Your Nest Egg's Best Asset is Your Health

David Ning, On Thursday November 4, 2010, 2:12 pm EDT 

When you are young and healthy it's hard to imagine a day when your health will fail. Although money is extremely important in our retirement, our health trumps that anytime of the day. Without a strong body, we cannot enjoy our travels. Without healthy bones and joints, we cannot even walk around the park without feeling pain. Without good health, we cannot enjoy anything.

Wealth might prolong our life, but it cannot make us healthy. Perhaps one day we will be able to replace what's inside of us much like car parts. But, right now, too many things are irreplaceable. No amount of money can buy a healthy body. When we think about retirement planning, we ought to think about our health too. Here are three areas you should start monitoring today.

Regular exercise. No one should say that they don't have time for exercise. It doesn't really take that much time out of your day. In fact, once you get into the hang of it, you will have more energy and you will probably end up accomplishing the rest of your chores much faster, freeing up more time.



Watch your diet. The key to getting in shape is measuring what you eat. Most people simply eat too much. You can still eat good, flavorful, and tasty meals, but just don't eat way too much if you care about your health. A 36-ounce steak may seem like a good idea now, but these meals add up over time.


Keep stress under control. The job market is getting more competitive these days, and it's understandable to feel like you have to work harder and take more responsibility just to avoid moving backwards. But remember, your family needs you to be healthy much more than any dollars you can bring home. Money doesn't always equal happiness.

If things around you don't change: change the things you're around!

"Establishing goals is all right so long as you don't let them deprive you of interesting detours" - Doug Larson

Restricted Stock Units vs Stock Options

My company has recently announced that it is giving its employees option to choose between Restricted Stock Unit (RSU) and Stock Options for our Stock Focal Program. The Stock Focal Program is a benefit given to employees as a reward for their contributions. The reward is based on the perceived potential of the employee and depending on that perception, the employee receives a certain number of RSU or options.

To start we have to define RSU and Stock Option first.

What are Stock Options?

A privilege, sold by one party to another, that gives the buyer the right, but not the obligation, to buy (call) or sell (put) a stock at an agreed-upon price within a certain period or on a specific date.

What are Restricted Stock Unit? RSU stands for what kind of stock?

Restricted stock is, by definition, stock that has been granted to an executive or employee that is nontransferable and subject to forfeiture under certain conditions, such as termination of employment or failure to meet either corporate or personal performance benchmarks. Restricted stock also generally becomes available to the recipient under a graded vesting schedule that lasts for several years.  

The two definitions were lifted from investopedia so I'm giving another example to make it easier to understand.

Stock Options are rights to buy a stock. For example, Company ABC gives employee D an option to buy 12,000 stocks at $10 vesting for 5 years beginning November 1, 2010 vesting monthly.

This means that Employee D can buy Company ABC's stock for $10. Since this is vesting monthly, Employee D receives 200 stocks per month starting December 1, 2010 (12,000 divided by 60 months). His gain is depending on the trading value of Company's ABC stock.

To illustrate, if on December 1 2010, Company ABC's stock trades at $5, Employee D stands to gain nothing because his grant price is $10. With this example, it is said that options are "under water".  On the other hand, if the market price of the stock is at $15 on December 1, 2010, Employee D stands to gain $5 ($15 - $10).

This means that Employee gain is dependent on how much the stock will perform after he receives his grant. In our example, if the stock fell down from $10 after the grant date and never increases above ten, employee D gains nothing.

Restricted Stock Unit on the other hand are like stock options without grant price. In our example above, if Employee D is given RSU of 4,000 vesting for 5 years beginning November 1, 2010 vesting annually, Employee D stands to receive 800 RSU every year. If Company ABC's stock trades at $10 a year after, Employee D earns $8,000. 

To further illustrate,

If on November 1, 2011, Company's ABC stock is trading at $10 and Employee D decides to exercise his options or sell his stock, he will not earn from stock options because the grant price is equal to stock price. With RSU, he will receive 800 times $10 or $8,000.

Now, assume that on November 1, 2011, Company's ABC stock performed well and is now trading at $20. With Stock Option, Employee D stands to earn $20 minus $10 times 2,400 or $24,000. With RSU, the employee will earn 800 times $20 or $16,000. 

Now, assume that on November 1, 2011, Company's ABC stock underperformed and is now trading at $5. With Stock Option, Employee D earns nothing because the stock is underwater (grant price higher that market price). With Restricted Stock Options, Employee D earns 800 times $5 or $4,000.

To summarize our example, it seems that selecting Stock Options is more favorable if the stock price is expected to increase through time from the stock grant date. If the stocks is not expected to perform above the stock price on the grant date, RSU seems the better option.

Vesting Type Consideration

Another thing to look at and consider is the vesting type. RSU is vesting annually while Stock Options vests monthly. Given the same period of five years, If Employee D has no plans of staying within the five years vesting period Employee D should prefer stock options because Employee D will receive options every month with the assumption that stock price will increase over time. If Employee D resigns five months after the grant date, Employee D can at least receive 1,000 options. With RSU, resigning five months after the grant date will have Employee D receiving nothing. It must be noted, however, that stock price after five months should be higher than the grant price. If not the 1,000 options received by Employee D are under water so it is also worthless.

