Dalpa R&I Roadshow
#241
Roll’n Thunder
Joined APC: Oct 2009
Position: Pilot
Posts: 3,836
Respectfully, the fact that a previous DB plan was 60% of FAE is irrelevant. For many people, that DB plan ended up at 0% of FAE.
The pertinent question is what value would a DB provide compared to the value we could extract with an equivalent amount of negotiating and research capital invested elsewhere.
The pertinent question is what value would a DB provide compared to the value we could extract with an equivalent amount of negotiating and research capital invested elsewhere.
#242
Emotion and Tax Math
Much of this thread has been fact based with a plenty of emotion and personal perspective thrown in. Here is some basic math absent my opinion on the matter.
The assumptions for this scenario are:
In Year 0, the MBCBP is worth $10,000 and the DPSP Cash is worth $6,000.
Year 5 the values are $12,763 and $9,232 respectively
Year 10 - $16,289 and $14,204
Year 15 - $20,789 and $21,855
Year 20 - $26,533 and $33,626
Year 25 - $33,864 and $51,738
When the money is taken out of the MBCBP all of it is subject to Income Tax. The gains on DPSP Cash would be subject to Long Term Capital Gains Tax.
Here are the AFTER TAX values of the respective investments at Years 5-25
Year 5 - $9,062 and $8,585
Year 10 - $11,565 and $12,563
Year 15 - $14,760 and $18,684
Year 20 - $18,838 and $28,101
Year 25 - $24,043 and $42,591
Add 5% to the DPSP Cash values if you are Married with AGI between $315K and $400K, because your investment would be $6,300 vs $6,000 in Year 0.
Here are the values based on 24% Income Tax (Married <$315K) during the contribution year.
Year 0 - $10,000 and $7,100
Year 5 - $12,763 and $10,924
Year 10 - $16,289 and $16,808
Year 15 - $20,789 and $25,862
Year 20 - $26,533 and $39,791
Year 25 - $33,864 and $61,224
Here are the AFTER TAX values:
Year 5 - $9,062 and $10,159
Year 10 - $11,565 and $14,867
Year 15 - $14,760 and $22,109
Year 20 - $18,838 and $33,253
Year 25 - $24,043 and $50,399
The assumptions for this scenario are:
- $10,000 of MBCBP or DPSP Cash.
- 35% Marginal Federal Tax while working (Married >$400K)
- 24% Marginal Federal Tax in retirement (Married <$315K)
- 5% Marginal State Tax
- 15% Long Term Capital Gains Tax (Married <$479K)
- MBCBP returns of 5%
- DPSP Cash return of 9% (S&P 500 ETF or equivalent)
In Year 0, the MBCBP is worth $10,000 and the DPSP Cash is worth $6,000.
Year 5 the values are $12,763 and $9,232 respectively
Year 10 - $16,289 and $14,204
Year 15 - $20,789 and $21,855
Year 20 - $26,533 and $33,626
Year 25 - $33,864 and $51,738
When the money is taken out of the MBCBP all of it is subject to Income Tax. The gains on DPSP Cash would be subject to Long Term Capital Gains Tax.
Here are the AFTER TAX values of the respective investments at Years 5-25
Year 5 - $9,062 and $8,585
Year 10 - $11,565 and $12,563
Year 15 - $14,760 and $18,684
Year 20 - $18,838 and $28,101
Year 25 - $24,043 and $42,591
Add 5% to the DPSP Cash values if you are Married with AGI between $315K and $400K, because your investment would be $6,300 vs $6,000 in Year 0.
Here are the values based on 24% Income Tax (Married <$315K) during the contribution year.
Year 0 - $10,000 and $7,100
Year 5 - $12,763 and $10,924
Year 10 - $16,289 and $16,808
Year 15 - $20,789 and $25,862
Year 20 - $26,533 and $39,791
Year 25 - $33,864 and $61,224
Here are the AFTER TAX values:
Year 5 - $9,062 and $10,159
Year 10 - $11,565 and $14,867
Year 15 - $14,760 and $22,109
Year 20 - $18,838 and $33,253
Year 25 - $24,043 and $50,399
#243
Gets Weekends Off
Joined APC: Jun 2015
Posts: 1,760
EDIT: Gunfighter, I see you and I had similar thoughts trying to model.
If you were to contribute $10,000/yr into a taxable account, compounded annually with a 32% tax, here would be the account balances using the historical S&P500 Total Returns from 1997-2017 vs a non-taxed DB@5%. (I'd show a graph but I don't know how to post). At withdrawal, the taxable account would be subject to LT Capital gains, while the DB would be ordinary income tax. Looking through the years there is a lot of variability with returns.
