Sunday, July 5, 2015

Boost your investment returns with an ESPP

Participating in your company's ESPP plan offers to boost your retirement savings
Very few things in life are certain and investment returns are no exception. Whenever I find an opportunity for practically free returns, I like to jump at the opportunity, whether it’s taking free money from casinos, earning cash back on credit cards, or making use of an ESPP.

If you work for a medium to large sized corporation, chances are that your company offers an ESPP, or an Employee Stock Purchase Plan. If you’re not already investing cash into your ESPP, you absolutely should do so right away.

For the longest time, I avoided contributing money to my company’s ESPP. I came up with excuses, like:
  1. I didn’t want to invest too much in my company. I was already highly dependent on my company for my salary, so I didn’t want to increase my risk more by having much of my investments concentrated in the same company.
  2. The primary intent of the ESPP is to encourage employees to own company stock, which makes employees more vested in a company’s success. I felt bad selling stock immediately on the purchase date.
  3. Rather than investing in the ESPP, I could invest that same money into the S&P 500, which would earn me 10% per year on average.
  4. I could skip out on all the tax paperwork involved in buying and selling stock from the ESPP plan.
  5. I didn’t run through the numbers to see how good of a deal it was.
At my wife’s insistence, I ran through the numbers to re-evaluate the plan. All I can say is that I wish I had done so earlier! To that, my wife said, “Was I right, or was I right?” There was only one answer to that question.

An ESPP plan typically offers a 10% – 15% discount on the company’s stock. You’ll need to contribute money throughout an offering period, which usually runs for 3-months. At the end of the offering period, you’ll have accumulated funds that your plan uses to purchase stock at a discount.

For example, let’s say you contribute 15% of your salary to your ESPP and your salary is $100K per year. During a three-month offering period, you’ll be able to contribute $3,750 to your ESPP. If a company’s stock is trading at $100 per share at the end of the offering period, you can pick up the stock for only $90 per share at a 10% discount. This means that your $3,750 is now worth $4,167 for a gain of $417, assuming you were to sell on the purchase date.

If you sell right on the purchase date, you lock in the return and your acumen just earned you a whopping 11.11% return over just three months. Over the long run, stock markets return on average 10% a year. This means that you just beat the long-term yearly average in only three months!  At an annualized rate, assuming the investment grows at the same rate throughout the year, you would have earned a 52% annual return! Try finding a return like that somewhere else.

Bravo if you’re already contributing to your ESPP. If you’re not already contributing, don’t delay and get started right away. By doing so, you’ll avoid having to answer the inevitable question that I had to answer... “was I right, or was I right?”

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