5 Steps for Apple Employees to Make the Most of Their AAPL RSUs

Transcript of Webinar

5 Steps for Apple Employees to Make the Most of Their AAPL RSUs

(00:00):

My Journey from a Dot.com Employee to a Financial Planner

Hello. Hello, everyone. Welcome, welcome, welcome Apple Employees. Hopefully you’re here for this webinar, which is Five Steps for Apple Employees to Make the Most for Apple your RSUs. So, let’s go ahead and get started. I’m gonna tell you a personal story about why I’m here, and then we’ll get into the heart of the presentation. So by the way, my name’s Tom Lo and I wanna share a story with you, which is, I wanna bring it back to the late nineties. And I worked@a.com and I remember, like, like it was yesterday I could hear the sound of people celebrating sound of campaign quirks popping, and everybody happy, very happy. And that’s because we had just done what every company in the late nineties wanted to do. Every startup, which we had gone public it was a very happy day.

(01:19):

And then as each day, week, month passed we got happier and happier because the stock kept going up. And I realized at a certain point that I might be able to reach financial independence a lot earlier than I thought I was going to.  At this point I was in my late twenties if the stock kept going up in that way. So now for those of you who know history you know that the.com bubble burst. So I was in.com and we actually ended up the company shut down. And so I had a ton equity that I held until it went to zero. And a couple of important things came out. One is I realized I didn’t really understand how my employee equity worked. And so I started to educate myself. And that actually started me down the path of making a career change in financial planning more than a decade ago. So I worked in tech for about 20 years and then made the career change because I had started that education with that event. And the reason I’m here today, and the reason I built this firm is because I wanna make sure that people like you, tech professionals and Apple employees

(02:59):

are able to make the most of their equity to reach their financial goals. And they don’t end up in a place where I ended up back in the late nineties, and that’s why I became a financial planner to help people like you. And that’s why I built this firm. So hope that was helpful for you to understand why I’m here. Let me share some slides with you. Okay. So this is, as I said, five steps for Apple employees to make the most for Apple RSUs. So again, this is for, this is for educational purposes. You should always talk to your professional.

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So here’s what we’re gonna cover today. I’ll tell you a bit more about my background and then I’ll walk through the five steps for how you can make the most your Apple RSUs, which is step one, understanding how the work step two, avoiding a surprise tax bill on your Apple R shoes. Step three, determining if you have too much in Apple R shoes. Step four, deciding when you should sell your Apple R shoes. And step five plan, what should you do with the proceeds once you have those? So I expect this will take about 30 to 45 minutes. We’ll have time for some q and a at the end. Now if you, I know some people are, I’ve done a number of these and I know some people are perfectly happy to ask in that forum, but some people also prefer to have a more private setting.

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So I’m happy to give everyone the chance who wants to talk about their specific situation to schedule a free virtual consultation with me. We’ll just, you can put time on my calendar. We’ll hop onto Zoom and we talk through whatever questions you have. So let me put this up there. So you should have on your screen now a big red schedule now button. So if you click on that again, it’ll just take you to my calendar and pick a time, we’ll have a Zoom conversation and I can answer questions about your specific situation. So free, no obligation. Okay, so let’s get started here. So here’s my background. And I think the key thing to know is that

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I’ve, I’ve been doing this for a decade plus, and I built this firm and I specialize in helping tech people with equity like Apple employees who want help with, with ongoing financial planning, investment management. So because I specialize in that I have a number of Apple employees who are clients. I understand your situation well and went through it myself when I worked in tech for about 20 years. So let’s start with step one. Let’s understand how your apple

Step 1: Understand How Your Apple RSUs Work

RSUs work. Okay? So your RSUs are simply compensation in the form of Apple share, apple shares, right? That vest over time. And the typical vesting schedule, which means how do you own these things, is you vest every six months over four years. So every six months you get some portion of your 12 point half percent of your original grant and every and that’s how it works.

