Denny Crane

Well good for him. I really and truly hope it all works out for him and by extension everyone else new or newer to the industry.

In an earlier post I gave out a number of $64,000 in saved taxes. Basically this is all I would save and the program would have to start next month to do so. So for me, this is really a negligible savings program. With the amount of time I think its going to take to negotiate our next contract, it will significantly reduce any savings to me. I started this thread with whole idea of trying to get pilots (especially younger ones) to go to the roadshow to educate themselves on what is being discussed and what might be available to them. I would hope that they might take the advice of someone who just completed 30 years to the day today. I've been very lucky to be gainfully employed and never furloughed. But I definitely HAVE seen a few up and down cycles in the industry and the market.

Anyway, that's my perspective. At this point in my career with 5 years to go, the only thing that would make a big difference to me is Delta buying me an annuity for $2000+ a month or the equivalent cash amount. We know this isn't going to happen so I have my hopes set on some sort of retirement health insurance so I wouldn't need to buy supplemental insurance for Medicare. This would be huge and probably save me in the neighborhood of 12K a year. (Thats a guess for 2 people).

By the way, if you guys haven't figured out who I am with the info provided, you should let someone else invest your money!!!!

Denny

JamesBond

I'd much rather pay lower taxes later as well.

JamesBond

ABSOLUTELY agree. And I haven't figured out who you are, but I am not trying either.

Trip7

Absolutely spot on. We need folks like you and LeineLodge on the R&I Committee. This is the type of information that should be presented at R&I Road Shows.

Planetrain

Denny,

I still am unclear on what happens to your $32k/yr that goes into the DB plan aka Market Cash Balance Plan. I don't know enough to make an analysis on taxes because it is unclear what the income stream is in retirement based upon that figure. What did the seminar say? (Btw, your tax bracket is 35% for marginal income $400-600k.)

I have heard of variable defined benefit plans and am largely against them because of low rate of return and fees. I am however a little intrigued about "market based cash balance plans." The union is a little silent on this substrate of variable DB. (Re-read 18-02 under variable DB.)


I learned a lot about them here: https://www.cashbalancedesign.com/re...h-balance-101/

You know how John McCain was called a RINO? The Cash Balance plan seems like a D-BINO, a Defined Benefit plan In Name Only. More like a raising of the 401k contribution cap with a set rate of return for that subset sum.

If I'm reading correctly, there are 4 key distinctions that may be alluring:

1) I can roll the accrued balance into an IRA at retirement. This is huge. I was under the impression that the DB HAD to be an annuity. Aka, fixed amount income stream.
2) There is an IRS lifetime cap on max contributions of about $2.6M. This drives a yearly, age-based, max contribution limit. The younger you are, the less you are allowed to contribute in a certain year, thus capping younger pilots from being forced to contribute too much to a low-return plan. It also allows older pilots to contribute more in their high-income years to a plan with less volatility, despite lower returns... similar to an age-appropriate risk glidepath of target-retirement-date mutual funds. Recap: as you age, you can contribute more, the money stays in your name. It isn't robbed from you to pay the old guy.
3) While the investments are co-mingled, you have an account, in your name. It is Qualified and ERISA protected from creditors through bankruptcy.
4) If Delta gets out of 7.5% payroll tax on this money, the bargaining credit could be applied to pay raises.

The only negative is the rate of return is fixed at plan inception, usually linked to 30-yr-treasury. I saw in reading that the limits are typically 2-8%ROR, with most at 4-6%... called the ICR, Interest Credit Rate. There were some IRS administrative penalties if the plan exceeded the set ICR. A lot would need to be explored and communicated regarding the ICR. This is the heartbeat of the investment.

If there were some guardrails to this plan, I may be softening my negative stance on this particular part of DB.
If fees really are <1%;
If the money is in my name/personal account;
If the income threshold to participate in the DB plan was raised a little higher than $275k that we are discussing as the DPSP Cash threshold. Maybe $315k? (The tax bracket start for 32% married filling jointly.)


Come on union, put some info with examples out there so we can read.

Spudhauler

From 1970 through 2016 the S and P averaged 10.31% returns while real estate averaged 11.42%. Better, sure, but when you add in oversight and management stuff, it doesn't seem like a much better investment plan in the long term. To be fair, I'm not a real estate guy, so I'd be happy to have you prove me wrong!

Trip7

Precisely. Now add in increased returns due to leverage, additional returns due to tax efficiency(ie Positive cash flow on a property but IRS sees it as a loss due to depreciation) and Real Estate comes out far ahead.

Spudhauler

Can you show me this long term? Human nature, both in the market and real estate, factors in. Many people locked in their losses in the last downturn. I'd be interested to see how your scenario plays out over a 10-15 year timeframe. Thanks.

