Dalpa R&I Roadshow
09-13-2018, 07:44 AM
#81
Line Holder
Joined APC: Oct 2010
Position: 320B
Posts: 46
Trip7,
I am going to take the other side of your trade and bring some "risk management" issues I would have dealing with physical real estate.
1. Liquidity risk. Real estate is a highly capital intensive and potentially an illiquid asset to dump in a major economic downturn. Leverage can cut both ways, you are still on the hook to service the debt in such a situation. One had better have exceptional lines of credit, access to liquidity etc, to weather such a financial storm.
2. Interest Rate Risk. Rates have been rising and potentially back to more historic norms. The days of easy monetary policy are over for the most part. Rising interest rates will mean higher levels of cash flow needed to service the debt.
3. Tenant Risk. I am not talking about "Pacific Heights". More along the lines, will I have a tenant at all times to service with OPM? Will they be good tenants and not destroy the property? Will they do things like "Cook Meth" where I will be on the hook for clean up/damages? I just wouldn't want to deal with tenants in general whether on my own or via a property manager.
4. Litigation Risk. Even if I have each property under their own corporate veils of a LLC eg, at some point, there is a potential I will be involved with litigation. It could be a slip and fall where I am sued or I have to go after a tenant who I have to evict them and most likely not get a judgment against them for income loss or damage. One can't get blood from some turnips.
5. Demographic Risk. There is no assurance real estate values will be worth more than you owe 25 years from now. Case in point, the retiring Baby Boomer generation who have the potential to all "Sell" and downsize affecting the overall supply and value of homes on the market.
I have a degree in Finance. I run my own money and do my own risk management analysis on investments. There are people who have made a lot of money in real estate but it isn't for me. The only real estate investment exposure I have had is via a REIT. I exited that position when rates started to rise (not investment advice).
As always, do your own homework as your miles may vary....
I am going to take the other side of your trade and bring some "risk management" issues I would have dealing with physical real estate.
1. Liquidity risk. Real estate is a highly capital intensive and potentially an illiquid asset to dump in a major economic downturn. Leverage can cut both ways, you are still on the hook to service the debt in such a situation. One had better have exceptional lines of credit, access to liquidity etc, to weather such a financial storm.
2. Interest Rate Risk. Rates have been rising and potentially back to more historic norms. The days of easy monetary policy are over for the most part. Rising interest rates will mean higher levels of cash flow needed to service the debt.
3. Tenant Risk. I am not talking about "Pacific Heights". More along the lines, will I have a tenant at all times to service with OPM? Will they be good tenants and not destroy the property? Will they do things like "Cook Meth" where I will be on the hook for clean up/damages? I just wouldn't want to deal with tenants in general whether on my own or via a property manager.
4. Litigation Risk. Even if I have each property under their own corporate veils of a LLC eg, at some point, there is a potential I will be involved with litigation. It could be a slip and fall where I am sued or I have to go after a tenant who I have to evict them and most likely not get a judgment against them for income loss or damage. One can't get blood from some turnips.
5. Demographic Risk. There is no assurance real estate values will be worth more than you owe 25 years from now. Case in point, the retiring Baby Boomer generation who have the potential to all "Sell" and downsize affecting the overall supply and value of homes on the market.
I have a degree in Finance. I run my own money and do my own risk management analysis on investments. There are people who have made a lot of money in real estate but it isn't for me. The only real estate investment exposure I have had is via a REIT. I exited that position when rates started to rise (not investment advice).
As always, do your own homework as your miles may vary....
Last edited by jetnwa; 09-13-2018 at 08:16 AM.
09-13-2018, 07:52 AM
#82
Gets Weekends Off
Joined APC: Apr 2008
Position: DAL FO
Posts: 2,167
Also, the more you un-mask yourself, the more I'm pretty sure we met last year. Were you on a 757 jumpseat from SEA-JFK for a last minute GS to CDG?
As to losing DPSP CASH->killing of the mega backdoor roth, maybe I should have used the term hobble/cripple instead of kill.
I'll try to explain my thinking without going too longwinded.
IMO the whole reason to run the mega backdoor roth is as an attempt to level one's buckets of money wrt tax treatment.
In order of desirability to the retiree, these buckets are:
1. Tax free - HSA $ for healthcare
2. Post tax accounts - HSA $ for non-healthcare spending, ROTH accts & taxable brokerage accts
3. Pre tax accounts/income streams - traditional IRA's, 401ks (including DPSP) & any SS, pensions, other work, etc
Money from buckets 1 & 2 are accessible without creating a tax bill (taxes already paid) while bucket 3 WILL result in ordinary income. The more you have, the higher your retiree tax bracket, and so on.
For most of us, bucket 3 is going to be the largest by far. If bucket 3 becomes too large (great problem to have) you will be in the same or higher tax bracket in retirement vs. your working years. Adding a MBCBP or VAP does not alleviate this problem, as both kick off $ that will be taxed as ordinary income.
Most of us doing the mega backdoor roth, are doing so in an attempt to increase our bucket 2, while simultaneously reducing bucket 3. This provides more options in retirement, at the expense of paying more taxes in the current year. The quick version, for those following along is to juice your DPSP with 401a (after-tax contributions) and then quickly take an "in service distribution" (meaning the $ leaves your DPSP while you still work for Delta), rolling that $ OUT to a roth IRA. This $ will never be taxed again.
