Bonus Planning 2022: Making the Most of a Record Bonus Season

Executive bonus planning is complex and time consuming. Your advisors can help you optimize all forms of compensation in order to meet your goals.

As the market swelled last year, bonus pools followed suit. In turn, executives, senior management and employees stand to reap the rewards of a record bonus season. According to a recent Robert Half survey, more than 75% of companies reportedly plan to remit annual bonuses to employees, with 61% of those bonuses being higher than the prior year.

A sizeable cash infusion can transform your financial standing, prompting the need for strategic planning to make the most of your bonus. Although income tax is typically withheld on bonuses, it is wise to review withholding percentage amounts to determine whether additional estimated tax payments are required. From there, carefully decide how best to allocate the remainder based on your specific goals.

Below, we explore ways to make the most of this year’s bonus season based on your career phase.

• Early, establishment

• Mid-point, advancement

• Late, nearing retirement

Whether you ultimately decide to pay down debt, invest or indulge, it is important to understand the full spectrum of strategies and options to ensure you are positioned to meet your goals.

Common Forms of Incentive Compensation

Below, we detail the tax implications and potential planning strategies for several common forms of executive compensation. Planning for restricted stock awards and options can be complex, particularly for those with limited time. We recommend meeting with your advisor, who can weigh the costs and benefits of each form of compensation through a Goals-Driven Wealth Management lens in order to optimize your plan for your specific circumstances and goals.

If you receive any or all of the above forms of incentive compensation, your current career stage will largely determine the strategies you use to address priorities and reach established financial goals.

Early, establishment career phase

Marked by the transition from formal education to the workforce and eventual carving out of a professional niche, the early, or establishment, career stage is often marred with mistakes. Despite a first taste of success or failure in the real world, it is important to stay disciplined, since financial decisions today inevitably impact opportunities tomorrow.

Consider the following strategies for your cash bonus.

• Build cash reserves. Revisit your monthly expenses, and ensure you have adequate cash reserves in your emergency fund.

• Use and manage debt wisely. Allocate a portion of a cash bonus to pay down high interest rate debt — credit cards and student loans, for example. While leveraging credit is commonplace in our economy, too much personal debt may limit your ability to maximize investments, obtain a loan to start a business or secure a favorable mortgage rate. Explore various debt structuring options with your banker.

• Fully fund retirement accounts. Supplement existing retirement contributions to reach your annual savings goal. Consider making the maximum annual contribution to a 401(k), Roth or Traditional Individual Retirement Account (IRA) and health savings account (HSA). Investing in retirement accounts not only lowers your overall tax liability, but also capitalizes on compounding returns to help you prepare for the future.

• Consider paying down your mortgage. If you are a homeowner, weigh the costs and benefits of using your cash bonus to pay down the mortgage debt on your home. Paying off your mortgage early may be a way to free up monthly cashflow and pay less interest —but doing so should be weighed against losing your mortgage interest deduction and capitalizing on today’s low interest (versus the amount you can make in investing those assets elsewhere). If a bigger or newer home is the goal, set aside a portion of your bonus for a large down payment.

• Spend for growth. If you want to reward yourself, do so in a meaningful way. Consider using your bonus for self-improvement to enhance your professional and personal life. For example, purchase fitness equipment, hire a career coach or enroll to obtain executive education, certifications or licensures.

Mid-point, advancement phase

With your formative years plainly in the rearview, you are in your maximum earning years. As you reap the benefits of a substantial salary and cash bonus, you may also be granted restricted stock awards and stock options. Although handsomely compensated, much of your wealth may be on paper. It is important to have a plan in place for the near- and long-term.

Consider the following strategies for making the most of your incentive awards.

• Actively manage positions. Actively monitor your stock options to determine the optimal timing for exercise. There is nothing worse than letting an option expire or letting it go underwater.
  

• Develop your hold/sell strategy. If granted stock awards, upon vesting, devise a strategy to determine whether to hold or sell in accordance with any applicable regulatory limitations. Be mindful of becoming overly concentrated in your company stock, and remain aware of the importance of diversifying your overall portfolio to protect against downside risks.
  

