Listener Question:
I’m an exec at a large tech company with about 50% of my net worth in company stock. The stock has done very well, and I’m planning to retire in the next five years. Should I start diversifying with my 10b5-1 plan when the next trading window opens, even though I’m at a high tax rate, or should I wait until my income drops in retirement to take advantage of a lower tax rate?
This is a good problem to have—high concentration usually comes from strong performance—but it still brings significant risk.
The Risk of Holding Too Much in One Stock
If half your net worth is tied to a single company, your portfolio’s volatility is much higher than a diversified mix of investments. A single stock can carry a standard deviation of 40–50%, compared to around 19–20% for a diversified portfolio.
That extra risk comes from idiosyncratic risk—company-specific issues like executive decisions, lawsuits, or regulatory changes. These are risks you can diversify away, and a 50% concentration means they could have an outsized impact on your overall wealth.
The Tax Timing Dilemma
Selling now means facing a high tax bill because you’re in a top bracket. Waiting until retirement could reduce your tax rate, but leaves you exposed to more concentration risk in the meantime.
A structured approach—gradually selling over several years—can balance the trade-off. This is where a 10b5-1 plan can help.
How a 10b5-1 Plan Works (and Its Limitations)
A 10b5-1 plan sets a predetermined schedule for selling shares, helping executives avoid the appearance of insider trading. You choose in advance how many shares to sell and when, and the plan executes automatically.
However, these plans require company approval. Your request could be denied outright or discouraged subtly, especially if leadership feels large executive sales could send the wrong message to the market. That’s why it’s important to plan for the possibility you can’t execute your ideal timeline while you’re still employed.
Coordinating With Retirement Timing
If selling through a 10b5-1 plan isn’t possible, your retirement date itself becomes a planning tool. Retiring sooner could allow you to take advantage of a lower tax bracket earlier, helping you diversify at a reduced tax cost—depending on your post-retirement income needs.
Other Ways to Reduce Concentration Risk
If selling now isn’t feasible, you might consider:
- Donor-Advised Funds (DAFs): Contribute appreciated shares for charitable giving and receive a tax deduction.
- Gifting: Transfer shares to family members in lower tax brackets.
Bottom Line
The goal is clear: reduce your concentration in company stock. The path depends on your tax situation, company policies, and retirement timing. Start exploring your 10b5-1 options now, but have a backup plan in case the company says no.
This blog post is based on an episode of the Scholar Wealth Podcast. Listen to the full podcast episode here.