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And at the end of four years, you have a hundred percent of your initial grant. Now, it’s important to understand the tax treatment, how these work. So when you’re granted, which is typically when you start, you start employment at Apple, you don’t have to pay any tax, $0, right? So there’s nothing upon grant. Now, what happens when you vest is that you pay ordinary income on the fair market value of that stock when it’s vested. So you can, you can, it’s treated just like your salary. You get taxed right away, and it’s a value on that, on the day you actually vest. So let me give you a little more detail. So one way I help clients think about RSUs is you can, you can view it or think of it as a cash bonus in the form of Apple stock.

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How are RSUs Taxed?

And that’s because you are taxed immediately as soon as you vest, which is different from for example, incentive stock options. So sometimes clients get those mixed up in their head, but they are treated very differently from a tax perspective. Okay? So again, as soon as you vest, you get tax ordinary income, just like, just like cash bonus, okay? Now to help you understand that, let me give you two versions how you could get of getting your RSU. So let’s say the, the first Apple RSU version, Apple gives you a hundred thousand dollars in RSUs, okay? And then what happens is Apple immediately sells, let’s say, $40,000 of your RSUs to cover your taxes and any other withholding may have. So they sell that, and then they leave you with, let’s say, $60,000 in Apple R S U.

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So what ends up in your account, they us, is let’s say $60,000 of Apple stock. Okay, let’s take a look at the cash bonus version. Let’s say Apple gave you instead a hundred thousand dollars cash bonus, okay? And then they take the cash bonus, they take out their taxes and other withholding, just like they do for your salary. Let’s say they take out 40,000 and you get $60,000 in your checking account. So now you got 60,000 in your checking account. And then let’s say you go out into the stock market and you buy $60,000 worth of Apple stock using that cash, you now have your checking account. You end up owing you own $60,000 of Apple stock. So in both the Apple RSU version and the cash bonus version, you end up in exactly the same place. You own $60,000 of Apple stock in both cases. So that’s why it’s helpful to think about it as, Hey, it’s really a cash bonus. It’s in the form of Apple stock.

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Now, the reason that’s helpful to think about is, is because the next question is I ask my clients, and you want to ask yourself is, if Apple gave you a cash bonus today, would the first thing you do with that cash be to go buy Apple stock? And if you hold your Apple RSUs, then you are, it’s the same as buying the stock at the current price. So, if the answer to that question is, and in fact most of my clients will say, when I ask the question, no, that’s not really the first thing I do with it then you should consider selling your Apple RSUs, okay? Because remember, it’s the same as cash bonus. Now, when you sell, really, it’s gonna depend on your specific situation. You should talk to your professional, your, you know, financial goals, how concentrated you are.  We’ll talk through some of those things in a little bit.

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But really that’s the first question. Ask yourself, Hey, if I received a cash bonus today, would the first thing I do be to take that cash and go buy Apple stock? If you say, yeah, that’s absolutely the first thing, then you may wanna hold on, but if not, then you at least should consider selling. So in general, I recommend that you sell as soon as you vest because there is no tax benefit for holding, all right? It’s treated just the same as cash, just the same as your income, okay?

Now, sometimes clients will say to me, oh, well, if I hold it more than a year, then I’ll get the long-term capital gains tax treatment, which is a lower tax rate. But that’s a, that’s a misperception. And I’ll tell you why. Let’s say you you exercise, I mean, you have, you vest your issues today, let’s say apple’s a hundred dollars to keep the mask simple, and then you hold it more than a year.

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You sell it for $110, then the $10 gain, the difference between the one 10 and 100 that does qualify for long-term capital gains, which is the highest federal rates, 20% versus the ordinary income, the highest is 37%, right? Okay. So you get the, that long-term capital gains on that $10. However, let’s say you go back, you vest your RSUs well, forget the RSUs. You just take a hundred dollars of your cash, you go buy an apple share, okay? You hold it more than a year, you sell it for one 10. That $10 gain is also treated as a long-term capital gain. So there’s no difference between your RSU holding your buying this suck. Okay? So that’s why there’s no tax bill, okay? Now, that’s how your RSUs work. Step two is avoid a surprise tax bill on your Apple RSUs.