• Fully fund your HSA. Many people tend to overlook and underutilize health savings accounts (HSAs), tax-advantaged accounts that allow you to save and pay for medical expenses if you have a high-deductible health plan.¹ Consider making the maximum annual contribution to an HSA.² Then, pay annual medical expenses out of pocket and invest the HSA funds like a retirement account. Save your receipts. Since there is no reimbursement deadline, you can choose to reimburse yourself, tax-free — even during retirement.
  

• Plan for education. Strategically fund your children’s education with a 529 plan. Not only will you be able to save for your child’s education, you may also be entitled to a state tax deduction.

• Save for personal fulfillment. If you plan to take a sabbatical in the coming years prior to retirement, save a portion of your bonus to ensure you are able to relax and reflect during your time away.

Nearing retirement, late career phase

After decades as an accomplished professional and sought-out expert, you are placing the finishing touches on an outstanding career and may be committed to mentoring the next generation. You have witnessed a lot of change — in your personal life and, likely, in your industry. This might be one of your last bonuses, or perhaps the very last. It is important for you to assess cash needs in light of your pending (and likely highly anticipated) retirement.

• Calculate liquidity needs. Evaluate your overall portfolio, calculate your future needs and immediately address any gaps. Consider working with your advisor to use any cash element of your bonus to fund your Portfolio Reserve — a buffer of relatively stable assets designed to meet cash flow needs and fund lifestyle goals through periods of market distress.

• Evaluate the diversification and investment strategy of your portfolio. With stock awards having vested over the years and options exercised, it is not uncommon for a retiree’s portfolio to be substantially dependent on their employer. Consider diversifying to ensure your investment mix makes sense for your retirement income plan.

• Use credit strategically. Using a portfolio line of credit can help bridge cash flow needs for major or unanticipated expenditures. Consider refinancing your primary residence to lower monthly expenses or accelerate amortization to retire debt sooner. If you are uncomfortable with debt, use your cash bonus to lower or eliminate outstanding debt so that you are not allocating funds to pay interest once you retire.

• Prepare emotionally and financially. In addition to the financial impact from the loss of your paycheck and bonus, it is not uncommon upon retirement to feel as though you are losing a part of your self-identity. Confidence in your financial independence for retirement can be key — not only in preparing to see your assets decline as you begin to make withdrawals from your retirement accounts — but, as importantly, in embracing this stage of life as an opportunity to shift focus, potentially reinvent yourself and engage in meaningful new work and activities.

Give

No matter the phase of your career, there are steps you can take in order to use your bonus to advance your philanthropic and charitable goals and, consequently, your values. These include:

• Contribute to a Donor Advised Fund (DAF). A DAF provides a formal structure for your giving and affords you the opportunity to track the results of your generosity, without ongoing operational expenses. It also allows you to set aside funds today to give to charities of your choice in the future.

• Structure your giving. Determine your desired giving level for the year, and design a plan to support the organizations, causes and themes important to you. This will ensure you are not distracted by “impulse giving” throughout the year.

• Create a Private Foundation. In addition to other distinct characteristics that can make it an attractive option for some, a private foundation provides an opportunity to engage your children, grandchildren and other family members on giving and align as a family on values. Explore ways for others to potentially become involved — for example, through the foundation’s grantmaking and activities.
  

   

Finally, it is certainly not uncommon to take this opportunity to consider purchasing a significant experience or long dreamt-of item, such as a dream vacation or second home. Your advisor can help you determine the timing, budget and overall planning of such a purchase while ensuring that you remain positioned to achieve your long-term goals.

Planning for executive compensation is complex, time consuming and requires highly nuanced consideration of each individual’s specific circumstances and goals. Regardless of your career stage, we encourage you to schedule a meeting with your advisor, who can bring clarity to the picture with the support of a multidisciplinary team of experts. Your advisor will work with you to ensure not only that your plan is optimized for each form of compensation, but that it is built with flexibility to adapt to the changing circumstances sure to arise throughout the course of a long and dynamic career.