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Retireby40’s Investment Fundamental #7 – Stock Participation Plan

{ 15 comments }
stock participation plan levi

flickr - troyholden

The Stock Participation Plan (SPP) doesn’t apply to everyone, but I’m writing about my retirement and the SPP is a big part of my savings.   If you work for a Fortune 500 company, chances are the company has a stock participation plan of some sort.

At my company, I can contribute up to 5% of my paycheck toward the SPP. The amount is deducted before I see my paycheck so I never miss it, similar to the 401k deduction. The SPP contribution is after tax though, and I get my shares every six months.  The purchase price is set to 85% of the lower of the two prices between the first and last day of the contribution period.

Example – contribution period is from January 1st, 2010 to June 31st, 2010.  The stock price was $15 on Jan. 1st and $10 on June 31st.  So my price is 85% of $10 = $8.50

If I sell the shares right away, I would make 17.5% profit in this example. The least amount of money that I can make is 17.5% of my contribution and it could be more, depending on how the market is doing.  If the price was reversed – 10$ on Jan. 1st and $15 on June 31st, my price would still be $8.50.  Then I would make 77% profit instantly if I sell the shares at $15.

Example continued – if my contribution for the pay period is $850 and I sell the shares right away when I receive them.

case 1 – Stock price Jan. 1st = $15 and June 31st = $10.  I would have $1,000, 17.5% profit. (1000/850 – 1)%

case 2 – Stock price Jan. 1st = $10 and June 31st = $15.  I would have $1,500, almost double my invesment 77% profit. (1500/850 – 1)%

This is free money.  Check if your company has an SPP and try to contribute up to the maximum allowable.

retirebyforty’s SPP strategies:

> Contribute maximum allowable, 5% of each pay check.

> Keep the stocks for at least one year so I don’t have to pay short term capital gain.

> Limit company stock to 5% of my total investment portfolio to make sure I am diversified.

Does your employer has an SPP? Do you contribute?

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{ 15 comments… add one }
  • Jessica07 November 29, 2010, 4:55 am

    Great strategies!

  • Moneycone November 29, 2010, 5:44 am

    The last point is so important: Limit company stock to 5% of my total investment portfolio to make sure I am diversified.

    (Even if you work for Google!)

    And if you get a chance, watch “Enron: The Smartest Guys in the Room “.

  • Squirrelers November 29, 2010, 11:14 am

    I agree that this is a great opportunity if you can take advantage of it.
    Question: does this impact how much you are allowed to contribute to your 401(k)?

    Anyway, it’s essentially free money, as you say. Now, I do generally believe in limiting exposure to one’s own company stock – actually, I strongly believe in it. You’re already investing many eggs in that basket by attaching your cash flow to their fortunes.

    That said, a 15% discount changes the conversation completely. I might have a different view of such risk in that case, depending on what I see with the company’s future. Hard to turn down maximizing this….

  • retirebyforty November 29, 2010, 11:24 am

    @Jessica – Thanks!

    @Moneycone – Yeap, I learned my lesson the hard way during the dot com bust and I’ve been maintaining the 5% rule.

    @Squirrelers – This does not impact my 401k in any way. I agree about limiting exposure to the company stock and many people always sell as soon as they get the shares. I think the company is doing good though so 5% of portfolio is ok for me. These stocks generate dividend so the extra cash is nice as well.

  • Everyday Tips November 29, 2010, 12:44 pm

    I could have written this exact post. You do exactly what I do, so you are obviously very smart. 🙂

  • Andrew @ 101 Centavos December 1, 2010, 4:08 am

    As long as your company is profitable, 15% discount is a good deal. Take advantage of it while you can.

    • retirebyforty December 1, 2010, 1:16 pm

      Even if it is not profitable, it would still be a good deal since I can sell right away and make 15%. The only disadvantage is to have the company holds 5% of my paycheck every month, but that’s ok.
      If the company is not profitable, they probably will discontinue the program and give out options instead.

  • Roshawn @ Watson Inc December 4, 2010, 4:29 pm

    I always enjoy reading what different things PF bloggers are doing investing-wise, so thanks for sharing. This sounds like a profitable strategy. 🙂

  • The Passive Income Earner December 12, 2010, 10:43 pm

    I do have SPP at the office. I can contribute 10% with a 15% discount. I contribute 10%. These days I cash in as soon as I get it. I did get a 40% discount once. That was quite nice!

    • retirebyforty December 13, 2010, 3:59 am

      Our contribution got cut down to 5% during the downturn and I don’t think it’s going back up anytime soon.

  • Sharelord July 13, 2011, 1:18 am

    Really a great blog. I agree with you and also enjoy a lot to read your blog. This is different blog and very informative.

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