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Step 2: Avoid a Surprise Tax Bill on Your Apple RSUs

So I have a bunch of clients go through this. So as we talked about apple will withhold for taxes on your RSUs when you vest, and then they’ll leave you the remaining shares. The question you wanna ask yourself is have taxes on your Apple RSUs been under withheld, okay? Remember, you pay ordinary income tax rate on the fair market value of the RSUs when you invest them. Now, typically Apple or all companies, the standard withholding is 22% federal tax rate, okay? Up to a certain point. Now, let’s say for example, you are in the 37% federal tax break bracket but Apple’s withholding it 22%, then you, you, you’re being under withheld 15% for your RSUs. So that means if you vest a a hundred thousand dollars worth of RSUs, you because they’ve under withheld, still owe the IRS $15,000, okay?

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So you’re gonna have to pay that come April. And so what happens is apple employees don’t realize this, that they’re being under withheld. They get to April of the falling tax year, and they get hit with this, a huge surprise tax bill, and they’re like, what happened? And the the reason why is because you have been under withheld. So this is something you want to be aware of. And the way to avoid this, so I do it this with my clients, is ideally you work with a tax professional, right? And every quarter you make quarterly estimated tax payments so that if you happen to be under withheld, you’re gonna make estimated tax payments so that you are paying what you owe. And you don’t have to wait and get surprised come April 15th, okay? And then you should, once we do, once we identify, okay, you need you’re under withheld, sell enough RSUs to cover the taxes and set aside as a tax reserve. Either pay it quarterly or have it held in cash so they can pay the taxes when they come. Okay? So this is how you avoid a surprise tax bill on your RSUs.

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Step 3: Determine if You Have Too Much in Your RSUs – A Concentrated Stock Position

Okay? So step three is determine if you have too much in Apple RSUs. So I talk with clients about this concept of concentrated stock, and that just means you own too much of a single company stock. And my general guideline is if it’s more than 20% of your investible asset, okay? And so when you compare it to a diversified portfolio, there’s just a ton more volatility and risk when you hold a highly concentrated stock position. Okay? And to illustrate this I want to go back telling another story, which is about a company called Enron, which is a company in the, in the nineties that was a energy company that everybody loved both as a business and as a company, and as a stock. And you can see here, stock went all the way up to $90 by the early two thousands.

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And then some bad news came out, which was, there was some fraud, some there’s accounting scandal. And within a matter of months, it dropped to nothing. Okay? Now, the concentration risk was that there were employees who had almost all of their retirement savings, all their net worth in Enron stock. And that’s because the, the company 4 0 1 K you had a choice to invest in Enron stock company match was Enron stock. You could purchase Enron stock. And so, as I said, once this happened, there were, there were Enron employees who had all of their net worth, all of their retirement accounts in Enron and they lost it overnight. So they’re employees who lost hundreds of thousands of dollars if not millions in a matter of, of months. Okay? So that is the risk of having too much concentration in a single stock. If something bad happens beyond your control and all of your net worth is in a single company stock, you could lose all your net worth and, or, you know, all your retirement savings.

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How to Calculate if You Are Highly Concentrated in Apple Stock

So, question is, all right, well, how do I figure out if I have too much in Apple? So let me walk you through the steps.

Step 1 is you just calculate the total value of invested apple equity, so all your RSUs and you, and if you happen to participate in employees purchase plan that, and if you happen to buy it on your own, the value of that. So you just take the total value of, of that equity, okay? Come up with a number.

Step 2 would be you calculate total value of your investible assets. That would be savings investments, your retirement, 401(k) accounts. You add it all up, you add the value of your vested equity.

Step 3 is you just take the value of your apple equity, you divide it by the total value of investible assets.

Step 4 is you have your con and you get your concentration percentage of concentration.

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If your concentration is greater than 20%, your highly concentrated as, as my general guideline goes. And you should think about diversifying.

So, quick example here is, let’s say you got 4,000 vested Apple RSUs, a hundred bucks a share. Keep the math simple, $400,000 worth of apple. Say you add up your savings invested 401(k)s at $600,000 total. Excluding Apple, you add your Apple 400,000 plus the 600,000 gives you a million dollars in total investable assets. You divide your 400,000 of apple by your million dollars. Total assets gives you 40% concentration, 40% is greater than the 20% threshold means you’re highly concentrated. So you should think about diversifying, and as I said, I, I specialize working with Silicon Valley Tech people. It is extremely common to be highly concentrated. I have clients who come in who have 50% concentration, 70, 90, 95% concentration. If you’re at a successful startup or if you’ve been at a place like Apple for a long time you, there’s a really good chance you could be highly concentrated, and that’s something you should think about because of what we just talked about in the Enron exam.

