The Equity Compensated Professional

Sean

Age: 37

Location: San Fransisco, CA

Occupation: Software Developer

Primary Goals:

• Better understand his equity and to get a plan in place for it.

• Achieve financial independence/optionality by 55.

• Sell his condo in the city and buy a home in the suburban area.

• Minimize taxes where he can.

The Setting

Sean has been a software developer for most of his career ranging from tech start ups to mature tech companies. He enjoys what he does and is thankful for the opportunities that it’s given him. He realizes that his personal finances are beginning to demand more time and attention than he’s able to give them. He’s fearful he’s going to make a costly mistake that’s going to set him and his goals back.

He also wants to “slow” some things down in his life since he’s been go-go-go since graduating college.

He’s concluded that it’s time, and worth the investment, to hire a trusted financial planner to do the heavy lifting for him.

The Conflict

Sean knows that his personal finances can be optimized in order to set him up better for achieving his goals on his timeline.

His questions are:

• How do I better utilize my equity in order to achieve my goals?

• How can I reach financial independence/optionality by the age of 55 (or sooner if possible)?

• How I go about selling my condo in the city to buying a house in one of the surrounding suburbs? Will I have to pay taxes?

• How can I minimize the taxes I pay or optimize my finances in a way that reduces the overall taxes I’ll pay? What is AMT and how do I reduce or avoid paying it?

• Am I invested properly accordingly to my goals?

He knows that he needs a plan and someone to guide him.

The Approach

First, I listened. I talked with Sean and asked the questions that many planners fail to consider. I asked him about his history with money, his best and worst financial decisions, his dreams and aspirations, and ultimately what was most important to him.

Many of the questions and concerns Sean had are common with my clients.

Once I truly understood his goals and motivations, we were able to create a unique plan together, with the proper action steps, to strengthen the fibers between his finances and what was most important to him.

The Resolution

After many meaningful conversations and analyzing the data, I was able to help Sean:

• Create a plan for his Restricted Stock Units (RSUs), Non-Qualified Stock Options (NSOs), and his Incentive Stock Options (ISOs). The plan included reducing concentration in his company’s stock in a tax-efficient manner while still allowing him to participate in upside potential. This reduced his overall risk while allowing him to fund his other goals.

• Materialize what it would take to reach financial independence/optionality by age 55 AND what it would take to incrementally do it before then. This prompted us to increase his saving within his taxable brokerage account. We also began doing Mega Backdoor Roth 401(k) contributions and conversions within his 401(k) and Backdoor Roth IRA contributions and conversions to create a “tax free” bucket income that would be available to him pre 59.5.

• Connect with a local realtor (referral) and mortgage broker (referral). I was able to identify that no capital gains would be owed due to him living in his condo 2 of the last 5 years with the projected gains to be under $250,000.

• Optimize his retirement saving in a way that confidently reduced taxes over his lifetime. I also recommended that he take full advantage of some of his employee benefits that could help save on taxes such as utilizing a Health Savings Account and investing the balance.

• Early exercise some of his Incentive Stock Options (ISOs) in order to bypass Alternative Minimum Tax (AMT). We determined that the remaining ISOs we would exercise and sell immediately upon a liquidity event in order to reduce exposure and risk (he was okay with the added taxes that would result from this strategy).

• Reallocate his retirement and taxable brokerage accounts to better reflect his goals and risk tolerance. He was previously invested too conservatively.

We meet on a regular cadence and track his plan and portfolio to ensure he’s maintaining a proper trajectory towards achieving his financial goals. Sean is excited to have a professional guiding him on his personal finance journey and has the peace of mind that everything is working in his favor.

Now that he has a plan that he’s confident in, Sean is able to fully focus on his career, relationships, hobbies, and the most important things in his life. The way it should be.

Note: The above case study is hypothetical and does not involve an actual Prospurpose Wealth client. No portion of the content should be construed by a client or prospective client as a guarantee that he/she will experience the same or certain level of results or satisfaction if Prospurpose Wealth is engaged to provide financial planning or investment advisory services.