By David Rae Certified Financial Planner™, Accredited Investment Fiduciary™

If you are an Apple employee and do a good job, you will likely own way too much Apple stock as your career progresses.  Good problem to have, right? I mean, Apple stock has performed amazingly well over the past few years; we all own iPhones and equity compensation (think Apple Stock Options or RSUs) can be fabulously easy ways to build wealth.  

However, we do need to talk about not having all your eggs in one basket. But for many of my clients with valuable stock options, they can’t even see the basket under all those eggs. It can be hard with a company as eponymous as Apple and/or with a company stock that has run up as much as Apple over the past few years.   These stock option tips and guidance may apply to anyone reading this who is lucky enough to have been awarded equity compensation or incentive stock from their own employer, including employees at Apple.

I am not here to offer a buy or sell rating of the Apple stock.  Likewise, this is not an examination of the intrinsic value of Apple stock or the company’s future. But rather a fiduciary financial planning conversation I’ve had with actual clients (names and details changed to shield their identities) of Apple.  Similar conversations have been had with employees of Microsoft, SpaceX, Tesla, to name a few.

Let’s call my clients them Steve and John. (Not their real names, all client information is confidential).  Steve had been working at Apple for over a decade, made a good salary, and had accumulated a large number of Apple stock options.

Steve came in for financial planning guidance his partner said the following things

“It is time to get serious about saving for a house and planning to retire someday. How can our Apple Stock help us get there faster?”

“We don’t have much; all we really have is my stock options at Apple. They have done amazing, so I don’t know if I want to sell them.

‘If we sell, we will owe a ton of taxes when we exercise our Apple Stock Options, and we totally don’t know what else to do with the money.”

“We live off our salaries and save the Apple Stock options. We have enough money to get by, but not really a ton extra to save.”

The Problem With Owning A Ton Of Apple Stock Options:

First off, too much company stock is a great problem to have.  It is also relatively easy to fix.  If you work for a massive company like Apple or Google, or Microsoft and have stock options and any other investments, you probably own even more of your company stock than you realize. Similar advice will also apply to workers at Tesla, Space X even ATT, for that matter.  If you dig into any other mutual funds, index funds, or Exchange Traded funds; you will likely find Apple stock there in most of those holdings. The same goes for Google and Microsoft.

As you keep working for these companies, you will likely continue to accrue more stock options over the years.  For most people who work in management, these stock option grant amounts will dwarf other savings or even contributions to your 401(K).   If the Apple stock does well, your portfolio will tilt even further to being dominated by this single stock.  This can turn into a disaster when/if the proverbial crap hits the fan. Just ask anyone who worked at a bank and had bank stock grants during the financial crisis.

It is not uncommon for valuable employees to get tens to hundreds of thousands of dollars worth of stock grants each year.  For comparison, the maximum 401(k) contribution as an employee is just $19,500 in 2021.

Using Apple Options To Fund Your Financial Plan:

The problem for Steve and John was they ended up feeling a bit cash-poor by holding onto all of their Apple Stock Options.  Their net worth was growing each year enough to stay on track for their financial goals.  Annoyingly to them, without touching their Apple options, they just didn’t have enough cash flow to save for a home down payment (they live in San Francisco, where a dump will set you back Million dollars and up). They also were missing out on tax savings from maximizing their 401(K) contributions. Not to mention leaving thousands of dollars on the table by missing out on a generous 401(K) matching from Apple. This is like free money, by the way.  EVERYONE READING THIS- YOU ARE CRAZY IF YOU DON’T GET EVERY CENT OF EMPLOYER MATCH!!!

Selling Enough  Apple Stock Options to Fund 401(K) Plans:

One of the easiest decisions to make was to start selling some of the stock options to give them money to fund their retirement accounts fully. Both Steve and John are highly paid executives (and get walloped each year by the Gay Marriage Penalty)  and need to be contributing to their 401(K) Plans. Both will be maxing out the account with contributions each per year. For 2021, you can contribute up to $ 19,500 to your 401(k) plan, $26,000 if you are 50 or older.  This is increasing to $20,500 / $27,000 in 2022.

