How to Turn Equity Compensation Into Retirement Income

Equity compensation is often the crown jewel of a successful career. Stock options, RSUs, or ESPPs can turn years of long hours and corporate-ladder grinding into life-changing wealth.

But as you near retirement, it’s quite possible there’s a big question looming in the back of your mind: how do you actually turn company shares into income you can live on?

Unlike a steady paycheck, equity awards aren’t designed to provide reliable cash flow. They’re concentrated, volatile, and heavily influenced by tax rules. Without a tangible plan, wealth (on paper) could shrink once the IRS and market fluctuations take their cut.

Let’s break down how to navigate tax implications, manage liquidity, and design an investment strategy that converts equity compensation into a reliable income stream.

The Basics of Equity Compensation Plans

Equity compensation comes in many forms, but the underlying idea is the same: companies give employees an ownership stake to reward performance and align interests. The three most common types of equity compensation are:

• Stock options
• Restricted stock units
• Employee stock purchase plans

For many professionals, especially in tech and startups, these equity awards can tangibly elevate one’s net worth. The challenge is understanding how each type works, because the mechanics (and the tax rules) directly affect how you can turn them into retirement income.

Stock Options

Stock options are one of the most common forms of equity compensation, particularly in startups and high-growth companies. They give you the right — but not the obligation — to buy company shares at a fixed exercise price (also called the strike price), regardless of the stock’s current fair market value (FMV).

If your company grows and the stock price rises, the spread between your exercise price and FMV can balloon into significant wealth.

Types of Stock Options and Tax Treatment

Incentive Stock Options (ISOs): Available only to employees. ISOs can qualify for favorable tax treatment, but exercising them may trigger the Alternative Minimum Tax (AMT). If you hold shares at least one year after exercise and two years after the grant date, gains may be taxed at long-term capital gains rates.

Non-Qualified Stock Options (NSOs): Broader in scope (can be granted to employees, advisors, or board members). NSOs don’t receive special tax treatment. The spread between the exercise price and FMV at exercise is taxed immediately as ordinary income. Any appreciation after exercise is taxed as capital gains when you sell.

Example:

Let’s assume you were granted ISOs with a $10 exercise price. Years later, the FMV is $50 when you exercise. On paper, you have a $40 gain per share. With ISOs, that $40 may count toward AMT, creating a tax bill even if you don’t sell.

If you hold the shares and later sell them for $80, you could qualify for long-term capital gains on the $70 total gain ($80 – $10), but only if you met the holding requirements.

With NSOs, the same $40 spread at exercise is subject to ordinary income tax in that year. If you’re earning a high salary, that could push you into the top marginal tax bracket, reducing the after-tax value of your options.

Stock options can bolster your retirement savings, but the tax rules can also create financial headaches. Exercising too close to retirement might create a tax spike in a year when you’re trying to reduce income. Exercising earlier may smooth out your tax liability, but it ties up cash in company stock and exposes you to volatility.

Restricted Stock Units (RSUs)

RSUs are among the simplest and most common forms of equity compensation, especially in later-stage startups and public companies. Unlike stock options, you don’t need to buy shares at an exercise price. Instead, RSUs convert into actual company stock once they vest according to a predetermined vesting schedule.

How RSUs Are Taxed

When RSUs vest, the FMV of the shares is treated as ordinary income in that year. The company typically withholds taxes at vesting by selling a portion of the shares or reducing the number delivered to you. After vesting, any appreciation (or depreciation) is treated as capital gains or losses when you eventually sell the shares.

Example:

Suppose you have 5,000 RSUs that vest when your company’s stock price is $40. That’s $200,000 in taxable income added to your W-2 — whether you sell the shares or not. If your other compensation is already high, this can bump you into the top tax bracket, negating a portion of the after-tax benefit.

Now imagine the stock price drops to $25 during your post-vesting lockup period. You’re still paying tax on $200,000 of income, even though your shares are now worth only $125,000. Far from ideal.

RSUs can be a powerful wealth-builder, but they can be tricky for retirement planning. Large vesting events late in your career or just before retirement can cause huge income spikes, complicating cash flow and tax planning.

Strategically selling vested shares (rather than holding them all) and diversifying into a broader portfolio can help stabilize your retirement income.

Employee Stock Purchase Plans (ESPPs)

ESPPs are a benefit many public companies offer to employees, allowing you to buy company stock at a discount — often 10–15% below the fair market value.

Purchases are usually funded through payroll deductions, and some plans include a “lookback” provision that applies the discount to the lower of the stock price at the start or end of the purchase period.

