From RSUs to Retirement

From RSUs to Retirement

Executive Summary

Many tech executives approaching retirement are sitting on a wealth of Restricted Stock Units (RSUs), but often struggle to accurately project their long-term value and calculate a safe withdrawal rate. By using Golden Door Asset's Discount Rate Calculator, advisors can help clients like Mark, a 55-year-old tech executive with $3.2 million in RSUs, potentially unlock an additional $32,000 in annual retirement income, all while mitigating the risk of prematurely depleting their portfolio. This case study demonstrates how our AI-powered tools empower RIAs to deliver more personalized and profitable financial planning strategies.

The Challenge

The Registered Investment Advisor (RIA) landscape is facing increasing pressure. Fee compression is rampant, clients demand more personalized service, and regulatory scrutiny, particularly around the DOL's fiduciary rule, is intensifying. According to Cerulli Associates, the average advisory fee has decreased by 5 basis points over the last five years, forcing firms to find ways to deliver more value with fewer resources. At the same time, the demand for sophisticated retirement planning is surging as the boomer generation continues to enter their golden years, often with complex portfolios including assets like RSUs.

One common challenge for RIAs is accurately assessing the risk and projecting the returns of portfolios heavily concentrated in a single sector, like technology. Traditional financial planning often relies on broad market averages for discount rates, which can significantly underestimate the true potential (and volatility) of these portfolios. This is especially problematic for tech executives who have accumulated substantial holdings in company stock through RSUs. These individuals often struggle to understand how to convert these assets into a reliable income stream that can sustain them throughout retirement.

When these challenges go unsolved, the consequences can be severe. Advisors risk providing inaccurate or overly conservative retirement plans, leading clients to unnecessarily sacrifice potential income and lifestyle. For example, a client who is advised to withdraw at a 3% rate based on a generic discount rate might actually be able to sustainably withdraw at 4% after a more refined analysis, potentially costing them hundreds of thousands of dollars in lost income over their retirement. Conversely, an overly optimistic plan based on inflated expectations can lead to premature portfolio depletion and financial hardship later in life, opening up the advisor to potential liability.

Our Approach

Golden Door Asset’s Discount Rate Calculator empowers RIAs to create more precise and personalized retirement plans by providing a more accurate assessment of portfolio-specific discount rates. Our approach, demonstrated in this case study with Mark, involves a step-by-step process leveraging both the Capital Asset Pricing Model (CAPM) and the Gordon Growth Model.

First, we gather detailed financial information from the client, including the composition of their portfolio, specifically focusing on the tech stocks within their RSU holdings. Then, using the Discount Rate Calculator, we apply the CAPM model, inputting the current risk-free rate (typically a US Treasury yield), a historical market risk premium (based on S&P 500 returns), and a carefully chosen beta that accurately reflects the volatility of the specific tech stocks in the client's portfolio. This beta is crucial, as it captures the individual risk profile of the client’s concentrated holdings, rather than relying on a generic market beta.

Next, we utilize the Gordon Growth Model. This involves estimating the expected dividend growth rate (if applicable) and the current dividend yield of the client's tech stocks. While many tech companies may not pay dividends, incorporating this model allows us to consider potential future dividend payouts and their impact on the overall discount rate. By comparing the results from both the CAPM and Gordon Growth models, the advisor can arrive at a more nuanced and realistic discount rate applicable to the client's specific RSU-heavy holdings. This discount rate is then used in standard retirement planning tools to calculate a safe withdrawal rate that aligns with the client's unique financial situation and risk tolerance.

What sets our approach apart is its ability to move beyond broad market averages and account for the specific risks and potential growth opportunities associated with concentrated tech holdings. Traditional methods often fall short in this area, leading to inaccurate projections and suboptimal retirement plans. Our Discount Rate Calculator seamlessly integrates into an advisor's existing workflow, providing a more data-driven and defensible approach to retirement planning. It also allows advisors to demonstrate their value to clients by providing customized insights that would be difficult or impossible to achieve using traditional tools.

