Monday, October 18, 2010

A Plan to Reduce Exposure to Company Stock

Approximately 40% of our retirement savings is still invested in the stock of the company from which I retired. The investments are divided into three categories: a retirement account at the company, stock options and a rollover IRA.

For two of the categories, I have clear plans for reducing company exposure. I plan to hold the company retirement account in stock until I'm 59-1/2 at which time I will use a Net Unrealized Appreciation withdrawal to minimize the taxes owed. The stock options will be exercised on an annual basis before expiration from 2012 through 2017. For the rollover IRA, I have not had a defined plan to reduce company shares. Essentially, I have been selling company shares periodically at what I think are attractive prices.

Given the large exposure to company stock, I have decided to use a covered call strategy and be more aggressive in reducing the shares in my rollover IRA. By selling a covered call, I am obligated to sell the stock at a certain price within a given time period. If the stock rises, then I will received the strike price for the stock plus the call premium. If the stock falls, then I will keep the call premium and can resell another covered call.

To have a good probability of selling, I have chosen strike prices that are 4-13% above the current price and expiration dates of 5 to 17 months, respectively. If the stock sells at these prices, I will receive less than the all-time high, but still a very good price. In addition, I will be able to reduce our exposure to my company stock by 7 % of our retirement savings. Hopefully, I will be able to sell all the company stock in my rollover IRA by early 2012.

Trough the end of 2018, the plan is to reduce company stock exposure by 7 % in 2011, 18 % from 2012 to 2017, and the final 15% in 2018. After 2019, we may still keep a small in company stock but at a level of less than 1%.

For more on Strategies and Plans, check back every Monday for a new segment.

This is not financial, investment or retirement advice. Please consult a professional advisor.

Copyright © 2010 Achievement Catalyst, LLC


pfstock said...

If you have 40% of your retirement savings in a single company's stock, I agree that it is a good idea to diversify some more. Is writing covered calls allowed in IRAs? I assume it must be, since you're doing it. I've never tried that myself.

With the recent run up in the stock market, have you been called out on any of your shares?

Super Saver said...

PF Stock,

Covered calls are one of the option trades allowed in IRAs.

None of my shares have been called yet. One third of my options are in the money and could be called away. However, in-the-money options are typically exercised within a few days of the expiration date, and my options expire in Jan 2011 and Jan 2012.