Looking way down range, at 70.5 years old the IRS starts forcing you to take required minimum distributions from qualified $ in bucket 3. Those of us anticipating a large bucket 3, are consequently expecting to be forced into a high tax bracket at that point, and the mega backdoor roth is an attempt to mitigate that somewhat.
Just food for thought, $1.5M (a number I see deadzoners throwing around a lot) in today's $ is equal to ~$3.6M in 30 years, at 3% inflation. A 70 year old with $3.6M in their DPSP will be required to take a distribution of ~$131,000, increasing each year, whether they need to take that money or not.
That all goes to illustrate why someone might want to use the mega backdoor roth strategy.
The reason this would be hobbled by re-purposing DPSP CASH, is I would now be more reluctant to reach the 415c limit early - to avoid pushing excess $ into a vehicle that will be artificially limited to 5% upside (while still exposing downside), plus likely subject to hefty mgmt fees of 1% or more. I totally get the desire to minimize tax burden (and we should do that to the max possible) but not to the extent of letting the tax tail wag the investment dog.
JMO, DPSP cash invested efficiently, and getting long term historical stock market returns far outweighs this proposal to artificially hold down returns, while simultaneously subjecting that $ to mgmt fees and leaving it in bucket 3.
***Caveat - I did watch the R&I webinar on the dal alpa page, and they could be onto something here IF the MBCBP is funded separately by the company and not from DPSP cash (self funding at lower returns IMO). Also, it would have to be designed to capture, or nearly capture, actual market returns vs. trying to "smooth" it by artificially holding down returns. I'd also preference this behind increasing our current DC, HSA $, etc. Otherwise, just give us the $ in our pay rates, and let us invest in our own bucket #2's as we see fit.
09-13-2018, 08:07 AM
#83
Gets Weekends Off
Joined APC: Apr 2008
Position: DAL FO
Posts: 2,167
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.
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.
Worth a re-read
09-13-2018, 08:12 AM
#84
Gets Weekends Off
Thread Starter
Joined APC: Sep 2008
Position: Kickin’ Back
Posts: 6,971
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.)
Yeah, I know my tax bracket is 35%. Add in 1.9% for Alpa dues and State income tax if you live in state that does so. It's not hard to reach 40%. 40% was what they used in the roadshow. I don't think it was unreasonable. With my VERY limited understanding your income stream is going to depend on how long your investment horizon is. As I was leaving they were putting up some numbers that said (I believe based on 25 or 30 year time line to retirement) that maxing out the 401k would fund 30% of your then FAE. If the same pilot participated in this Plan s/he would have another 30% FAE in tax deferred income. These numbers are based on a projected FAE at the time of retirement, not current.
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.)
Going by what the R&I committee members said, there are more than 23,000 of these plans out there. They really only benefit highly compensated employees. Right now these are just exploratory roadshows. They are trying to see if the pilot group as a whole are interested in pursuing some way to shelter more money from taxes. I've just been talking about the one that intrigued me the most. Implementing a Plan like this would also be advantageous (to a certain extent) to the Company also. They could avoid paying payroll taxes on over $132 million a year........that is growing every year. That is exactly the type of plan they talked about.
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.
this is exactly what I have said in any number of posts.
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.
Sounds good to me. Don't see a problem.
3) While the investments are co-mingled, you have an account, in your name. It is Qualified and ERISA protected from creditors through bankruptcy.
Again, as I posted. It is also part of your estate. If you go to the great beyond, your heirs will get it. This was not true of the VEBA and was a huge reason I was against the VEBA.
4) If Delta gets out of 7.5% payroll tax on this money, the bargaining credit could be applied to pay raises.
My guess is the savings to the Company would be applied to setting up the program and administering it in future years.
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.
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.)
Yeah, I know my tax bracket is 35%. Add in 1.9% for Alpa dues and State income tax if you live in state that does so. It's not hard to reach 40%. 40% was what they used in the roadshow. I don't think it was unreasonable. With my VERY limited understanding your income stream is going to depend on how long your investment horizon is. As I was leaving they were putting up some numbers that said (I believe based on 25 or 30 year time line to retirement) that maxing out the 401k would fund 30% of your then FAE. If the same pilot participated in this Plan s/he would have another 30% FAE in tax deferred income. These numbers are based on a projected FAE at the time of retirement, not current.
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.)
Going by what the R&I committee members said, there are more than 23,000 of these plans out there. They really only benefit highly compensated employees. Right now these are just exploratory roadshows. They are trying to see if the pilot group as a whole are interested in pursuing some way to shelter more money from taxes. I've just been talking about the one that intrigued me the most. Implementing a Plan like this would also be advantageous (to a certain extent) to the Company also. They could avoid paying payroll taxes on over $132 million a year........that is growing every year. That is exactly the type of plan they talked about.
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.
this is exactly what I have said in any number of posts.
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.
Sounds good to me. Don't see a problem.
3) While the investments are co-mingled, you have an account, in your name. It is Qualified and ERISA protected from creditors through bankruptcy.
Again, as I posted. It is also part of your estate. If you go to the great beyond, your heirs will get it. This was not true of the VEBA and was a huge reason I was against the VEBA.
4) If Delta gets out of 7.5% payroll tax on this money, the bargaining credit could be applied to pay raises.
My guess is the savings to the Company would be applied to setting up the program and administering it in future years.
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.
My understanding, the money is in your name/personal account. You just don't have the ability to self-direct the investment.
I don't know if that's negotiable or not (the income threshold). Its a good question to ask at the roadshow!