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So, again, this is, I know general advice on how to determine if you have too much in Apple stock. Again, if you wanna talk about your specific situation feel free to click on the schedule now button and, and set up time with me and we can talk about your specific situation. Okay?

Step 4: Decide When You Should Sell Your Apple RSUs

This is the biggest question that a lot of my clients deal with and a lot of other Apple employees. So here is a way of thinking about it. Let’s say we have a bunch of Apple RSUs. Okay? The first step is I would sell immediately to cover any, what I call valid near term cash needs. Okay? That means things, you know, you have to pay in the near term. Near term is the next, let’s say less, less than year or two.

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So for example, if you have taxes, like we talked about in the RSU example, you know, you owe, you owe taxes, go ahead and sell. So you’ve got the cash so you can pay your taxes because you’re gonna have to pay them now or in April an emergency fund. So emergency fund is if you have an emergency, like a medical big medical bill job loss clients, I typically have them put aside three to six months of living expenses, enough to cover living expenses. So if you don’t have one, then I think it’s reasonable to sell and, and build one immediately. Well, let’s say you’re gonna buy a house, okay? You’re gonna get the down payment if you’re gonna buy the house in the next, you know, in the near term, you wanna have that in cash, okay? You don’t want to have it in something like apple stock, because it could go up or, or down. And you wanna make sure you have the cash so you can buy the house when you wanna buy it. Okay? So that’s the first thing.

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The next thing is, I would think about, decide if you want to keep a certain percentage of your apple or issues over the long term. You may have plenty of clients who say to me, you know, I believe in the long term future of Apple. And so if you do, that’s, that’s fine. You can hold onto some I would recommend to keep something like at most five to 10% of your investible assets in the stock. But let’s say you say, okay, yeah, I wanna keep some, I’m gonna keep 10%. So take your RSUs, whatever you’ve sold, whatever’s left over, carve out 10%, and then the remaining 90%, let’s figure out how to sell and diversify.

So there are a few specific ways I suggest clients think about selling those remaining shares. Okay?

1. Sell immediately. Okay? That’s simple. And so window opens, you sell everything that you’re able to sell. That keeps things very simple. Now, most of my clients, when I suggest that one, they’re not that comfortable. And the reason why is they don’t wanna sell at the wrong time, okay? 
2. Sell over time on a schedule which simply means, let’s say you decide I’m gonna sell 25% a quarter over the next four quarters. So every time the window opens, I’ll sell 25%. I won’t worry if the price is high or low I’ll sell it. And then the second version I’ll talk through in a bit, but the benefits are a couple. One is you don’t, you know, you’re not gonna pick the wrong single day when the price is at a low point, right? Because it’s gonna go up and down and you’ll get multiple chances. The second benefit is you can spread your tax over multiple years. So you can spread it over more than a year, couple years, few years, however long you wanna take. But the, the benefit of it of this is it takes a lot of emotion out of the decision. So instead of you getting to the window opening and you thinking, huh, oh, is the price high enough? Maybe it’ll go higher, or it drops, oh, it’s kinda low. Should I really sell? If you have this, this puts it on autopilot. So you know, next quarter I’m gonna sell 25%. It doesn’t really matter if the price is high or low, what I think I’m gonna do to sell it. Okay? Next quarter you sell 25% more and so on. So again, you’re just trying to remove as much emotion as you can, and you know, you need to diversify, and this is a way to get you diversify.
3. Sell over time on a schedule, but and, and one other thing to add, you can do that over any timeframe. So 10% a quarter over 10 quarters, you know, however long you want and you’re comfortable with, you can figure that out. So the next version is sell over time on a schedule, but sell more when it’s higher and less when it’s lower. So what that means is you can set price bands. So let’s say you can say today, okay, if the stock, if Apple stock is greater than $150, I’m gonna sell 50%. If it’s between a hundred and 150, I’m gonna sell 25%. If it’s less than a hundred, I’m gonna sell 15%. Okay? And so you set your tar, your bands, and then wherever the price is, when that say quarter comes, you sell that percentage, okay?