Trip7

He's an overview from a successful investor:

I like real estate for retirement savings. Here is why. I’ll keep this over-simplified

The strength of real estate is:

1) Leverage

2) Other people’s money

3) Inflation

LEVERAGE

If you buy a $400,000 house and put down 20% - that is $80,000 down plus closing costs. (You could put down less such as $60,000).

You now have a $320,000 mortgage that costs about: $1,200 per month in mortgage plus taxes. Lets just round up to $1,500 per month. You can buy a different priced house.

Where I live there is no problem covering this cost on a $400,000 property. (Different parts of the country have different rates for rent.)

This is LEVERAGE: You have a $400,000 investment that COST YOU $80,000 of cash. You have “leveraged” the power of your money 5 to 1 the day you buy. Five TIMES the amount you put in - is now active and in play.

OTHER PEOPLE’S MONEY

You rent the house out and pay it off over 25 years with other people’s money.

25 years from now you own this house outright!

You can sell it for cash or continue to rent it for retirement income.

If the market never went up a dime for the next 25 years (which is impossible) - you own a $400,000 (income producing) asset.

You just turned $80,000 into $400,000. You FIVE folded your money in 25 years for a 400% gain by simply paying off the house.

There is all kinds of ways to define this gain: A 400% gain overall. a 16% per annum linear gain, or approximately 6.5% compounded for 25 years.REMEMBER: This is assuming a 0% inflation.

INFLATION

In the real world we live with annual inflation compounding at a rate of about 3.0% per year.

For those of you who don’t really think about what inflation is or does: Consider it to be like rising water. It can be either destructive or beneficial.

It can lift a “buoyant” asset like a boat, or swamp a fixed asset like a parked car.

Both of these are “vehicles” so to speak - Investment vehicles. One gets flooded by the ever rising water and one gets a free lift. Lots of mutual fund sales-guys hate talking about this.

Inflation erodes the “buying power” of money. That is why near cash savings (anything like savings accounts or T-Bill, etc) - that don't go up with inflation get slowly drowned - losing their REAL value.

I looked this up: A brand new Corvette convertible in 1970 was $4,500. That was A LOT OF MONEY in those days. (People made like $2 an hour). Today a new corvette is about $75,000.

Just like today - In 1970 it was a dream car that most couldn’t afford.

So in 1970 - an investment advisor told people to save their pennies and invest in Treasury Bills and Bonds etc, …Wait for it… Because some day - a long time later - they would be “RICH”. They could buy that Corvette.

But no one told them it was an illusion. That corvette would always be just out of reach as its price went up and up and up (with inflation).

Nothing has changed. The price of milk and everything has gone up by the same multiplier and continues to do so. You know what else goes up by that same multiplier? Real Estate (and gold). They rise on inflation.

SO…At 3.0 % compounded inflation:

Your $400,000 house in 25 years will be worth $900,000.

That is 11 times your investment, or a 1000% gain

You will actually have a $900,000 house - Paid for by other people - from $80,000 today.

Buy two or three houses and you are retiring with Millions.

It doesn't end there. Inflation impacts rents as well. So the renters will be paying $3,500 a month for rent on a house with no mortgage. BUT you will need that $3,500 because Corvettes will cost $180,000 and milk will be $10.

That is the power of real estate.

The stock market doesn't do that.

BANKS ARE NOT YOUR FRIEND

This is an admittedly simple model. That is what a “model” is. Negative commenters will write about: houses need repairs, you have to be a landlord, the RE market could crash, you can't count inflation gains as investment gains - thats not fair.

It’s true. Being a landlord is difficult. Its not like signing papers at the bank, sacrificing your pay-check for 25 years, and passively showing up when you are 55 to find your investments can't buy a car in the year 2042.

Real estate investing takes education and work, both now and later. Its not for everyone. I could tell you how to do this - so thats no problem, but its only for a certain kind of person.

The strength of real estate is that its not rocket science. If you survive at your job everyday, you can survive at real estate.

There are equal counter-criticisms of the “stock market”. It crashes, companies go bankrupt, it gets eaten by inflation, you can't leverage your investment. If you buy $20K of stocks - that’s all you have is $20K in the market.

I am cynical about Mutual Fund commission salespeople (called “Financial Planners”) because its not in their interest for you to read this content, or think about what inflation does.

Its not in the interest of their employer (the bank) for you to stop depositing your savings for them to lend out to others - for profit.

The banks are an industry. They are not your friend. Their employees are NOT social workers for the Red Cross. They don't even have finance degrees. Many used to work at Best Buy selling car stereos on commission.

My advice is mix up your investments, but seriously consider the benefit of a hands on investment that rises with inflation, protecting you from whatever crazy economy comes along.



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jetnwa

Denny,

Thank you for taking the time to give us insight on the seminar. I am looking at the option of another income stream in retirement. The CH-11 aspect was the deal breaker for me, so, if not an issue, a potential to be looked upon in negotiations.

Thanks again...