Again, I would highly encourage everyone to go to one of these roadshows.
You can also direct questions to the R&I committee via email. It may take awhile but I think you'd get a answer.
Denny
09-13-2018, 08:23 AM
#85
Gets Weekends Off
Joined APC: Feb 2011
Posts: 766
Some thoughts so far..... I think we all agree that the company should me making significant contributions to our retirement accounts. We would all certainly like to see more, no doubt about it and I will always vote for that. Where those additional funds end up is what seems to be in question. I am absolutely open to finding additional ways to maximize tax savings now and increase account balance in the future. Unfortunately, much of this is just educated guessing.
A lot of people are saying, this mandatory annuity option (that's EXACTLY what this is) may not be best for "you" but it may be whats best for the collective. So, I think we need to define what it is that we think is best for our labor group. Personally, to me what is best for the group would be MORE MONEY.
To me, this annuity option could lead to ADDITIONAL money in retirement, yes. However, we would not be realizing the full potential of our money. That is to say, this option will most certainly stunt the growth of our funds and it will not result in our money working for us. Instead, we will be paying a management company management fees, we will be paying fees on the annuity and we will be getting a small return as a result. We will be working to pay the management company.
I don't believe we should be letting taxes drive this decision, I believe it is being very short sighted. To say we should vote for this NOW, because my tax bill NOW is high isn't looking that the entire picture. Yes, a lot of us are paying large tax bills right now, but I am focused on 30 years from now, growing and managing my own money and creating WEALTH for the future. If we invest that way and generate real wealth, the taxes will take care of itself. Yes, we could have a tax advantage now, but perhaps when we do retire, the tax rates will be significantly higher than they are now, even if our financial needs are lower in the future. It was mentioned that these contributions will be rolled into an IRA upon retirement; consider a person that contributes to this over to course of 30 years will then be required to make RMDs from this roll over into an IRA in addition to their 401k RMDs, Traditional IRA RMDs and so on. You may very well end up in a tax bracket which is not optimal, one that you were not planning on. It seems people think they'll be in a much lower tax bracket in retirement than they are now, but that is just a guess. With this option the government will FORCE you into a higher tax bracket. Being FORCED to make distributions from this option is a huge negative to me. I'd rather invest my own after tax money, have the option to leave it as is when I retire or, cash in and pay long term capital gains (assuming they still exist in the future). You could convert these TIRA funds into Roth funds to avoid RMDs, but that too will create a tax bill and given the short window (a little over 5 years) before you hit the RMD age and given the potential balance of these accounts, the tax bill will be significant. Converting 2.6 million dollars from a TIRA to a Roth over 5 years won't be cheap.
Personally, I think we would be better off having the company fully funding our HSA accounts (which can be indexed at present) AFTER they fully fund the maximum allowed by the IRS in our retirement accounts. These funds can be withdrawn TAX FREE in retirement and assuming you keep your medical receipts over the course of your career, you could very easily use these funds in retirement to pay for regular expenses or medical expenses if you so choose.
So what is the solution? To me, it is education. I completely reject the fact that this is the best option for the collective because people "don't understand investing". We should make money management and investing for retirement required curriculum. So, I am against the fact that I have to accept 0-2% returns after inflation over 30 years because people can't be bothered learn about investing, saving and money management. This could cost me millions if we go this option, a price I will have to pay because people don't want to put in the effort. It's really as simple as indexing, set it and forget it. I believe even after we pay ordinary income taxes, over time, we would be much better off, although this may not necessarily be true for those retiring in the next few years.
I would like options where nothing mandatory, unless the rules and flexibility for this new account are similar to that of our current 401k. Perhaps, the deferred compensation plan is a good option as it is optional, but whether or not we will be able to self manage those funds has yet to be seen.
A lot of people are saying, this mandatory annuity option (that's EXACTLY what this is) may not be best for "you" but it may be whats best for the collective. So, I think we need to define what it is that we think is best for our labor group. Personally, to me what is best for the group would be MORE MONEY.
To me, this annuity option could lead to ADDITIONAL money in retirement, yes. However, we would not be realizing the full potential of our money. That is to say, this option will most certainly stunt the growth of our funds and it will not result in our money working for us. Instead, we will be paying a management company management fees, we will be paying fees on the annuity and we will be getting a small return as a result. We will be working to pay the management company.
I don't believe we should be letting taxes drive this decision, I believe it is being very short sighted. To say we should vote for this NOW, because my tax bill NOW is high isn't looking that the entire picture. Yes, a lot of us are paying large tax bills right now, but I am focused on 30 years from now, growing and managing my own money and creating WEALTH for the future. If we invest that way and generate real wealth, the taxes will take care of itself. Yes, we could have a tax advantage now, but perhaps when we do retire, the tax rates will be significantly higher than they are now, even if our financial needs are lower in the future. It was mentioned that these contributions will be rolled into an IRA upon retirement; consider a person that contributes to this over to course of 30 years will then be required to make RMDs from this roll over into an IRA in addition to their 401k RMDs, Traditional IRA RMDs and so on. You may very well end up in a tax bracket which is not optimal, one that you were not planning on. It seems people think they'll be in a much lower tax bracket in retirement than they are now, but that is just a guess. With this option the government will FORCE you into a higher tax bracket. Being FORCED to make distributions from this option is a huge negative to me. I'd rather invest my own after tax money, have the option to leave it as is when I retire or, cash in and pay long term capital gains (assuming they still exist in the future). You could convert these TIRA funds into Roth funds to avoid RMDs, but that too will create a tax bill and given the short window (a little over 5 years) before you hit the RMD age and given the potential balance of these accounts, the tax bill will be significant. Converting 2.6 million dollars from a TIRA to a Roth over 5 years won't be cheap.
