Freed by 50

It’s about RSU’s again.

I’m facing what some would call an equity cliff at the end of 2023. Three years ago I was granted a fairly large amount of RSUs (restricted stock units) which would vest quarterly over four years. While I’ll still have RSUs for the next six years, the difference between 2023 and 2024 is significant.

With that in mind, in 2021 I decided to hold some of my vested stock regardless of stock price for two reasons. First, since I didn’t exactly need the money from the vested stock, I thought I’d save a small amount of the shares (2-10 shares) per vesting period for at least one year. This would get me past capital gains taxes and save me about 15% in taxes. Since my company stock had only gone up for the first six years of my tenure, this seemed like a very good idea. The second reason was to save these shares into 2024 to ease my transition into getting less equity each quarter. This also seemed like a good idea, although not as good as the first idea.

Here we are halfway through 2022 and I have over 60 shares now in this aging process. By next week, half of them will have been held for over a year, thus past capital gains tax and into my regular tax level. Mission accomplished, right?!

In hindsight, my good idea, at least in the short term, has gone sour. The oldest shares, of which there are five, have appreciated nicely even in this climate. That was a win since they’re up over 100% and I’ll save quite a bit percentage wise on the taxes. However it amounts to a few hundred dollars. The lion’s share of the company stock that I’ve held vested when my company was trading in the 600’s and 700’s, and it’s now down 25% from those highs. In fact, the shares that vested at the peak are down 30%. So doing a little math here, rather than save myself 15% in taxes I wound up costing myself 10-15% in gains on top of the taxes.

When I started a job with company stock as part of my pay I was given a lot of advice. Most of it was from seasoned professionals who had 10-20 years of getting paid in RSUs under their belts. Almost all of them had horror stories. In some cases, these people worked for companies in the 90’s and early 2000’s that were rocket ships. They were overnight millionaires when their companies went public. And then the bottom fell out. They went to bed millionaires and woke up with nothing. In other cases, they worked for companies with solid value stocks. They didn’t see much growth, but the stock was usually pretty stable and could go up a few dollars per year. These people got big options packages and decided to hold them because the stock was so stable. Years later the options were underwater and would cost them money if they sold them.

The best advice I got was to sell my RSUs as they vest and reinvest them in index funds. This is something I had diligently done with both my RSUs and my ESPP (employee stock purchase plan) for years until my bright idea. It is a strategy that has worked well for me. I do not regret the stock I sold at the beginning of my tenure for what is now 1/5 the current stock price. Without that stock I wouldn’t be debt free. I wouldn’t have the house I live in. I wouldn’t have had the life and the freedom I’ve enjoyed these past seven years. I wouldn’t have a million dollar diversified portfolio. What’s more, no one could have known my company, or any company, would have performed the way it did. I could have held all that stock and lived a different life while becoming an overnight multi millionaire. Or I could have held that stock and watched it drop quarter after quarter as my company floundered.

I mean for this to be a case study, or an experiment that I conducted so you don’t have to. At the time of this writing, I cost myself about $20k to save $3k. Sure, my stock may go back up, but it could take years. I’m willing to wait it out with what I’ve saved to this point, but this experiment is over and from here on out I’ll just pay my capital gains and stick with the process that made me a lot of money in the first place. No need to mess with something that’s working.

My final thought on this is how I would have reacted if this had worked out. What if my stock had kept climbing and today I was selling these shares in the 800’s and 900’s while saving on capital gains tax. Would this be a different article? Would I keep doing this indefinitely? I want to say that I would have learned the same lesson. I want to believe that I would stick to a sound investment strategy. That I wouldn’t get greedy. But I know I’d be wrong. This article would have explained my brilliant strategy to save taxes and ease myself into lower RSUs. Maybe I would be talking about the years I shaved off of my retirement date. I really can’t say. This could have gone either way. Today I consider it a bad idea.