Money Talks News may earn commission or revenue through links in the content below. Our editorial team independently selects all products. Compensation does not influence our recommendations.
Elon Musk had a very good morning last week.
According to Forbes, his net worth rose to $1.012 trillion at around 10 a.m. on Oct. 9, after a rally in SpaceX and Tesla shares added about $22 billion to his fortune in a single morning (1). Forbes says he owns around 11% of Tesla and 38% of SpaceX (1).
That’s what happens when so much of your fortune is tied to a couple of companies’ stock prices. And it works in both directions.
I was a stockbroker on Black Monday, Oct. 19, 1987, when the Dow finished down 22.6% in one day (2).
One day can undo a lot of years.
Musk can ride that roller coaster. Plenty of people with a big slug of their employer’s stock in a 401(k) are riding it too. FINRA, the brokerage industry’s regulator, warns that “Employees might be tempted to concentrate their retirement savings in the stock of their employer” (3). A 2023 Center for Retirement Research at Boston College analysis of Vanguard data found that in 2022, 3% of participants still held more than 20% of their account in company stock (4).
The good news: far fewer people do this than in 2005, when 18% of participants had more than a fifth of their account in company stock (4). The bad news: if you’re one of them, the risk is all yours. Here are five things I’d want you to know before your retirement looks like Musk’s balance sheet.
1. Musk can lose half and still be a billionaire. You can’t.
Do the math. If Musk’s $1.012 trillion fortune were cut in half, he’d still have about $506 billion.
Now take a retiree with $400,000, most of it in one company’s stock. Cut that in half and you have $200,000, and a very different retirement.
Concentration isn’t a strategy for people who need the money. It’s a luxury for people who don’t.
2. Company stock doubles up on the same risk
Alicia Munnell of the Center for Retirement Research put it plainly: holding one stock instead of, say, 30 “more than doubles the riskiness of a portfolio” without a higher expected return to make up for it (4).
Company stock adds a second problem. It’s tied to your paycheck. If your employer hits the skids, you could lose your job and a big chunk of your retirement savings at the same time (4). Remember Enron? Munnell did, too (4).
3. Find out how big your bet really is
Pull up your 401(k) statement and any brokerage accounts. Add up everything in your employer’s stock, including shares from stock purchase plans and grants.
Then ask yourself one question. Here’s my read, as a guide: if any single stock is a slice you couldn’t watch fall by half without changing your retirement plans, it’s too big.
If that describes you, you don’t have to sell everything tomorrow. You can trim a little at a time.
Quick gut-check — if your money advice is coming from random online influencers, you’re playing a dangerous game. I’ve been a CPA since 1981 and writing about money since before the internet existed. Sign up for the free Money Talks Newsletter and get expert advice that’s been tested by time.
4. Before you sell or roll it over, ask about NUA
Here’s where being a CPA comes in handy, because there’s a tax break that’s easy to miss.
If your company stock has grown a lot inside your 401(k), there’s something called net unrealized appreciation, or NUA. When employer securities come out of the plan as part of a lump-sum distribution, the IRS says “the NUA is generally not subject to tax until you sell the securities” (5).
The rules are technical, and the order of steps matters. This is exactly the kind of decision worth running past a pro before you sign anything.
If you have roughly $100,000 or more to invest, Advisor.com can connect you with a financial advisor to talk through what to keep, what to sell and how to handle the taxes.
5. Spread out what you rebuild
Once you start trimming a big position, the goal is to own a lot of companies, not to swap one big bet for another.
And you have nothing in stocks, start investing. SoFi® Active Invest lets you get started with as little as $5, with no account minimums. And if picking individual stocks feels like a lot, you can start with a collection SoFi has already put together and spread your money across a mix of companies. Check it out here.
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUEBrokerage and Active investing products offered through SoFi Securities LLC, member FINRA(www.finra.org)/SIPC(www.sipc.org).
The bottom line
I don’t begrudge Musk his massive fortune. He runs those companies, and his money is his to bet.
But a retirement isn’t a bet. It’s the money you’ll live on when the paychecks stop, and it should be built to survive a bad day, not just enjoy a good one.
Musk can afford to be wrong by $22 billion before lunch. You can’t afford to be wrong once.
Sources: 1. Forbes; 2. Federal Reserve History; 3. FINRA; 4. Center for Retirement Research at Boston College; 5. IRS
Add a Comment