Taxable Bal....DB Bal 5% ROR
9,068......…….10,500
20,404...……..21,525
32,927...……..33,101
36,112...……..45,256
37,810...……..58,019
34,751...……..71,420
53,468......….85,491
66,825...…….100,266
77,240...…...115,779
97,310........132,068
109,826......149,171
73,474........167,130
101,515......185,986
124,627......205,786
134,200...….226,575
163,560......248,404
225,540.....271,324
264,147.....295,390
274,686.....320,660
315,152.....347,193
392,234.....375,052
If you were to contribute $10,000/yr into a taxable account, compounded annually with a 32% tax, here would be the account balances using the historical S&P500 Total Returns from 1997-2017 vs a non-taxed DB@5%. (I'd show a graph but I don't know how to post). At withdrawal, the taxable account would be subject to LT Capital gains, while the DB would be ordinary income tax. Looking through the years there is a lot of variability with returns.
Taxable Bal....DB Bal 5% ROR
9,068......…….10,500
20,404...……..21,525
32,927...……..33,101
36,112...……..45,256
37,810...……..58,019
34,751...……..71,420
53,468......….85,491
66,825...…….100,266
77,240...…...115,779
97,310........132,068
109,826......149,171
73,474........167,130
101,515......185,986
124,627......205,786
134,200...….226,575
163,560......248,404
225,540.....271,324
264,147.....295,390
274,686.....320,660
315,152.....347,193
392,234.....375,052
Last edited by Planetrain; 09-20-2018 at 07:10 PM.
#244
Gets Weekends Off
Joined APC: Jun 2015
Posts: 1,760
Same assumptions, but 1990-2010, a less rosy period
Taxable Bal DB Bal
6,589 10,500
17,469 21,525
26,118 33,101
36,236 45,256
43,604 58,019
69,346 71,420
93,630 85,491
133,933 100,266
180,954 115,779
227,258 132,068
212,759 149,171
193,453 167,130
155,997 185,986
209,487 205,786
239,819 226,575
258,728 248,404
307,455 271,324
331,508 295,390
213,134 320,660
278,129 347,193
327,839 375,052
Taxable Bal DB Bal
6,589 10,500
17,469 21,525
26,118 33,101
36,236 45,256
43,604 58,019
69,346 71,420
93,630 85,491
133,933 100,266
180,954 115,779
227,258 132,068
212,759 149,171
193,453 167,130
155,997 185,986
209,487 205,786
239,819 226,575
258,728 248,404
307,455 271,324
331,508 295,390
213,134 320,660
278,129 347,193
327,839 375,052
#245
Gets Weekends Off
Joined APC: May 2011
Posts: 275
Respectfully, the fact that a previous DB plan was 60% of FAE is irrelevant. For many people, that DB plan ended up at 0% of FAE.
The pertinent question is what value would a DB provide compared to the value we could extract with an equivalent amount of negotiating and research capital invested elsewhere.
The pertinent question is what value would a DB provide compared to the value we could extract with an equivalent amount of negotiating and research capital invested elsewhere.
That's not my point.
#246
Not only does Gunfighter's Math prove that a higher return in DPSP Cash beats a low risk return on MBCBP, it proves the benefits of wealth diversification. Three common financial mistakes by Joe Six Pack:
He bought a financed car.
He bought a luxury home with a huge mortgage.
He failed to build any significant wealth outside of a retirement account
The third one is the key. DPSP Cash gives you the opportunity to build wealth outside a 401k. Wealth that is a few years helps give you enough cashflow that you can take SIL for your sabbatical in Kathmandu for two months but still have income as if you were working at Delta full time.
Wealth in a retirement account is fairly useless for those that aspire to become financially free at an early age and that if the majority of your net worth creation is going on in that account alone, that you are in big trouble.
Leave DPSP Cash alone. Secure the Bag
He bought a financed car.
He bought a luxury home with a huge mortgage.
He failed to build any significant wealth outside of a retirement account
The third one is the key. DPSP Cash gives you the opportunity to build wealth outside a 401k. Wealth that is a few years helps give you enough cashflow that you can take SIL for your sabbatical in Kathmandu for two months but still have income as if you were working at Delta full time.
Wealth in a retirement account is fairly useless for those that aspire to become financially free at an early age and that if the majority of your net worth creation is going on in that account alone, that you are in big trouble.
Leave DPSP Cash alone. Secure the Bag
#247
Gets Weekends Off
Joined APC: Nov 2011
Posts: 4,535
I don’t do the mega back door roth. It can be marginally beneficial for some folks in our position. It provides for some flexibility and a hedge on future taxes. It’s most beneficial to high earners whose company put a much lower % into there DC plan where hitting the $55K per year isn’t possible between company contributions on the 1st $275k and the $18.5k personal contribution. However, I do the standard backdoor Roth IRA.