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So again, this lets you sell more when the price is higher, 50% when it’s more than one 50 and less when it’s lower, 15% when it’s less than a hundred. Those are just examples, okay? You would need to figure out what price spans make sense for you and what percentage you’re comfortable with. Same thing putting it on autopilot, except there’s a little the differences you can sell more when it’s higher, less when it’s lower. So those are the three ways that I, you can think about selling your Apple RSUs, okay?

Step 5: Plan What You Should Do with Your Apple Proceeds

So once you sell or start to sell your apple RSUs, what should you do? So ideally you develop a, a financial plan with both your near term and your long term goals. So then you understand, okay, how can I use these proceeds to help me reach these financial goals?

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So that’s why clients work with me is we build a financial plan so that they can figure out, okay, here are the near term goals, here are the long term goals. Near term I wanna buy a house, long term term I wanna retire. How can we use the apple or shoes to get to those goals? Okay? But you can do this on your own. Now once you have those goals plan and you have those goals, you want to understand first of all the time horizon for each of those goals. So near term and long term are the ways the key differences. So near term, I’d say less than a year or two. And so examples of that could be taxes, you know, you’re gonna have to pay in April and emergency fund, you need it now, and down payment you’re gonna buy in a year or two.

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Long term would be goals that are more than two years. So, for example, saving for college for my kid retirement. So that’s the first step. So think about your goals in the time horizon. The next step is to understand your risk tolerance. So that is how comfortable are you with risk, meaning that stocks will go up and down. If you’re, if you understand that and it’s not a big deal, then your risk tolerance may be high. If whenever the stock market goes down, you can’t sleep at night, that means your risk tolerance is likely low. But you wanna think about that because whatever decision you make, you need to be comfortable with, okay? You wanna be able to stick with. So based on your time horizon of your goal and your risk tolerance, you wanna decide on some what we call asset allocation, which is just what mix between stocks, bonds, and cash.

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Okay? And in general, for near term goals, that means things you’re gonna need, like I said, less than a year or two, you want to hold it in lower risk. Investments and lower risk investments are bonds, for example, or even cash, right? So if you know you gonna have to pay taxes in April, put it into a highly liquid safe account, like cash in a savings account, right? So that when April comes, you will be able to pay your taxes. You’re not gonna have to worry about the value dropping 20, 30% by, by the time April comes. And then long-term goals you want typically some mix of stocks and bonds, okay? And it depends in part how far away it is, time horizon, and then your risk tolerance, okay? In general, the longer your time horizon. So if you’re gonna retire in 30, 40 years, that’s a long time horizon.

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And you have the higher your risk tolerance, I’m comfortable with risk, I’m okay losing then you can take more risk and you can invest a higher percentage in stocks. And a very simple rule of thumb is you take 110 and you subtract your age. That should be the percentage you invest in stocks, okay? For retirement, for a long-term goal. So for example, if you’re 40 one 10 minus 40 is 70, those 70% stocks, 30% bonds would be a reasonable way of thinking about it. You wanna ideally, again understand your specific situation better, but that’s kind of, that’s a, a way of thinking about it. So for retirement, for longer time horizon goals in general, you wanna invest in a broadly diversified, globally allocated low cost portfolio of stocks and bonds. So broadly, diversified just means different asset classes. And globally allocate means different geographies. So for example, you want us large cap stocks, us small cap stocks, you want international stocks, emerging market stocks, you want US bonds, international bonds, that’s broadly diversified, globally allocate, okay? So that’s how to think about investing your proceeds.

