future. However, it’s especially important for senior-level executives, because they typically have more complex financial circumstances. They may need careful planning to ensure that they make the most of the wealth they’ve created.

Let’s consider the example of a senior-level executive who plans to retire in three years following a successful 30-year career in corporate America. We’ll assume that most of her income — salary, bonus, stock options and other deferred compensation — is tied to the success of the company where she works.

If you are in a similar situation, here are four actions you should consider now to be prepared.

1. Diversify your wealth

Many senior-level executives have received company stock grants and equity awards over the years. For the client in our example, company stock makes up approximately 30% of her investments.

Even if you work for a successful company, it’s risky to have too much wealth tied up in one stock. Take, for example, the pandemic, which suddenly and unexpectedly created unfavorable conditions for many sectors, including airlines and hospitality companies. An executive with company stock valued at $1 million when the pandemic hit could have seen that number suddenly drop by 20% to 30% or more. You don’t want something like that happening to you.

One strategy to help mitigate “concentration risk” is to sell your company stock as soon as the shares vest. This move will reduce your exposure to the stock, and also reduce the likelihood of paying additional capital gains taxes from holding the stock for a longer period and selling later.

2. Understand how to manage deferred compensation

Many executives have built a substantial balance in deferred compensation plans. This can form a key part of your income in retirement, especially if you have a cohesive strategy when making your payout elections.

Many deferred compensation plans give executives a choice of a lump-sum payment or annual payouts over a period of years. This choice will have a significant impact on income and taxes paid once you retire. Choosing five or 10-year distributions could provide steady annual income to bridge the gap between the time you retire and when you start receiving Social Security benefits or required minimum distributions from your retirement account at age 72.

3. Open an Individual Retirement Account (IRA) or Roth IRA for your spouse

Let’s assume the executive in our case study has a spouse who has not been working for several years and does not have an IRA or Roth IRA. In this scenario, the working spouse is eligible to contribute to an IRA or Roth IRA in the name of the non-working spouse who has little or no income.

For 2024, the use of a spousal IRA strategy allows couples who are married and filing jointly to contribute $14,000 to IRAs per year — or $16,000 if they are age 50 or older, as a result of the catch-up contribution provision.¹

It’s important to consider income limits when determining eligibility to make tax-deductible IRA contributions, as well as non-deductible IRA contributions or direct after-tax Roth IRA contributions. Depending on your household income, you may be limited to certain options.

This is a complex strategy, so consult a tax adviser before making any decisions.

4. Consider purchasing long-term care insurance

A few years before retirement is often a good time to consider buying long-term care insurance. These policies typically pay for in-home aides, nursing homes and other costs for people who can no longer adequately care for themselves.

Assuming you’re in good health, it may be a good time to purchase this type of insurance between the ages of 60 and 65. In this age range, you are neither too young nor too old, making monthly premiums more reasonable.

Long-term care insurance is not the right choice for everyone. Some people decide to self-insure by investing their money rather than paying insurance premiums. And, of course, it’s possible the insurance may not even be needed. But now is the time to investigate if it’s right for you and your personal situation.

With solid planning, most senior executives can position themselves to reap the maximum benefits from their compensation once they decide to wind up their full-time career. It could mean an increased value in their portfolio while also cutting their taxes for years to come, which leaves more money to enjoy in retirement.

To find out more about preparing for retirement as an executive, please reach out to us and we’ll be happy to assist you.

¹ https://www.investopedia.com/retirement/making-spousal-ira-contributions/

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