Why was this an easy decision?  Well, they both can technically repurchase Apple stock in their retirement accounts if they choose to. They didn’t, and I wouldn’t recommend that they purchase more Apple stock directly. All the same, they could, if they really wanted to.   Also, the tax deduction for contributing to their retirement accounts should more than offset the taxes owed for selling stock options (especially for long-term capital gains– stock options held for more than one year.)   Of course, the tax deduction only applies to the funds that are contributed to a pre-tax retirement account.  In Steve and Johns’s case, they would be selling several hundred thousand dollars in Apple stock each year.

They felt a bit better about selling some stocks after I showed them how much money they were leaving on the table every year by not getting the full company match on the 401(k).  It could be millions of dollars over their working lives.

Selling Apple Stock Options to Fund a House Down Payment:

John and Steve had the goal of buying a home in the Castro area of San Francisco.  This was a few years ago, but they figured they would need at least $2 million to get a home they could live in for some time.  That works out to about $400,000 down payment assuming 20% down.  We planned on the selling of Apple Employee Stock Options over three years to “save up” for the down payment on their new home.  Selling over a few years helped them strategically minimize their taxes on the options when exercised.

Since we did this, they’ve ended up buying a house in the neighborhood they wanted to live in.  Again, we weren’t selling Apple stock just to sell it. We were selling to help diversify their overall investment portfolio.  More importantly, for this chunk of Stock Options, we were helping them prepare to buy a home.

The next housing goal was to buy a second home in Palm Springs, which they have also accomplished!

They Still Have more Stock Options Value Then When We Started:

We’ve been selling off funds for several years.  In fact, we set a goal of selling 20% of the Stock Options value each year. That included the money above for 401(k) Contributions and a house down payment.   We sell some Apple stock options, and each and every year, Steve is granted more.  Pairing growth in the value of Apple stock over the years with the new stock options he has earned, the total value of the Stock Options account has continued to grow even as well sell off a significant amount each year.

Steve and John own way more Apple Stock that would be prudent typically in a well-diversified portfolio. Usually, an individual wouldn’t have more than 10% of their portfolio in any single stock.   This can be difficult to achieve for successful business owners, or people receive a large portion of their compensation in the form of equity compensation or stock options.  While Steve and John continue to own more dollars’ worth of Apple Stock options, over time, they have diversified, and this single holding has become a smaller porter of their overall investment portfolio.

Each year we review, how many shares Steve has been granted. What else is going on in their lives (aka what they may need money for), and we review taxation.  Yes, tax laws, tax rates and even Steve and John’s personal tax situation can change over time.  We try to only sell shares that will qualify for long-term capital gains.  I try to avoid short-term capital gains unless the money is actually needed at that time for some reason.

FOMO Be Gone:

Fear of missing out has been a big challenge for many people I’ve spoken with who own large amounts of their company’s stock options. In this case, APPLE is a very public stock, and people who don’t even hold it will often have an opinion of the company and its value.  Millions of us use ipads, iPhones, Apple TV or at least have ventured into an Apple Store. (I am looking forward to the Apple autonomous car).  Telling someone you are selling Apple stock likely won’t earn you praise from friends at a cocktail party.

With the confidence inspired by their financial plan, you may notice we are never talking about what the future holds for Apple stock when making these decisions to sell a small portion of their stock options. It is all about what that money will be used for and reducing their overall stock market risk from owning just one stock. That risk is there for any person holding only one stock.

How could you use your Appl stock options to improve your life?

DAVID RAE, CFP®, AIF® is a Los Angeles retirement planner with DRM WEALTH MANAGEMENT. He has been helping friends of the LGBT community reach their financial goals for over a decade. He is a regular contributor to Forbes.com, the Advocate Magazine Investopedia and Huffington Post as well as the author of the Financial Planner Los Angeles Blog. Investopedia name David Rae one of the  “100 Top Financial Advisors” in 2021 for the fifth year in a row.  Follow him on Facebook, or via his website www.davidraefp.com

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