3 Keys to Retirement Planning for Executive Clients

"Executives spend 25 or 30 years with their head down in a role that defines their calendar, their peer group, their sense of purpose, and often their identity," said Nick Stevens, founder of Evergreen Wealth Management. "Retirement planning conversations with this group get dominated by spreadsheets, but the spreadsheet is usually the easy part. What keeps them up at night is the question of who they are on Monday morning when there's no Monday morning."

He said he's had clients with more than enough money to retire and still delay the decision to do so because they weren't asked what the next chapter looks like.

"Most of these clients have built deep industry relationships over decades, and they don't want to walk away from them cleanly," Stevens added. "Many end up doing some form of consulting, board work or fractional executive work post-retirement — not because they need the income, but for the sport of it, the social side, and honestly because they still enjoy earning money."

That matters financially, he noted, "because it changes the tax picture and the timing of Social Security, Roth conversions and [non-qualified deferred compensation] distributions." It also matters emotionally.

"A client who expects to fully retire and then finds themselves restless six months in can make bad financial decisions out of boredom," he said.

Stevens cited an anonymized client example of David, age 58, who is a senior vice president at a publicly traded company. His compensation includes a base in the mid-$400,000 range, an annual cash bonus, restricted stock units vesting on a rolling schedule, and a concentrated position of vested non-qualified stock options and incentive stock options representing roughly a third of his net worth. David also has a seven-figure 401(k) and a non-qualified deferred compensation plan scheduled to pay out over five years after his separation, with a target retirement age of 59.

"Two years before his target date we had the identity conversation," Stevens said. "David thought he wanted to stop working entirely. A year in, he took on advisory work in his industry two or three days a week — exactly the kind of shift a rigid plan can't accommodate well, but a flexible one can."

2. Start a few years early.

While retirement planning should start a few years before any client leaves the workforce, early planning is even more important for executive-level clients. That's to address the amount of details faced by most higher-income clients.

"We consider the five years before retirement the retirement red zone," said Brennan Decima, managing director of Decima Wealth Consulting. "Just like in football, the cost of a mistake in the red zone is magnified. The playbook shrinks, requiring more attention to detail. The last thing we want is to fumble right before retirement."

Decima explained how early planning made a "million-dollar difference" for one of his clients.

"I worked with a C-Level executive who was preparing to retire after 25 years, and ... [she] had $14 million in a deferred compensation plan that was set to pay out the January following her departure," he said. "This coincided with a large cash bonus and equity vesting. She was planning to lose half of her deferred comp to taxes."

The plan, Decima explained, allowed a one-time adjustment to the distribution schedule, as long as it was made at least 12 months before her last day.

"We were able to structure this in a way that spread her payouts over 15 years and avoid state income tax," he said. "This not only allowed for more compounding on almost $7 million, but the state tax savings alone paid for her retirement condo. A detailed review of her future tax projections and her company benefit documents saved this client well over a million dollars in taxes."

3. Look for tax planning opportunities.  

One reason that tax planning matters to all clients looking toward retirement is a common misconception that taxes are less of an issue in retirement than while working.

For executive-level clients, one strategy to minimize the tax effects of appreciated employer stock when leaving is the use of net unrealized appreciation when rolling over the client's 401(k).

Darcy Gonsalves, partner and senior wealth advisor at MAIA Wealth, explains this situation.

"If you complete a direct rollover of the 401(k) into a rollover IRA, all distributions from the IRA will be subject to income tax. However, there is an alternative method to take the distribution by transferring the employer stock to a non-retirement account, instead," he said. "This way, the appreciation is subject to lower, long-term capital gains tax rather than income tax."

Gonsalves adds that there are "very specific requirements" to handle the transfer correctly.

"I make sure we review this closely with our executive clients as, once you roll over the entire account, you cannot go back," he said.

Mike Anderson, a planner with AdviceOnly, detailed another example of careful tax planning for a client who was a senior executive at a defense contractor.

"He came to me because a new government contract had been completed and consequently, the share price had tripled. He was considering liquidating his options and preparing to retire within a year's period. Taxes were an obvious concern," he said. "We ran different scenarios to help minimize the situation, but there was an unexpected result. His wife helped him realize that he really didn't want to stay any longer, so he chose to liquidate and pay the taxes now. He retired the following week."

The executive is a few years away from qualifying for Medicare, and Anderson "found an advantageous way to use taxable funds" for their living expenses.

"This prevents further income spikes in the two-year Medicare look-back period," he said. "In the meantime, we are structuring withdrawals to use an ACA plan and smooth out RMDs."

Gonsalves added that her firm considers completing Roth conversions "either before retiring, or in early retirement," before drawing Social Security benefits.

"We also have to be mindful of the Medicare IRMAA brackets," she said. "Just one dollar into the next bracket means you are paying a higher Part B premium than you would have otherwise."