Assuming Employee D stays for one year and stock price increased to $11, with RSU he stands to earn $11 times 800 or $8,800. With Stock Options, he stand to earn $11-$10 times 2,400 or $2,400.

But in both scenario, Employee D stands to earn more if he elect to stays five years. After all, this is just a reward with no cost to the employee.

Tax Consideration

In all of our examples, we have not considered taxation. Remember that RSU's are taxed at vest date. Stock Options on the other hand, are taxed on the exercise date based on the difference of the stock price and grant price. For Non-US residents, taxation differs. Again, it is always better to consult your CPA regarding tax matters.

Summary

Using the illustrations above as basis for conclusion, stock options are favorable if stock price is expected to increase and the employee has plans of not staying for five years. Restricted Stock Unit on the other hand is a less risky choice for those intending to stay and do not expect the stock price to perform well above the grant price.

What do you think? 

Note: This is no way intended to serve as an advice. While I am a CPA here in the Philippines, i do suggest you consult your CPA for tax implications as well. This entry is just based on my own analysis.

My Seven Favorite Quotes about Work and Success

• "The only place success comes before work is in the dictionary."
- Vince Lombardi

• "Change before you have to." - Jack Welch

• "Life is ten percent what happens to you and ninety percent how you respond to it." - Lou Holtz
  
  
    
• "The best way to make your dreams come true is to wake up." Paul Valery
  
  
   
  
   
• "Be like a postage stamp. Stick to one thing until you get there." - Josh Billings
  
  
  
  
   
• "There" is no better a place than "here." When your "there" has become a "here", you will simply obtain another "there" that will again look better than "here." - Cherie Carter-Scott

Contentment is being satisfied with what you have

Contentment is not getting what you have but being satisfied with what you have

Do you own a laptop? I have one and uses it to write on this blog and that laptop has story about contentment.

You see, when i started taking up my MBA studies, i realized that i will need to own one. My company issued me a laptop but i felt that bringing it at school will not be a good idea so i planned on purchasing my own. My criteria was simple. I need a laptop that has a word processor and powerpoint program. I googled and browsed laptops and i end up owning a macbook. I know that purchase was not well thought of. I was in Las Vegas at that time and tax rates were cheaper compared to California. I bought one for the mere reason of tax savings forgetting that my main consideration was the word processor and powerpoint program.

The story did not end there but rather begins from that purchase. You know how more expensive macbook is compared to other laptops. So along with the expensive laptop, my desire to purchase accessories followed suit. I bought a keyboard protector and a screenshield. My reasoning was since i bought an expensive laptop i might as well protect it. After buying the keyboard protector and screenshield, i realized i will need a laptop bag. So i bought one. Then when i used my macbook, i realized how good the pictures organizing program and i thought i would need a camera so that i can take pictures and maximize the laptop.  Then one day, i realized i have bought too much to fulfill a single need: to have a word processor and powerpoint program.

The lesson is most often we have this want and to justify the purchase, we add our needs to this want. We add our wants to our needs to justify and make it appear that we are making a wise decision. We are never contented to what we have. Most of the time, we want this thing that we think of this thing too much. So much that it has become an internal struggle whether to purchase that item or not. Then the rationalization comes in saying that we need to purchase that item because we have been working so hard and we need to reward ourselves. Then once we get that item, we get tired. Yes, we'll be happy and satisfied days or weeks after the purchase but soon after we'll have another want to satisfy. The cycle never ends unless we decide to.

Looking back, i still have the macbook but have stopped deciding over this macbook. I no longer buy accessories. I've made a firm decision that i'll focus on my need and not on my wants. I try to observe the life of less crap less stress. If you are interested you might read this post about minimalism

Share Buy Back

Share Buy Back means the company is purchasing its own stock thus reducing the number of outstanding shares in the market. Reducing the outstanding shares results to higher earnings per share because earnings per share is computed by dividing net income over the number of shares outstanding.

What does this mean for the investors? Share buy back is a signaling technique by companies. This sends a message "our shares are worth more than the market values it".  Why? Because, if you take a look at it, the company is spending investor's money to purchase shares in the market. And before the company can do this, this has to be approved by the board of directors. Just to make it short, share buy back are authorized by current investors because they believe that the company is worth more than what the stocks are currently selling thus they are willing to buy it now while it is cheaper.

This has the same impact when CEO/CFO or any other top executive deals with the company stocks. If the CEO pitches to the investors how good the company is then you'll see in the SEC report that the CEO is dumping stocks then you'll have a second thought. The CEO must know something that's why he's unloading himself of the stocks. Because if not, why will he unload himself of the stocks if he knew the company will perform.

On the other hand, if CEO buys stocks in the market, this sends a signal to the public how confident the CEO is about the future performance of the company.