Personally, I think we would be better off having the company fully funding our HSA accounts (which can be indexed at present) AFTER they fully fund the maximum allowed by the IRS in our retirement accounts. These funds can be withdrawn TAX FREE in retirement and assuming you keep your medical receipts over the course of your career, you could very easily use these funds in retirement to pay for regular expenses or medical expenses if you so choose.
So what is the solution? To me, it is education. I completely reject the fact that this is the best option for the collective because people "don't understand investing". We should make money management and investing for retirement required curriculum. So, I am against the fact that I have to accept 0-2% returns after inflation over 30 years because people can't be bothered learn about investing, saving and money management. This could cost me millions if we go this option, a price I will have to pay because people don't want to put in the effort. It's really as simple as indexing, set it and forget it. I believe even after we pay ordinary income taxes, over time, we would be much better off, although this may not necessarily be true for those retiring in the next few years.
I would like options where nothing mandatory, unless the rules and flexibility for this new account are similar to that of our current 401k. Perhaps, the deferred compensation plan is a good option as it is optional, but whether or not we will be able to self manage those funds has yet to be seen.
Last edited by mispoken; 09-13-2018 at 08:42 AM.
09-13-2018, 08:34 AM
#86
Gets Weekends Off
Joined APC: May 2015
Position: Power top
Posts: 2,960
No plan is going to be perfect for everyone. Like spending negotiating capital on improving say, reserve. It will never help me or a large percentage of us. But I won't say no just because it doesn't help me.
09-13-2018, 08:46 AM
#87
Gets Weekends Off
Joined APC: Feb 2011
Posts: 766
No argument there. But, the crux of the issue here is that people resign to the fact that "they don't understand how to invest" or "I'm not a talented investor" or "I can't beat the market, no one can". Why must a group of us be penalized in the form of lost gains because another group can't do something as simple as learning how to invest in a low cost index fund. The solution to this problem IS NOT to pay a financial management company fees to manage a high cost annuity. What is and isn't right for the group aside, I think most could all agree that paying these higher fees out of our own pockets due to a lack of financial literacy on the part of some isn't the solution either.
09-13-2018, 09:00 AM
#88
Gets Weekends Off
Thread Starter
Joined APC: Sep 2008
Position: Kickin’ Back
Posts: 6,971
I absolutely do not think you're stupid - we NEED to be looking at these proposals from all angles. Unlike our current echo chamber MEC, civil disagreement is healthy.
Thanks for that but, when it comes to investing prowess, I am.
Also, the more you un-mask yourself, the more I'm pretty sure we met last year. Were you on a 757 jumpseat from SEA-JFK for a last minute GS to CDG?
That definitely sounds like it could be me!
As to losing DPSP CASH->killing of the mega backdoor roth, maybe I should have used the term hobble/cripple instead of kill.
I'll try to explain my thinking without going too longwinded.
IMO the whole reason to run the mega backdoor roth is as an attempt to level one's buckets of money wrt tax treatment.
In order of desirability to the retiree, these buckets are:
1. Tax free - HSA $ for healthcare
2. Post tax accounts - HSA $ for non-healthcare spending, ROTH accts & taxable brokerage accts
3. Pre tax accounts/income streams - traditional IRA's, 401ks (including DPSP) & any SS, pensions, other work, etc
I need to make a comment here. In my case, I would reorder that and say 3 should be 2. I've talked to any number of financial advisors and everyone of them agrees with me that, at my income level now and my expected income level in retirement, I should tax defer as much money as I can now. Hence the reason I don't do the backdoor stuff now. For me, it will probably be more advantageous to do a Roth conversion in the first couple of years after retirement.
Money from buckets 1 & 2 are accessible without creating a tax bill (taxes already paid) while bucket 3 WILL result in ordinary income. The more you have, the higher your retiree tax bracket, and so on.
For most of us, bucket 3 is going to be the largest by far. If bucket 3 becomes too large (great problem to have) you will be in the same or higher tax bracket in retirement vs. your working years. Adding a MBCBP or VAP does not alleviate this problem, as both kick off $ that will be taxed as ordinary income.
Mainly because of our lost DB I will not be in a higher tax bracket. But let me run something by you and see what you think. I apologize in advance if this becomes long winded. You are right, it would be a great problem to have, earning more in retirement than when working. Under your scenario I'm guess you (the collective you) would have quite a bit of investments that are outside of any qualified plan. You know, just an ordinary investment account that you pay taxes on, a savings/checking account etc. And by the time you retire there will be a significant amount of money in it, say a million or $500,000? Well then here is what you do with that MBCBP after it's transferred into a traditional IRA. For the first year or more in retirement, you live off of the investment account thats already been taxed. You then do a Roth conversion of however much you want to per year of your MBCBP that is now a traditional IRA. The only income you have is what you make on the investment accounts you are using income in those couple of years plus whatever amount you convert.
Most of us doing the mega backdoor roth, are doing so in an attempt to increase our bucket 2, while simultaneously reducing bucket 3. This provides more options in retirement, at the expense of paying more taxes in the current year. The quick version, for those following along is to juice your DPSP with 401a (after-tax contributions) and then quickly take an "in service distribution" (meaning the $ leaves your DPSP while you still work for Delta), rolling that $ OUT to a roth IRA. This $ will never be taxed again.