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Okay? So let’s talk about next steps. Again, as I mentioned before feel free to schedule a free virtual consultation to answer your specific questions about your apple or shoes or any financial planning questions you have. You can click on the schedule now button, or you can go to this u go to this u r l and you can, as I said, it’s straightforward. You will get my calendar, you can put time on it. We’re a half hour zoom call. We’ll talk and you can ask me your questions. Now we’re gonna have a couple of time for a little bit of q and a, but before that I want to just tell you one more story, my yellow jacket story. So few years ago we had yellow jackets in the backyard. My wife said to me, Hey honey, go call.

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Can you call an exterminator and have him take care of the yellow jackets? And I said, I said, honey, I can take, can take care of that myself. So I went out there in the backyard, I got some, had some spray for you know, yellow jacket, wasps started spraying. Next thing I know, I had a dozen yellow jackets all over my head. dinging me, and I ran screaming and in fact, I was so disoriented. I ran into our house to find my wife, but I ran through our closed screen door. Anyway, she ended up hosing down my head, got all the other jackets off, and I called the exterminator and he took care of the yellow jackets. Okay? So the reason I leave that story is that sometimes you think, Hey, I can do this myself. But sometimes it makes sense to hire a professional who does this every day and knows what they’re doing. And that’s best way to get the job done, right?

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Questions & Answers

So let me take, got a couple minutes for Q&A. And if we don’t get to your question, then you can just email me, tom@vestedfinancialplanning.com . And then also there should be an option to just drop your question in. If we do, we’ll get back to you by email within typically within 24 hours or so. Okay? Okay. So I see the question here. Question here is how do we specifically avoid the tax surprise? So ideally you hire a tax professional and they can run your estimated taxes each quarter. This is what I, what I do with my clients typically, and they’ll be able to tell you specifically, okay you’re under withheld, you need to pay X dollars in estimated taxes this quarter, and then you should be in good shape.

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And by the time you get to April, if you paid your estimated taxes each quarter, then you likely won’t have any surprise when April rolls around. Okay? Now, if you’re a do it yourselfer, you’re doing your own taxes, then you could do the same thing as you go into TurboTax or whatever software put in your data. And if you’re comfortable doing that, come up with, all right, here’s what my estimate taxes are. You can pay those. Or even if you don’t wanna do that, you can also make sure you sell RSUs or have cash in a tax reserve. Again, like a savings account or something that, hey, let’s let’s say for example, I calculated owe $15,000 in taxes this quarter. I sell our shoes, I get 15,000 in cash, I stick it in a savings account. I hold do that each quarter when April comes around I will have cash set aside to cover those taxes. And hopefully the calculations have been done, right? So ideally tax professional, but if you do it on your own, then sell and set aside cash in a tax reserve.

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Okay? Another question is, okay, apple employees, any other financial planning tips? So one of the, actually two other things I wanna highlight for Apple employees that you should be aware of beyond your issues. The first is the employee stock purchase plan, the E S P P. Okay? And the way it works is you get a discount as an employee that you can purchase the stock at and it’s typically a 15% discount off the price at the beginning or end of the period if you get the discount. And if you are willing and able to sell that shortly after you make the purchase, then that makes a lot of sense because you’re getting the discount and you can in some ways, if you’re able to sell soon thereafter, you’re able to have a really good chance of locking in that gain.

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If you sell, you can lock in that gain from the discount. Okay? The other, the second thing to be aware of is there’s something called a mega backdoor Roth, which your normal 4 0 1 k has a certain dollar limit. You can, you can contribute every year. The sure version of the Megan Back Go Roth, which Apple offers as a benefit, is it enables you to save a lot more. And you can have it saved in a Roth account, which is an after tax account, meaning that the dollars you put in, if they’re in the Roth, normally in your 4 0 1 K, your pre-tax 4 0 1 K, you put ’em in, you don’t pay taxes initially. It grows, goes, grows when you retire and you take it out, you have to pay taxes, okay? Roth, if you get in a Roth it’s after tax dollars, it grows, goes, goes retire, you take it out,

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You don’t have to pay taxes on the gains, okay? But that’s another key benefit that Apple employees should be aware of. Okay? So that is the time we have today. So I want to thank you all for taking the time to join me and I hope this was helpful for answering your questions, helping you understand five steps you want, you need to take, if you wanna make the most of your Apple RSUs. So thanks for taking the time and I will see you later.