I’m against this plan as it only defers the taxes, aims for a mediocre growth target, and costs are unkown. The salesjob is misleading. You either pay taxes now or when you withdraw funds from a tax deferred account. I’d much rather pay taxes now and aim for much better returns and cash in on long term capital gains and qualified dividends vs. what is being proposed. I’m certain I’d be far better off.
I’m against this plan as it only defers the taxes, aims for a mediocre growth target, and costs are unkown. The salesjob is misleading. You either pay taxes now or when you withdraw funds from a tax deferred account. I’d much rather pay taxes now and aim for much better returns and cash in on long term capital gains and qualified dividends vs. what is being proposed. I’m certain I’d be far better off.
#248
Gets Weekends Off
Joined APC: Feb 2009
Position: 320B
Posts: 781
Not only does Gunfighter's Math prove that a higher return in DPSP Cash beats a low risk return on MBCBP, it proves the benefits of wealth diversification. Three common financial mistakes by Joe Six Pack:
He bought a financed car.
He bought a luxury home with a huge mortgage.
He failed to build any significant wealth outside of a retirement account
The third one is the key. DPSP Cash gives you the opportunity to build wealth outside a 401k. Wealth that is a few years helps give you enough cashflow that you can take SIL for your sabbatical in Kathmandu for two months but still have income as if you were working at Delta full time.
Wealth in a retirement account is fairly useless for those that aspire to become financially free at an early age and that if the majority of your net worth creation is going on in that account alone, that you are in big trouble.
Leave DPSP Cash alone. Secure the Bag
He bought a financed car.
He bought a luxury home with a huge mortgage.
He failed to build any significant wealth outside of a retirement account
The third one is the key. DPSP Cash gives you the opportunity to build wealth outside a 401k. Wealth that is a few years helps give you enough cashflow that you can take SIL for your sabbatical in Kathmandu for two months but still have income as if you were working at Delta full time.
Wealth in a retirement account is fairly useless for those that aspire to become financially free at an early age and that if the majority of your net worth creation is going on in that account alone, that you are in big trouble.
Leave DPSP Cash alone. Secure the Bag
I think the problem is that most pilots don't invest that DPSP cash, I know not your problem (or mine) but unless there is someplace to put the money, there is no reason to negotiate for more retirement dollars. Would this be a correct view?
#249
So I am assuming that you would be an advocate of not adding anything more to the retirement funding and letting the current 16% funding be it forever (actually if that is the case I would recommend bumping it up to 20% so you are full at $55k on $275k wages).
I think the problem is that most pilots don't invest that DPSP cash, I know not your problem (or mine) but unless there is someplace to put the money, there is no reason to negotiate for more retirement dollars. Would this be a correct view?
I think the problem is that most pilots don't invest that DPSP cash, I know not your problem (or mine) but unless there is someplace to put the money, there is no reason to negotiate for more retirement dollars. Would this be a correct view?
#250
Gets Weekends Off
Joined APC: Apr 2008
Position: DAL FO
Posts: 2,169
So I am assuming that you would be an advocate of not adding anything more to the retirement funding and letting the current 16% funding be it forever (actually if that is the case I would recommend bumping it up to 20% so you are full at $55k on $275k wages).
I think the problem is that most pilots don't invest that DPSP cash, I know not your problem (or mine) but unless there is someplace to put the money, there is no reason to negotiate for more retirement dollars. Would this be a correct view?
I think the problem is that most pilots don't invest that DPSP cash, I know not your problem (or mine) but unless there is someplace to put the money, there is no reason to negotiate for more retirement dollars. Would this be a correct view?
I know your post wasn’t directed at me, but to answer your question: yes!
First priority, as you mention, BEFORE even entertaining any of these other schemes should be to have all/most pilots hit the 415c limit on company contributions.
Then maybe entertain some smaller other ways to shelter a few $ from taxes (higher company HSA funding, higher per diem, lower health insurance premiums, expense reimbursements like uniforms, dry cleaning, etc)
After that, we don’t need ALPA forcing us into another qualified plan. Just show us the $ in payrates*
*before somebody calls me a wh0re, I’m only referring to the $ part of the equation. Give each pilot the cash and allow him to direct it as he sees fit. Gunfighter pretty clearly shows the tax arbitrage isn’t all its being portrayed to be. And the tax deferral is the only benefit IMO to an otherwise subpar investment suggestion.
*QOL (time off!) and Scope are the other two biggies for me
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