I understand the reason guys are doing it but, again, you are making an assumption bucket 2 is better than bucket 3. That is not so all of us. I understand how it's done, I just don't see how getting DPSP CSH has any effect on what you are doing.
Looking way down range, at 70.5 years old the IRS starts forcing you to take required minimum distributions from qualified $ in bucket 3. Those of us anticipating a large bucket 3, are consequently expecting to be forced into a high tax bracket at that point, and the mega backdoor roth is an attempt to mitigate that somewhat.
See my above comment.
Just food for thought, $1.5M (a number I see deadzoners throwing around a lot) in today's $ is equal to ~$3.6M in 30 years, at 3% inflation. A 70 year old with $3.6M in their DPSP will be required to take a distribution of ~$131,000, increasing each year, whether they need to take that money or not.
That all goes to illustrate why someone might want to use the mega backdoor roth strategy.
The reason this would be hobbled by re-purposing DPSP CASH, is I would now be more reluctant to reach the 415c limit early - to avoid pushing excess $ into a vehicle that will be artificially limited to 5% upside (while still exposing downside), plus likely subject to hefty mgmt fees of 1% or more. I totally get the desire to minimize tax burden (and we should do that to the max possible) but not to the extent of letting the tax tail wag the investment dog.
Really what you are saying then is you just don't want your DPSP CSH going into this type of investment. It really has no effect on being able to do the Mega Backdoor Roth.
JMO, DPSP cash invested efficiently, and getting long term historical stock market returns far outweighs this proposal to artificially hold down returns, while simultaneously subjecting that $ to mgmt fees and leaving it in bucket 3.
***Caveat - I did watch the R&I webinar on the dal alpa page, and they could be onto something here IF the MBCBP is funded separately by the company and not from DPSP cash (self funding at lower returns IMO). Also, it would have to be designed to capture, or nearly capture, actual market returns vs. trying to "smooth" it by artificially holding down returns. I'd also preference this behind increasing our current DC, HSA $, etc. Otherwise, just give us the $ in our pay rates, and let us invest in our own bucket #2's as we see fit.
Thanks for that but, when it comes to investing prowess, I am.
Also, the more you un-mask yourself, the more I'm pretty sure we met last year. Were you on a 757 jumpseat from SEA-JFK for a last minute GS to CDG?
That definitely sounds like it could be me!
As to losing DPSP CASH->killing of the mega backdoor roth, maybe I should have used the term hobble/cripple instead of kill.
I'll try to explain my thinking without going too longwinded.
IMO the whole reason to run the mega backdoor roth is as an attempt to level one's buckets of money wrt tax treatment.
In order of desirability to the retiree, these buckets are:
1. Tax free - HSA $ for healthcare
2. Post tax accounts - HSA $ for non-healthcare spending, ROTH accts & taxable brokerage accts
3. Pre tax accounts/income streams - traditional IRA's, 401ks (including DPSP) & any SS, pensions, other work, etc
I need to make a comment here. In my case, I would reorder that and say 3 should be 2. I've talked to any number of financial advisors and everyone of them agrees with me that, at my income level now and my expected income level in retirement, I should tax defer as much money as I can now. Hence the reason I don't do the backdoor stuff now. For me, it will probably be more advantageous to do a Roth conversion in the first couple of years after retirement.
Money from buckets 1 & 2 are accessible without creating a tax bill (taxes already paid) while bucket 3 WILL result in ordinary income. The more you have, the higher your retiree tax bracket, and so on.
For most of us, bucket 3 is going to be the largest by far. If bucket 3 becomes too large (great problem to have) you will be in the same or higher tax bracket in retirement vs. your working years. Adding a MBCBP or VAP does not alleviate this problem, as both kick off $ that will be taxed as ordinary income.
Mainly because of our lost DB I will not be in a higher tax bracket. But let me run something by you and see what you think. I apologize in advance if this becomes long winded. You are right, it would be a great problem to have, earning more in retirement than when working. Under your scenario I'm guess you (the collective you) would have quite a bit of investments that are outside of any qualified plan. You know, just an ordinary investment account that you pay taxes on, a savings/checking account etc. And by the time you retire there will be a significant amount of money in it, say a million or $500,000? Well then here is what you do with that MBCBP after it's transferred into a traditional IRA. For the first year or more in retirement, you live off of the investment account thats already been taxed. You then do a Roth conversion of however much you want to per year of your MBCBP that is now a traditional IRA. The only income you have is what you make on the investment accounts you are using income in those couple of years plus whatever amount you convert.
Most of us doing the mega backdoor roth, are doing so in an attempt to increase our bucket 2, while simultaneously reducing bucket 3. This provides more options in retirement, at the expense of paying more taxes in the current year. The quick version, for those following along is to juice your DPSP with 401a (after-tax contributions) and then quickly take an "in service distribution" (meaning the $ leaves your DPSP while you still work for Delta), rolling that $ OUT to a roth IRA. This $ will never be taxed again.
I understand the reason guys are doing it but, again, you are making an assumption bucket 2 is better than bucket 3. That is not so all of us. I understand how it's done, I just don't see how getting DPSP CSH has any effect on what you are doing.
Looking way down range, at 70.5 years old the IRS starts forcing you to take required minimum distributions from qualified $ in bucket 3. Those of us anticipating a large bucket 3, are consequently expecting to be forced into a high tax bracket at that point, and the mega backdoor roth is an attempt to mitigate that somewhat.
