Should an ESOP Be Your Only Retirement Account?
When it comes to saving for retirement, diversification is critical. Consider building your nest egg with a combination of accounts in addition to an ESOP.


Editor’s note: This is part four of a six-part series in which Peter Newman, CFA, of Peak Wealth Planning, explains the benefits of employee ownership for the U.S. workforce. There are more than 6,500 Employee Stock Ownership Plans, or ESOPs, in the U.S. covering almost 14 million employees. See below for the links to the other articles in the series.
Employee stock ownership plans (ESOPs) empower employees by providing them with a company-funded account for retirement. While businesses steered by their employees often exhibit remarkable management, they, like any other enterprises, may occasionally face challenging periods or even extreme situations like bankruptcy. Kodak, Piggly Wiggly and most recently in 2023, Silicon Valley Bank, are examples that underline the importance of resilience and adaptability.
Indeed, while ESOPs present an avenue for financial growth, employees often depend on the same company for both income and retirement savings. Recognizing this, it is important to save in other investment vehicles alongside your ESOP to ensure a secure future.

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This article aims to guide you through a variety of account options that will bolster your retirement planning, ensuring you remain well prepared and resilient, even in the rare instance where your company-sponsored ESOP faces financial turbulence.
Save in multiple accounts to enhance retirement planning
When it comes to saving for retirement, diversification is key. Your ESOP is not meant to be your only retirement savings vehicle. Having a large portion of money in an ESOP alone is restrictive and lacks diversification. By relying on just this type of plan, you may be putting too much weight on one component of your retirement plan. It’s best to have additional retirement plans in place, like a 401(k) or IRA.
- 401(k) plan. A 401(k) plan is a retirement savings plan sponsored by an employer that allows employees to contribute a portion of their income to an investment account to grow their retirement savings. Some companies provide an incentive to save with an employer matching contribution. 401(k) plans may offer pre-tax or after-tax Roth contributions for employees.
- Individual retirement account (IRA). An IRA is a type of retirement savings account that allows individuals to contribute pre-tax or after-tax Roth dollars to an investment account. Roth IRAs have significant tax benefits if certain rules are followed.
- Taxable brokerage account. A taxable brokerage account is an investment account that allows individuals to buy and sell securities, such as stocks, bonds, ETFs and mutual funds, with after-tax dollars. Careful investment selection and management can decrease taxes on brokerage accounts used for retirement savings.
The investment accounts you and your employer contribute to during your working years should grow into a nice nest egg that you can draw from during retirement. The value of that nest egg will be dependent on your annual contributions, the mix of investments and corresponding growth in each account, plus the number of years you tuck money away.
Your nest egg makeup and risk to retirement income
Portfolio withdrawals are the monies taken out of your investment portfolio to generate income to meet spending needs. The value of these assets fluctuates and may not provide a predictable income stream as the assets are dependent on the performance of the underlying investments in the portfolio. With those cautions in mind, it’s still useful to estimate the income from your retirement accounts.
For every million dollars you have saved at retirement, that should create about $40,000 in retirement income, according to the commonly used 4% spending rule. Your actual income will vary, but this is a rough estimate or starting point. Evaluating the value of your ESOP relative to other retirement savings amounts and portfolio holdings will show you where the benefits and risks live.
Below is an example. The income projections are rule-of-thumb estimates and not guaranteed. Your income could be higher or lower depending on your retirement investment portfolio returns and whether you use a periodic withdrawal strategy or purchase an annuity.
- $200,000 in an ESOP could generate $8,000 in income
- $800,000 in a 401(k) could generate $32,000 in income
In this $1 million nest egg forecast, the ESOP represents 20% of $40,000 of retirement income. In the event of a catastrophic ESOP failure, retirement income would be lowered to $32,000.
Here’s another example:
- $3 million in an ESOP could generate $120,000 in income
- $1 million in a 401(k) could generate $40,000 income
In this $4 million nest egg forecast, the ESOP represents 75% of $160,000 of retirement income. In the event of total ESOP failure, retirement income would be lowered to $40,000.
It’s important to note that retirees can’t withdraw directly from the ESOP. The company or plan buys shares back, and ESOP participants can reinvest the proceeds into their IRA or 401(k) account. This process is called diversification and is covered in the series article How Does an Employee Stock Ownership Plan, or ESOP, Work?
Secure sources of retirement income
In addition to the retirement accounts discussed above, most folks will have secure income from Social Security. Secure income refers to reliable and predictable streams of income that are unlikely to be disrupted, providing financial stability and peace of mind. In addition to Social Security benefits, your family may have additional secure income sources, such as:
- Pension. A pension is a retirement plan in which an employer or the government makes contributions to a fund on behalf of an employee. The contributions for all participants are invested and later paid out to each individual employee as income during their retirement years. Pensions usually have a formula to determine the income benefit during retirement.
- Annuity. An annuity is a financial product in which an individual makes a lump-sum payment or series of payments to an insurance company in exchange for regular payments over a set period, often used for retirement income.
What to do now
For many ESOP retirees, Social Security provides a stable foundation of income. Depending solely on Social Security and your ESOP may not produce enough income to meet your retirement budget. Allocating 15% of your earnings toward a 401(k) today can be a prudent step toward securing your retirement income. If your budget permits, contribute to an IRA account as well.
By distributing funds across various account types, you are reducing the risks linked to concentrated stock ownership and creating a safety net in case of future uncertainties, such as cuts to Social Security benefits or a downturn in your ESOP account value.
Diversifying your retirement savings by building up a well-funded 401(k), annuity or IRA accounts can increase your chance of having a comfortable retirement. Additionally, having substantial balances in your savings account and 401(k) can serve as a contingency plan in case of job loss or unexpected company challenges.
Consider taking the following four actions:
- Allocate 15% of your earnings toward your 401(k) account.
- Forecast the value of your ESOP and 401(k) account at retirement.
- Identify the sources of secure income you will have at retirement.
- Diversify your ESOP if it’s a significant portion of your retirement nest egg.
As you move toward your golden years, it is worth contemplating how different income sources contribute to your income in retirement. Consider what portion of your retirement income will come from the ESOP and whether your sources of income are sufficiently diversified. This is especially important if your ESOP is a significant proportion of your net worth.
Are you comfortable with your progress toward retirement? Are you confident you’ll know how to handle your ESOP diversification and distribution when the time comes? Do you need help forecasting how your ESOP and 401(k) can generate retirement income? A wealth manager from the Peak Wealth Planning team can assist.
Other Articles in This Series
- Part one: Five Key Advantages to Working at an Employee-Owned Company
- Part two: How Does an Employee Stock Ownership Plan, or ESOP, Work?
- Part three: Five Things Employee Owners Need to Know About Their ESOP
- Part five: Understand Your ESOP Benefit: The Diversification Option
- Part six: How Much Retirement Income Could Your ESOP Generate?
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Peter Newman founded Peak Wealth Planning, LLC in 2014 to provide financial planning and investment management for individuals who built their wealth through ESOP participation, business ownership or real estate investing. He helps families diversify their concentrated stock, reduce estate taxes, preserve wealth and generate stable retirement income. Peter holds the Chartered Financial Analyst designation, considered by many to be the gold standard for investment management.
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