Author Topic: Case Study - Stock Purchase Plan 10% and Loan Option 5%  (Read 1737 times)

couponvan

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Case Study - Stock Purchase Plan 10% and Loan Option 5%
« on: March 11, 2016, 08:45:12 AM »
I am trying to figure out if we should investment in my husbands Employee Stock Purchase Program more heavily, or even consider investing in his Company's Employee Loan Program. (My DH just received a promotion and is now allowed into the Employee Loan Program, which we have never accessed before.)  He's being strongly encouraged to consider it as a "good deal".

Background: DH has worked for the company since 2008 (8 years ago exactly this month).  He has been contributing the minimum $25/paycheck to the program since then, so $5,200 of his own contributions...and the value of his stock account was $11,926 as of December - and the stock is up slightly from year end.  It has been one of our better performing investments. Our overall net worth is approximately $1.15 million.  I believe we should not have more than 10% exposure to the Company overall, since he is also employed there.  He also receives ER stock in his 401(k) match, and the value of that stock is $58K.  Combined this is $70K.  So we could invest $45K more and only have it be 10% of our net worth. The company is growing, and recovered quickly from the last 2008-2009 drop. 

Details of the Plans....

Stock purchase plan - Anyone may purchase during the year, minimum amount is $500, or $25/per paycheck - 10% bonus on the number of shares increase over the prior year, measured at 12/31. The bonus is paid on 3/31.

Stock loan program - Minimum loan $10,000. Interest is charged at 3% annually.  There is a 5% bonus on shares in initial year of purchase.  DH can borrow up to $150,000. There is also the potential for additional bonus share on the loan program, but only if the company meets certain growth targets: Since 2011, the additional amount has varied between 3-5% additional bonus.

I could see doing a couple different options, getting progressively riskier:

1) Invest an additional $1,500/month in the stock purchase program in one off purchases as we have money available until we hit that 10% of net worth balance. 
2) Borrow $45,000 under the loan program with the 3% interest option and payoff the loan with $1,500/mo as available (there is no prepayment penalty for the loans).
3) Borrow from our 401(k)s in December 2016 $100K (4.25%), buy stock with the loans, get the 10% stock bonus on 12/31, then sell that stock in January when he is able to and pay back the 401(k) loan.  Each company has a $50 loan fee, but spending $100 to make potentially $10K in a month is tempting. This would only work every other year....Yes, there is a risk the stock could go down more than 10% between December and January negating the return.

Feedback would be greatly appreciated....

zephyr911

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Re: Case Study - Stock Purchase Plan 10% and Loan Option 5%
« Reply #1 on: March 11, 2016, 09:27:39 AM »
4) Retire immediately on your $1.15M in market holdings, hello!

So wait... this company lends you money to buy its own shares? Do you invest on margin in other areas? If not, DH's employer is no place to start.

This is from a presumably younger, fairly risk-tolerant guy with 1/4 of your Stash... it seems odd to stick your neck out financially when you're in a position to wind down and coast into a very secure retirement. Your borrowing scenarios sound like the kind of thing I might try to shave a year or two off FIRE, knowing full well that if it goes sideways, I've added time instead.

Withdrawing $100K from 401(k) is probably a waste of effort and a needless risk just to make $10K. You should be pulling that much in dividends every few months already without risking any principal or paying any interest. Your daily balance probably fluctuates more than that. Meanwhile, even if it goes 100% to plan, you could miss out on portfolio gains, reducing the win substantially. And if you get caught with bad timing, the market dives and your shares go with it, you still owe the $$. You've done a great job of Stashing the old-fashioned way till now... why get clever just to add less than 1% to the pile?

Even 2) seems like needless risk to cash flow. If you have great confidence in the company's prospects, I could get behind #1. The 10% rule seems reasonable, but take your time getting there.

couponvan

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Re: Case Study - Stock Purchase Plan 10% and Loan Option 5%
« Reply #2 on: March 11, 2016, 09:53:35 AM »
4) Retire immediately on your $1.15M in market holdings, hello!

So wait... this company lends you money to buy its own shares? Do you invest on margin in other areas? If not, DH's employer is no place to start.

This is from a presumably younger, fairly risk-tolerant guy with 1/4 of your Stash... it seems odd to stick your neck out financially when you're in a position to wind down and coast into a very secure retirement. Your borrowing scenarios sound like the kind of thing I might try to shave a year or two off FIRE, knowing full well that if it goes sideways, I've added time instead.

Withdrawing $100K from 401(k) is probably a waste of effort and a needless risk just to make $10K. You should be pulling that much in dividends every few months already without risking any principal or paying any interest. Your daily balance probably fluctuates more than that. Meanwhile, even if it goes 100% to plan, you could miss out on portfolio gains, reducing the win substantially. And if you get caught with bad timing, the market dives and your shares go with it, you still owe the $$. You've done a great job of Stashing the old-fashioned way till now... why get clever just to add less than 1% to the pile?