See my above comment.
Just food for thought, $1.5M (a number I see deadzoners throwing around a lot) in today's $ is equal to ~$3.6M in 30 years, at 3% inflation. A 70 year old with $3.6M in their DPSP will be required to take a distribution of ~$131,000, increasing each year, whether they need to take that money or not.
That all goes to illustrate why someone might want to use the mega backdoor roth strategy.
The reason this would be hobbled by re-purposing DPSP CASH, is I would now be more reluctant to reach the 415c limit early - to avoid pushing excess $ into a vehicle that will be artificially limited to 5% upside (while still exposing downside), plus likely subject to hefty mgmt fees of 1% or more. I totally get the desire to minimize tax burden (and we should do that to the max possible) but not to the extent of letting the tax tail wag the investment dog.
Really what you are saying then is you just don't want your DPSP CSH going into this type of investment. It really has no effect on being able to do the Mega Backdoor Roth.
JMO, DPSP cash invested efficiently, and getting long term historical stock market returns far outweighs this proposal to artificially hold down returns, while simultaneously subjecting that $ to mgmt fees and leaving it in bucket 3.
***Caveat - I did watch the R&I webinar on the dal alpa page, and they could be onto something here IF the MBCBP is funded separately by the company and not from DPSP cash (self funding at lower returns IMO). Also, it would have to be designed to capture, or nearly capture, actual market returns vs. trying to "smooth" it by artificially holding down returns. I'd also preference this behind increasing our current DC, HSA $, etc. Otherwise, just give us the $ in our pay rates, and let us invest in our own bucket #2's as we see fit.
I think one of the major reasons they want to fund this thru DPSP CSH is because, first and foremost, they want pilots to fill up their 401k first (no matter whether its Roth or Traditional). Not all pilots have reached this so an increase in DC percentage would allow these pilots to fill it up. On the other side there are 9000+ pilots that already DO fill up the 401k. So instead of funding them separately, an increase in DC percentage will benefit all 14000+ by allowing for more tax deferral.
I do understand your stance and applaud you for your savings and investment prowess. I truly do. I wish I had been smarter about this when I was younger but, IMO, you have to realize you are in the minority in being able to make more money on after tax investments.
Enough for this post!
Denny
09-13-2018, 09:03 AM
#89
Gets Weekends Off
Joined APC: Apr 2007
Posts: 4,613
Trip7,
I am going to take the other side of your trade and bring some "risk management" issues I would have dealing with physical real estate.
1. Liquidity risk. Real estate is a highly capital intensive and potentially an illiquid asset to dump in a major economic downturn. Leverage can cut both ways, you are still on the hook to service the debt in such a situation. One had better have exceptional lines of credit, access to liquidity etc, to weather such a financial storm.
Why would you dump it in an economic downturn?
When the economy is down, you have a larger supply of renters.
You can also protect yourself by investing in linear markets vs cyclical markets so there is less impact on valuations. (i.e. GA, TN, TX, AR not CA, FL, SEA, NYC etc.)
The other big myth destroyer regarding liquidity is that you can do a cash out refi on an income property and tap into the appreciation without paying capital gains taxes. This is a great strategy for an appreciated property in a down economy when rates are often lowered.
As a real estate investor, a down economy is where you build wealth, by using savings and cash flow to buy more income property.
2. Interest Rate Risk. Rates have been rising and potentially back to more historic norms. The days of easy monetary policy are over for the most part. Rising interest rates will mean higher levels of cash flow needed to service the debt.
Residential income property can be financed with 15-30 year fixed rate mortgages. Each individual has a limit of 10 mortgages under current guidelines. After the 10th mortgage, you will fall under commercial lending. My commercial properties have rates fixed from 5-20 years. As a general rule, during a down cycle, when rates are lowered an astute investor will do a cash out refi and buy more properties.
The upside to rising interest rates is that it supports rising rental rates. An increase in rates, takes many first time buyers out of the market and keeps them as renters.
3. Tenant Risk. I am not talking about "Pacific Heights". More along the lines, will I have a tenant at all times to service with OPM? Will they be good tenants and not destroy the property? Will they do things like "Cook Meth" where I will be on the hook for clean up/damages? I just wouldn't want to deal with tenants in general whether on my own or via a property manager.
You will have vacancies. Plan for it in your financial models. Keep a reserve account for vacancies and repairs and fund it monthly with the cash flow when the properties are occupied. Depending on the market 3-15% is a safe vacancy factor. Owning several properties in a few markets is the proper way to build a portfolio. Putting everything into one property or neighborhood is a bad idea. There is risk of damage that can be mitigated with good tenant screening, proper deposit collection and periodic property inspections. All of these can be done by a competent property manager or via self management using a little bit of technology.
4. Litigation Risk. Even if I have each property under their own corporate veils of a LLC eg, at some point, there is a potential I will be involved with litigation. It could be a slip and fall where I am sued or I have to go after a tenant who I have to evict them and most likely not get a judgment against them for income loss or damage. One can't get blood from some turnips.
It could happen, but the risk is minimal. You could also end up a multi-millionaire, with cash flow that exceeds your Delta income within a decade. For a beginning investor (under a few million), an umbrella policy is a better choice than multiple entities. As far as a judgement goes, the turnip may apply for a mortgage one day and will be required to clean up the judgement as a condition of getting financed. Some properties are more likely that others to set you up for this. If your tenants are watching daytime talkshows with loads of ads for slip and fall attorneys you may be at greater risk that renting to someone who is working every day.
