NEW YORK (CNNfn) - You hate your job, right? Can't stand the bureaucracy and the Yes Men? So you dream at your little cubicle about taking one of those hot start-up jobs.
Glamour, independence and stock options to make you rich.
But before you make the leap out of Corporate America, financial pros say you should be careful not to rely on the potential of stock options as part of your retirement plan. Because the chances of hitting the jackpot are a lot less likely than the chances you'll wind up with nothing.
"If you have options all you have is the promise of money," said Gary Schatsky, a fee-only financial planner and attorney in New York City. "It's like the lottery."
Many new businesses without the resources to offer a full benefits package will dangle stock options in front of your nose. The number of options will depend on how hot you are in the marketplace and how hungry they are to get you, Schatsky said. Some may also invite you to invest your own money in company stock before the IPO.
"Options create an incentive for people to work hard," said Mark Groesbeck, a certified financial planner with Stanford Group in Houston. "But if they don't diversify, then they have their net worth and their livelihood tied up to the welfare of one company."
If the start-up doesn't have a retirement plan like a 401(k), it's crucial you contribute to an IRA, investment advisers agree. You may strike it rich, but it's nice to have a guaranteed nest egg that will grow tax-free thanks to compound interest.
If your adjusted gross income is less than $95,000 for a single person or $150,000 for a couple, then choose a Roth IRA instead of a traditional IRA. With a Roth, you can't deduct the contributions but you won't pay taxes on the money you take out. A Roth also has more flexible withdrawal rules in the early years.
"If you're 22 and just out of school, you can afford to make a risk because you'll have a lot of time to make it up before you retire," said Frank Armstrong, a certified financial planner and president of Managed Account Services in Miami. "For somebody mid-career, you can take a chance, but if you do that, you have to protect your investment capital -- your IRA and your other savings."
If you had a 401(k) at your old job, you may want to consider leaving it there if the costs are reasonable and you have good investing choices. If not, consider rolling it over into an IRA.
You should also consider all of your retirement accounts -- 401(k)s, IRAs, traditional pensions -- when deciding on asset allocation for your dollars, experts said. So you would look at all of the accounts when deciding what portion to designate to large cap stocks, small cap stocks, bonds, and so on.
Putting your future in company stock
Don't be pressured by your new bosses into investing a lot of your money in the company, Armstrong warns. Even if the company isn't a start-up, the risks are horrendous, he said.
He recalled a time in Miami in the 1990s where a number of airlines and banks went into bankruptcy. The employees were buying stock up until the moment the businesses went under, never thinking they were throwing their money away.
"It's suicidal to put all of your money in the company."
-- Frank Armstrong, Managed Account Services
Companies typically give employees a sunnier outlook on the stock than they give to Wall Street analysts, Armstrong said.
"It's never appropriate to take your retirement dollars and invest in company stock," Armstrong said. "It's suicidal to put all of your money in the company."
When exercising is bad for you
The other big decision you'll face is when to exercise your options when the company goes public. In most cases, there are strict rules about when and how you can do it. You'll also have to consider your cash flow, your risk tolerance and the tax implications, Schatsky said.
There aren't any industry statistics to show the success rate of stock options, but there's plenty of anecdotal proof. Some so-called "paper millionaires," are still waiting for the payoff. Many people also look at extreme examples like Dell Computer, where some jokingly call employees "Dellionaires," for the money they've made in stock options.
"In the past few years, even the worst-conceived company that's gone public has gone up," Schatsky said. "Certainly if you're in a company pre-IPO and it goes public and you have a chance to sell, you're almost guaranteed of a very significant profit."
Plus, 1999 was a record year for IPOs, smashing previous records and sending stocks skyrocketing in the first days of trading.
But the difference between the right and wrong decision in exercising options could be thousands, even millions, of dollars, Schatsky said.
"You should get good, unbiased advice," Schatsky said. "It's an intricate analysis."
If you think you're working for the next Microsoft, you might want to hold onto your options as long as possible. But don't throw away an opportunity to be rich for an opportunity to be super-rich, Schatsky said.
"You don't want to tell your grandchildren someday that you could have been wealthy but you wanted to be extraordinarily wealthy," he said. "It's fear and greed pulling you in opposite directions." 
|
