Three Options for Retirees With Concentrated Stock Positions

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In the past 15 years, I have had many people, some of whom became clients, tell incredible stories of being in the right place at the right time.

Take the woman whose $6,000 of Apple stock (AAPL) turned into $2.7 million, or the couple who were early Tesla (TSLA) adopters and watched their stock soar over $10 million. Theoretically, these people are now good forever. In a diversified portfolio, that is.

But in a single stock, Example A is worried about quarterly iPhone sales. Example B is worried about quarterly Tesla deliveries. Don’t get me wrong — it is still an enviable position. But it leads to an important decision. Is what made you rich going to keep you rich?

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What is a concentrated position?

Let’s start with what constitutes a “concentrated position.” There is debate in the planning community over whether it’s 5% or 10% or more of your portfolio in a single stock.

This generally does not mean one mutual fund or ETF that makes up more than 10% (but it could be in some of these new concentrated ETFs).

We start discussing planning options with clients at 5% and are more inclined to act when we get over 10%. According to EY, the average lifespan of a S&P 500 company 80 years ago was 67 years. As of 2023, it was 15. I think the risk of holding is now obvious.

Here are some options based on a retiree’s goals.

1. Charitably inclined and want income?

Charitable remainder trusts (CRTs) and charitable gift annuities (CGAs) achieve the same objective. You give an appreciated asset to a charity. In exchange, that charity, or in the case of a CRT, the trust, pays you a set percentage for the rest of your life.

You get a deduction for a portion of the gift and escape the massive capital gains bill (although a portion of your income distribution will be considered a capital gain).

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We use CGAs for smaller gifts if you are OK giving up control of who receives the remainder at death. For example, if I knew I wanted money to go to the Michael J. Fox Foundation, I would be inclined to use a CGA. If I were making a larger gift with multiple charitable beneficiaries, I would use a CRT.

I retain the right to change beneficiaries down the road in exchange for the complexity of drafting and maintaining that irrevocable trust.

2. Not ready to just sell the stock? Consider put options

It’s hard to just break up with something that made you rich. That’s especially true if you spent your career at the company. In this case, buying put options can cap the loss on the stock.

Put options are essentially portfolio insurance. In exchange for a premium, the buyer can establish a floor at which they can sell the stock if it goes down.

For example, if you own 100 shares stock XYZ at $100 and you buy a put with a floor at $90, if the stock goes down to $80, you can sell it at $90.

Sounds too good to be true? It’s just too good to be free. This can be expensive, especially as it becomes worthless at expiration if the stock goes up. This is why you may want to consider using a collar strategy.

In this strategy, you sell a call option, which limits your upside. You then turn around to buy a put option with the money you received from the call. The end goal is to establish a zero-cost or near-zero-cost collar.

This will establish an upside and downside range for your stock. Think of this like the bumpers kids (and some adults) use at the bowling alley.

Most financial plans require some rate of return to be successful, i.e. your money needs to earn X% for you to maintain your lifestyle in retirement.

You typically don’t need the full upside of stocks, but you can almost never take the full downside either. A collar may allow you to establish a return range to protect your financial plan.* If you’d like to build your own plan, you can access a free version of our software online.

3. Want to leave a legacy to individuals?

Let’s say you have an investment portfolio of $5 million, and $2 million is in XYZ stock. You want to leave $1 million to your grandkids when you die.

From a tax perspective, earmarking your concentrated position for that goal makes sense. That massive capital gain can be avoided via a step-up in basis when you die. The problem is that you must bet that the company that did well enough to make you wealthy will keep its value for the next 30 years. As the EY statistic above shows, that’s a risky bet.

Exchange funds may make sense in this scenario. From a 20,000-foot view, they allow you to roll in your appreciated investment(s) with a whole bunch of other people.

This is structured as a partnership offered through a private placement, which means that it is typically open only to accredited investors or qualified purchasers. The exchange fund manager builds a diversified portfolio with the contributed investments.

After a holding period of seven years where taxes are deferred, a diversified portfolio of securities is returned to you.

All these strategies are complex.** Complexity often accompanies wealth. These strategies require the coordination of a financial planner and tax and legal professionals.

The juice must be worth the squeeze. If you find yourself sweating during Apple or Nvidia (NVDA) earnings calls, there may be a lot of juice. In which case, congrats on getting the stock in the first place.

* Please understand you can lose money investing, and diversification does not ensure a profit or against loss. For additional risks, please contact a professional.

** This article is strictly for educational purposes and is not a recommendation or investment advice.

Disclaimer

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.

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After graduating from the University of Delaware and Georgetown University, I pursued a career in financial planning. At age 26, I earned my CERTIFIED FINANCIAL PLANNER™ certification. I also hold the IRS Enrolled Agent license, which allows for a unique approach to planning that can be beneficial to retirees and those selling their businesses, who are eager to minimize lifetime taxes and maximize income.