5. Demographic Risk. There is no assurance real estate values will be worth more than you owe 25 years from now. Case in point, the retiring Baby Boomer generation who have the potential to all "Sell" and downsize affecting the overall supply and value of homes on the market.
If baby boomers are downsizing en mass, they will be putting upward price pressure on the smaller bread and butter rental homes. Baby boomers selling will not change the supply or demand in the overall market. That is determined by population and construction. If there are a glut of baby boomer McMansions, it presents an opportunity to buy a large home at a low price and turn it into an assisted living facility with contacted care.
I have a degree in Finance. I run my own money and do my own risk management analysis on investments. There are people who have made a lot of money in real estate but it isn't for me. The only real estate investment exposure I have had is via a REIT. I exited that position when rates started to rise (not investment advice).
As always, do your own homework as your miles may vary....
Direct investment in income property is not for everyone. It takes time and effort like mastering aviation or any other profession. For those with the temperament and drive it is the most historically proven asset class for wealth creation. Passive investment as a limited partner in a syndication with a reputable sponsor may be for some.
I am going to take the other side of your trade and bring some "risk management" issues I would have dealing with physical real estate.
1. Liquidity risk. Real estate is a highly capital intensive and potentially an illiquid asset to dump in a major economic downturn. Leverage can cut both ways, you are still on the hook to service the debt in such a situation. One had better have exceptional lines of credit, access to liquidity etc, to weather such a financial storm.
Why would you dump it in an economic downturn?
When the economy is down, you have a larger supply of renters.
You can also protect yourself by investing in linear markets vs cyclical markets so there is less impact on valuations. (i.e. GA, TN, TX, AR not CA, FL, SEA, NYC etc.)
The other big myth destroyer regarding liquidity is that you can do a cash out refi on an income property and tap into the appreciation without paying capital gains taxes. This is a great strategy for an appreciated property in a down economy when rates are often lowered.
As a real estate investor, a down economy is where you build wealth, by using savings and cash flow to buy more income property.
2. Interest Rate Risk. Rates have been rising and potentially back to more historic norms. The days of easy monetary policy are over for the most part. Rising interest rates will mean higher levels of cash flow needed to service the debt.
Residential income property can be financed with 15-30 year fixed rate mortgages. Each individual has a limit of 10 mortgages under current guidelines. After the 10th mortgage, you will fall under commercial lending. My commercial properties have rates fixed from 5-20 years. As a general rule, during a down cycle, when rates are lowered an astute investor will do a cash out refi and buy more properties.
The upside to rising interest rates is that it supports rising rental rates. An increase in rates, takes many first time buyers out of the market and keeps them as renters.
3. Tenant Risk. I am not talking about "Pacific Heights". More along the lines, will I have a tenant at all times to service with OPM? Will they be good tenants and not destroy the property? Will they do things like "Cook Meth" where I will be on the hook for clean up/damages? I just wouldn't want to deal with tenants in general whether on my own or via a property manager.
You will have vacancies. Plan for it in your financial models. Keep a reserve account for vacancies and repairs and fund it monthly with the cash flow when the properties are occupied. Depending on the market 3-15% is a safe vacancy factor. Owning several properties in a few markets is the proper way to build a portfolio. Putting everything into one property or neighborhood is a bad idea. There is risk of damage that can be mitigated with good tenant screening, proper deposit collection and periodic property inspections. All of these can be done by a competent property manager or via self management using a little bit of technology.
4. Litigation Risk. Even if I have each property under their own corporate veils of a LLC eg, at some point, there is a potential I will be involved with litigation. It could be a slip and fall where I am sued or I have to go after a tenant who I have to evict them and most likely not get a judgment against them for income loss or damage. One can't get blood from some turnips.
It could happen, but the risk is minimal. You could also end up a multi-millionaire, with cash flow that exceeds your Delta income within a decade. For a beginning investor (under a few million), an umbrella policy is a better choice than multiple entities. As far as a judgement goes, the turnip may apply for a mortgage one day and will be required to clean up the judgement as a condition of getting financed. Some properties are more likely that others to set you up for this. If your tenants are watching daytime talkshows with loads of ads for slip and fall attorneys you may be at greater risk that renting to someone who is working every day.
5. Demographic Risk. There is no assurance real estate values will be worth more than you owe 25 years from now. Case in point, the retiring Baby Boomer generation who have the potential to all "Sell" and downsize affecting the overall supply and value of homes on the market.
If baby boomers are downsizing en mass, they will be putting upward price pressure on the smaller bread and butter rental homes. Baby boomers selling will not change the supply or demand in the overall market. That is determined by population and construction. If there are a glut of baby boomer McMansions, it presents an opportunity to buy a large home at a low price and turn it into an assisted living facility with contacted care.
I have a degree in Finance. I run my own money and do my own risk management analysis on investments. There are people who have made a lot of money in real estate but it isn't for me. The only real estate investment exposure I have had is via a REIT. I exited that position when rates started to rise (not investment advice).
As always, do your own homework as your miles may vary....
Direct investment in income property is not for everyone. It takes time and effort like mastering aviation or any other profession. For those with the temperament and drive it is the most historically proven asset class for wealth creation. Passive investment as a limited partner in a syndication with a reputable sponsor may be for some.
DYODD, YMMV, Returns may not be typical, Actors representing actual clients, Side effects may include..., etc...
