Employers are trying their best to keep their best talent. And, as more top executives and senior-level managers re-evaluate their careers after two years working from home, companies are trying to find new ways to entice them to stay.
While stock options, restricted stock and other deferred compensation plans have long been part of talent-retention plans, recent news reports say that more companies are instead offering cash bonuses. According to these reports, Alphabet, owner of Google, adopted a new cash bonus plan in October 2021 that lets the company give employees bonuses of nearly any size for nearly any reason. Amazon said in February it doubled its cash-pay cap for employees.
But with more money hitting bank accounts, it’s tempting for an executive making a healthy six-figure income to make an expensive purchase that eats up a large chunk of this cash. It’s even more likely for people to begin to stray from their budgets and spend more money. Lifestyle “creep” takes hold; with more money to spend, it’s too easy to be less disciplined. Then, when high inflation hits, a recession occurs, or their company downsizes them, it’s hard for people to pare back when times get lean.
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A few years ago, one of my clients, a corporate executive, used a bonus to install a $75,000 swimming pool in her backyard. It may have seemed like a reward for a job well done, but the pool put a major dent in her goal to build her savings for her three children’s college education, which was right around the corner.
Whether it’s a big cash bonus or stock options and restricted stock grants, “What Matters Most” is a phrase I use to guide my clients. With that as background, here are some of the best ways to invest cash bonuses:
Increase Your Pre-Tax and After-Tax 401(k) Contributions
Retirement savers with a 401(k) can contribute up to $20,500 in 2022. Those savers ages 50 and older can make an annual catch-up contribution up to $6,500 in 2022 (no change from 2021), for a total contribution of $27,000. If you weren’t already doing this, now is the time.
Set Up Automatic Monthly Deposits in Key Accounts
Saving money for a child or grandchild’s college education has never been easier. Regular deposits to a 529 college savings plan will add up over the years, and in about 30 states, individuals and married couples may be able to deduct part of their 529 contributions from their state income tax return.
A 30-year-old saving for their retirement may need to save half as much money over their career compared with someone who starts saving when they are 40 years old, assuming similar market returns on their portfolios.
Pay Down Your Debt
With extra money in hand, now could be a good time to make extra monthly principal payments on your mortgage, credit cards or other consumer debt.
One of my clients is doing just this – after earning her big promotion last year she immediately took the extra income from her monthly paychecks and sent it directly to the mortgage company. As a result, she’ll be able to get out of debt at least five years sooner.
When it comes to which payments to prioritize, I have an unconventional approach to getting out of debt. Most people say to pay off your highest interest rate debts first. I advise people to pay off the smallest balances first. That will help the mountain of debt feel like a small hill quickly, and it provides encouragement for people to keep working on their debt-reduction strategy if they have these small successes along the way.
Consider More Insurance
A higher income means you will likely need more life insurance to protect your family, especially if your lifestyle increases. Adding more disability insurance can make sense too. The higher your income, the more protection you may need if you suffer a serious illness or injury and can no longer work full-time, especially if you haven’t hit your financial retirement goals yet.
Look into Personal Excess Liability Insurance
Professionals and senior-level managers may also consider buying an excess liability policy. A high-profile job can increase the risk you are the target of a lawsuit; an excess liability policy — aka umbrella insurance — can help protect your family’s assets should there be a future personal judgment against you.
Two Additional Tips for Stock Compensation
For those executives who receive stock options and restricted stock grants, the good news is that the vesting period – often three to five years – means there is plenty of time to plan when to cash in these awards and how to invest the proceeds.
With stock prices having risen steadily over the past decade, these awards have been a windfall for many. But be careful not to let too much stock accumulate since its value will drop if the company stock price declines. The stock market’s overall pullback so far in 2022 has meant a double-digit percentage decrease in the stock prices of many companies.
Also, take time to understand how and when you can access these awards. As the vesting period draws near, determine the exact vesting date of your awards, how to access them, sell the shares and wire the money to your checking account. This can be a time-consuming process if you are not familiar with it, and it needs your attention to be properly executed.
Finally, for those considering retirement in the next few years, begin to use these options and grants to diversify your stock portfolio. Many executives have achieved their wealth largely from company stock concentration. But owning too much stock in one company could quickly bring down your net worth in retirement. Instead, a diversified plan that includes U.S. and foreign equities, bonds, real estate and insurance can be more effective than relying heavily on one company’s stock price.
This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.