Technical Implementation

The Discount Rate Calculator is built on a robust and scalable architecture leveraging modern technologies. The core of the application is written in Python, utilizing libraries such as NumPy and SciPy for complex financial calculations. The user interface is built with React, providing a responsive and intuitive experience for advisors.

Data sources are critical to the accuracy of the Discount Rate Calculator. We integrate with leading financial data providers, such as Refinitiv and FactSet, to access real-time market data, including risk-free rates, market risk premiums, company betas, dividend yields, and growth estimates. These integrations are facilitated through secure APIs, ensuring data accuracy and reliability. Furthermore, the platform allows advisors to manually input data when necessary, providing flexibility to incorporate proprietary research or client-specific information.

Security and compliance are paramount. The platform is hosted on AWS, leveraging its robust security infrastructure and compliance certifications, including SOC 2 and GDPR. All data is encrypted both in transit and at rest using industry-standard encryption algorithms. We adhere to strict data privacy policies and comply with all applicable regulations, including the SEC's cybersecurity guidelines. Access to sensitive data is controlled through role-based access control (RBAC), ensuring that only authorized personnel can access specific information. We also maintain a comprehensive audit trail of all user activity, providing transparency and accountability.

Results & Impact

By using Golden Door Asset’s Discount Rate Calculator, Mark was able to gain a clearer understanding of his portfolio's true potential and calculate a more accurate safe withdrawal rate. This resulted in a tangible increase in his confidence in his retirement plan, and potentially, a higher sustainable withdrawal rate.

In Mark’s case, using a standard market-based discount rate suggested a 3% safe withdrawal rate, translating to $96,000 per year. However, after a refined analysis using the Discount Rate Calculator, taking into account the specific characteristics of his tech stock holdings, the advisor determined that a 4% withdrawal rate was sustainable. This translates to $128,000 per year – an extra $32,000 in annual retirement income!

Moreover, avoiding an overly conservative withdrawal rate (due to inaccurate discount rate assumptions) prevented Mark from unnecessarily sacrificing potential lifetime spending. Conservative estimates could have led him to live a less fulfilling retirement, missing out on experiences and opportunities due to fear of outliving his savings.

Here's a summary of the key results:

Beyond the quantifiable benefits, the use of the Discount Rate Calculator also improved client satisfaction. Mark felt more confident in his retirement plan and appreciated the personalized attention he received from his advisor. This enhanced client experience contributes to increased client retention and positive referrals, further benefiting the advisory firm. Moreover, utilizing our AI-powered tool helps advisors stay compliant with their fiduciary duty by providing a more robust and defensible investment strategy.

Key Takeaways

• Don't rely solely on broad market averages: Tailor your discount rate calculations to the specific characteristics of your client's portfolio, especially when dealing with concentrated holdings.
• Leverage both CAPM and Gordon Growth models: Combining these two models provides a more nuanced and accurate assessment of the discount rate.
• Regularly review and adjust: As market conditions and company performance change, it's crucial to regularly review and adjust the discount rate to ensure the retirement plan remains on track.
• Embrace AI-powered tools: Leverage technology to streamline the retirement planning process and deliver more personalized and profitable solutions for your clients.
• Communicate transparently with clients: Clearly explain the methodology and assumptions behind the discount rate calculation to build trust and foster a strong advisor-client relationship.

Why This Matters for Your Firm

In today's competitive environment, RIAs need every edge they can get. Golden Door Asset provides that edge by equipping you with the tools you need to deliver superior client outcomes and differentiate your firm. The "From RSUs to Retirement" case study illustrates the power of our Discount Rate Calculator to unlock hidden value in client portfolios and provide a more personalized and data-driven approach to retirement planning.

By adopting Golden Door Asset's AI-powered tools, you can not only enhance your service offerings but also improve your operational efficiency and compliance. Our solutions are designed to seamlessly integrate into your existing workflow, empowering you to focus on building client relationships and growing your business. Ready to see how Golden Door Asset can transform your practice? Explore our suite of AI-powered tools and schedule a demo today to discover how we can help you deliver exceptional results for your clients.