09-13-2018, 09:04 AM
#90
Gets Weekends Off
Joined APC: Dec 2007
Posts: 5,591
Trip7,
I am going to take the other side of your trade and bring some "risk management" issues I would have dealing with physical real estate.
1. Liquidity risk. Real estate is a highly capital intensive and potentially an illiquid asset to dump in a major economic downturn. Leverage can cut both ways, you are still on the hook to service the debt in such a situation. One had better have exceptional lines of credit, access to liquidity etc, to weather such a financial storm.
2. Interest Rate Risk. Rates have been rising and potentially back to more historic norms. The days of easy monetary policy are over for the most part. Rising interest rates will mean higher levels of cash flow needed to service the debt.
3. Tenant Risk. I am not talking about "Pacific Heights". More along the lines, will I have a tenant at all times to service with OPM? Will they be good tenants and not destroy the property? Will they do things like "Cook Meth" where I will be on the hook for clean up/damages? I just wouldn't want to deal with tenants in general whether on my own or via a property manager.
4. Litigation Risk. Even if I have each property under their own corporate veils of a LLC eg, at some point, there is a potential I will be involved with litigation. It could be a slip and fall where I am sued or I have to go after a tenant who I have to evict them and most likely not get a judgment against them for income loss or damage. One can't get blood from some turnips.
5. Demographic Risk. There is no assurance real estate values will be worth more than you owe 25 years from now. Case in point, the retiring Baby Boomer generation who have the potential to all "Sell" and downsize affecting the overall supply and value of homes on the market.
I have a degree in Finance. I run my own money and do my own risk management analysis on investments. There are people who have made a lot of money in real estate but it isn't for me. The only real estate investment exposure I have had is via a REIT. I exited that position when rates started to rise (not investment advice).
As always, do your own homework as your miles may vary....
I am going to take the other side of your trade and bring some "risk management" issues I would have dealing with physical real estate.
1. Liquidity risk. Real estate is a highly capital intensive and potentially an illiquid asset to dump in a major economic downturn. Leverage can cut both ways, you are still on the hook to service the debt in such a situation. One had better have exceptional lines of credit, access to liquidity etc, to weather such a financial storm.
2. Interest Rate Risk. Rates have been rising and potentially back to more historic norms. The days of easy monetary policy are over for the most part. Rising interest rates will mean higher levels of cash flow needed to service the debt.
3. Tenant Risk. I am not talking about "Pacific Heights". More along the lines, will I have a tenant at all times to service with OPM? Will they be good tenants and not destroy the property? Will they do things like "Cook Meth" where I will be on the hook for clean up/damages? I just wouldn't want to deal with tenants in general whether on my own or via a property manager.
4. Litigation Risk. Even if I have each property under their own corporate veils of a LLC eg, at some point, there is a potential I will be involved with litigation. It could be a slip and fall where I am sued or I have to go after a tenant who I have to evict them and most likely not get a judgment against them for income loss or damage. One can't get blood from some turnips.
5. Demographic Risk. There is no assurance real estate values will be worth more than you owe 25 years from now. Case in point, the retiring Baby Boomer generation who have the potential to all "Sell" and downsize affecting the overall supply and value of homes on the market.
I have a degree in Finance. I run my own money and do my own risk management analysis on investments. There are people who have made a lot of money in real estate but it isn't for me. The only real estate investment exposure I have had is via a REIT. I exited that position when rates started to rise (not investment advice).
As always, do your own homework as your miles may vary....
1. Liquidity. Real Estate is indeed Capital Intensive. So is buying stocks and bonds. However, you control much more in assets vs the capital you put in due to leverage. Maintenance and Repairs are also capital intensive however, most smart investors budget that into their cash flow projections when evaluating a purchase. Real Estate is an illiquid investment that is quite expensive to sell off. An investor should not let any investment cut too deep into their emergency fund/personal budget.
2. Interest rate risk is not a factor for residential real estate since your evaluation of the property's cash flow will be based on 15 or 30 year fixed. From a commercial real estate standpoint that may be a factor based on the adjustable rate mortgages those properties are largely financed by but that is ATP Level Real Estate.
3. Tenant Risk. This can be mitigated by thoroughly vetting prospective tenants, or hiring a competent property manager. Problem tenants can still occur and the risk is further mitigated by multiple doors. The more doors you have, the more you reduce the risk of a problem tenant affecting your cash flow.
4. Litigation Risk. Mitigated by hiring a competent property manager and/or Real Estate Lawyer
5. Demographic Risk. Yes, there is an assurance. That assurance is Math. If the you are on a 25 year fixed mortgage and the rent covers the mortgage and then some your property will be paid off in 25 years.
Moreover, as high-income earners and likely accredited investors, many have the opportunity to invest in Real Estate passively as a Limited Partner in a General Partnership. Due diligence is required to find a competent sponsor/general partner/syndicator that has a proven track record of success. Negatives are most hold periods on your money is 5-7 years and high minimum investments (25-100k+)
Lastly, I agree Real Estate is not for everyone. I am a big believer in having the freedom to do as you see fit with your DPSP Cash.
Side note: REITs are highly tax inefficient investments outside of 401ks/IRAs. REITs have to distribute 90% of earning to investors. That's taxed at short-term investment gain rates. No K1, no depreciation benefits. Whether a Direct Owner of Real Estate Property or a Limited Partner, you receive a K1 and tax benefits that drive higher returns. I do hold a sizeable amount of REITs in my 401k (Not investment advice).
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