How ESPPs Are Taxed

The tax treatment of ESPPs depends on how long you hold the shares after purchase:

• If you meet the IRS holding requirements (at least one year after purchase and two years after the grant date), the discount is taxed as ordinary income, but the rest of your profit is subject to long-term capital gains tax.
• If you sell before meeting those holding periods, the entire discount plus any additional appreciation is taxed as ordinary income.

Example:

Suppose your ESPP allows you to buy shares at a 15% discount. If the stock is trading at $100, you purchase shares for $85. Immediately, you’ve gained $15 per share.

If you sell right away, that $15 is taxed as ordinary income. If you hold the shares for the required periods and later sell at $130, only the $15 discount is ordinary income — the $30 gain ($130 – $100) qualifies for long-term capital gains treatment.

ESPPs are an easy way to accumulate shares, but they can gradually increase your concentration risk if too much of your net worth is tied up in company stock. For retirement planning, balance is imperative: take advantage of the discount, but periodically sell and diversify into a broader portfolio that supports steady retirement income and reduces volatility.

Converting Company Stock Into Retirement Income

To turn equity into reliable retirement income, you’ll need a plan that balances liquidity, diversification, and tax efficiency.

Unwinding Concentrated Company Stock

When too much of your wealth is tied up in one company, your financial security rises and falls with a single stock price. Keep in mind, you’re already “invested” in your employer through your paycheck, health benefits, and career trajectory. Adding a concentrated equity position on top of that only magnifies your exposure.

The worst-case scenario isn’t hard to imagine: the company struggles financially, share prices drop, and layoffs follow. In that scenario, both your income and your portfolio take a hit simultaneously. Is this situation probable? Most likely not, but it does happen.

Slowly unwinding concentrated stock positions — through phased sales or diversification strategies — helps protect your retirement plan from that kind of double shock.

Staying Mindful of Tax Liability

Selling company stock is a tax event. Plain and simple. But a coordinated tax plan helps keep more of your hard-earned equity flowing into your own accounts, versus the pockets of the IRS.

That’s incredibly important in states like California, for instance, where capital gains are taxed at the same rates as ordinary income, which can create significant tax drag on equity payouts.

Planning sales carefully can reduce the sting. Some strategies include:

• Prioritizing sales within tax-deferred accounts (like a 401(k) plan) when possible to avoid immediate tax consequences.
• Using tax-loss harvesting in your broader portfolio to offset large realized gains from company shares.
• Spreading equity sales across multiple years to smooth taxable income and avoid bumping into higher tax brackets.

Diversifying Proceeds

Once you sell, the question becomes: where should the money go?

A traditional 60/40 portfolio of stocks and bonds is still a common starting point for retirees, but it isn’t a one-size-fits-all approach. In recent years, stocks and bonds have tended to move in the same direction — rising and falling together. That positive correlation means bonds don’t necessarily provide the cushion they once did during market downturns, leaving portfolios more exposed than many investors expect.

While this allocation still mixes growth and income with downside protection, more high-net-worth portfolios now include alternative assets, such as private equity, private credit, commodities, and real estate.

The right allocation depends on your risk tolerance, income needs, and financial goals, but the principle remains the same: transform concentrated wealth into a diversified portfolio that can generate sustainable retirement income and fund your Life After Work.

Consider Professional Wealth Management

Even perks come at a price.

Your compensation package can be one of the most rewarding parts of your career — but also one of the most complex pieces of your financial life. Turning stock options, RSUs, and ESPPs into reliable retirement income takes coordination across your entire financial profile.

That’s where professional guidance makes all the difference.

• Tax professionals can model how various sales scenarios affect your tax liability — whether that’s exercising ISOs early, staggering RSU sales, or offsetting gains with tax-loss harvesting. They help ensure the IRS doesn’t claim more than its fair share.
• Fiduciary financial planners and financial advisors focus on the bigger picture: how to diversify concentrated wealth, design an investment portfolio to generate income, and balance equity proceeds with retirement accounts and Social Security. They serve as a sounding board for financial decisions during what can be a once-in-a-lifetime transition.
• Estate planning attorneys help ensure sudden wealth doesn’t create unintended problems. From trusts to charitable giving, they make sure your wealth is transferred efficiently and in line with your wishes.

Financial planning can unlock lasting wealth and a truly open-ended retirement. And with a fiduciary advisor at the center of the process, you can be confident the advice you receive puts your interests first.

At BEW, we call this shift Life After Work — the stage where your career success fuels the next chapter of purpose and financial freedom.

Ready to explore what your own Life After Work could look like? Download our free guide, Retirement Redefined: Your Guide to Life After Work.