Even 2) seems like needless risk to cash flow. If you have great confidence in the company's prospects, I could get behind #1. The 10% rule seems reasonable, but take your time getting there.
If we didn't have 3 kids and wasteful spending, we probably could FIRE on our net worth.  We've decided to postpone FIRE until the last knows her college costs and we can leave our fabulous school district and high taxes (which are cheaper than private school), so 2022.

I think having a larger stash is precisely why I feel we can afford to take a few more risks now - we've always played it very safe.  Our high net worth is largely due to positive real estate investing and high incomes...not great stock market returns. The 4% rule makes me nervous...3% feels more like it.  Hence more years to FIRE. I've only worked PT the past 5 years, and already took 6 years off SAH.  I'm 1/2 way FIRE.  To be fair, AMT makes working less attractive, and if I could find a job that paid $50K for 10 hours a week I'd do it just to stash HSA, DCS, 401(k) and save for college funds. I'm toying with applying for a relatively low paying PT job at a fabulous college nearby the kids could go to for free if I worked there. However the oldest is only a sophomore!  Maybe next April....4 months 401(k) max out and then switch to 403(b). But that is a different forum topic! :-)

zephyr911

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Re: Case Study - Stock Purchase Plan 10% and Loan Option 5%
« Reply #3 on: March 11, 2016, 10:33:48 AM »
Well, as they say, only invest what you can afford to lose. If you can reliably predict the best and worst possible outcomes, and you think it's worth doing, you're clearly in a position to handle the risk. I won't say do it or don't, but I understand your situation a little better and I can see why you're stretching for better gains.

RelaxedGal

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Re: Case Study - Stock Purchase Plan 10% and Loan Option 5%
« Reply #4 on: March 11, 2016, 01:22:05 PM »
Hang on a sec, you didn't mention that either option allows you to buy the stock at a discount, just the bonus for share increase.  Are you buying the shares at face value?  If you sell shares are you missing out on the bonus because number of shares does not go up?  I ask because it's different from what I'm used to for an ESPP.

We invest in my husband's ESPP, which allows him to buy shares at 15% off fair market value.  Makes taxes a pain but the quick profit is nice. We used to do quick sales - immediately dump the shares and get the cash back, richer for the discount.  Our new strategy, since our financial advisor pointed out the short term capital gains hit, is to keep the shares 2 years and then after each tranche is purchased sell a matching number of 2 year old shares.  Voila, it's a quick sale without the capital gains.  The downside is that we have 2 years of shares queueing up, making them a noticeable % of net worth.

If you are not buying at a discount, then the only upside is the 10% bonus for share increase.  I'd go for option #1 for the next 3 years since a 10% bonus is nothing to sneeze at.  When you hit 10% of net worth in company stock start selling the 2+ year old shares after the bonus deposits.   Your % of net worth in company shares will probably continue to go up due to the 401k match. 

couponvan

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Re: Case Study - Stock Purchase Plan 10% and Loan Option 5%
« Reply #5 on: March 11, 2016, 03:39:00 PM »
Hang on a sec, you didn't mention that either option allows you to buy the stock at a discount, just the bonus for share increase.  Are you buying the shares at face value?  If you sell shares are you missing out on the bonus because number of shares does not go up?  I ask because it's different from what I'm used to for an ESPP.

We invest in my husband's ESPP, which allows him to buy shares at 15% off fair market value.  Makes taxes a pain but the quick profit is nice. We used to do quick sales - immediately dump the shares and get the cash back, richer for the discount.  Our new strategy, since our financial advisor pointed out the short term capital gains hit, is to keep the shares 2 years and then after each tranche is purchased sell a matching number of 2 year old shares.  Voila, it's a quick sale without the capital gains.  The downside is that we have 2 years of shares queueing up, making them a noticeable % of net worth.

If you are not buying at a discount, then the only upside is the 10% bonus for share increase.  I'd go for option #1 for the next 3 years since a 10% bonus is nothing to sneeze at.  When you hit 10% of net worth in company stock start selling the 2+ year old shares after the bonus deposits.   Your % of net worth in company shares will probably continue to go up due to the 401k match.

There is no discount upon purchase - yes, there is only the 10% bonus of the total number of shares held at the end of the year OVER the number of shares held at the beginning of the year.  (They only reward you for continuing to grow your investment).  Your point is good on the getting rid of them after 3 years when there isn't any benefit to "increasing" our number of shares.  That timing would coincide with college payments for our oldest, so selling then would be good to fund school.