MBCBP implementation announced…
05-26-2023, 10:23 AM
#111
Gets Weekends Off
Joined APC: May 2012
Posts: 1,157
Not sure why you believe 12% is some sort of unachievable return for pilots. To be in the realm of Warren Buffett a pilot will need to average well in excess of 20% returns over a career. Please don't quote Berkshire Hathaway recent returns from their multi billion dollar operation that has far less options with that sum of money vs a small individual investor.
Warren Buffett as a small individual investor achieved 50% IRR. Peter Lynch achieved 29% IRR over 10 years managing the Fidelity Magellan Fund. Joe Greenblatt averaged 49% returns managing the Gotham Partnership. Lynch and Greenblatt both retired when their funds grew to big to generate excess return from the S&P 500. All of them have wrote books detailing their investment process in a simple, easy to understand format. All say the same thing, investing is not difficult, does not require some sort of high IQ, just basic math and emotional stability.
Warren Buffett as a small individual investor achieved 50% IRR. Peter Lynch achieved 29% IRR over 10 years managing the Fidelity Magellan Fund. Joe Greenblatt averaged 49% returns managing the Gotham Partnership. Lynch and Greenblatt both retired when their funds grew to big to generate excess return from the S&P 500. All of them have wrote books detailing their investment process in a simple, easy to understand format. All say the same thing, investing is not difficult, does not require some sort of high IQ, just basic math and emotional stability.
https://www.lazyportfolioetf.com/com...%20annualized).
05-26-2023, 10:32 AM
#112
Gets Weekends Off
Joined APC: Oct 2014
Posts: 903
They wanted it to be each contract cycle, but the IRS said no. The only people allowed to not participate are those who opt to maintain their status quo benefits now. There will not be a future chance to opt out.
05-26-2023, 11:24 AM
#113
Just lucky to be here
Thread Starter
Joined APC: Sep 2021
Posts: 92
I think you summed it up well. In essence, a pilot with a long time horizon signing up for the MBCBP would be giving up control of their money for a targeted 5% return (IMO will likely be worse than that due to rising interest rates decreasing bond prices) for a tax crap shoot in the future. I would much rather take the known(current tax rate) pay that, and control my own destiny with Real Estate Partnerships and Value investing. If I had 5ish years or less left I'd definitely look into the MBCBP. JMHO... DYODD... YMMV
The cliff notes verbiage in the section under MBCBP indicates their spillover funds will be “self directed”. Sounds like they might get to choose their own investments (perhaps within a selected menu of funds?). Anyone want to chime in on the future possibility of adding additional investment options to our program? Perhaps that hope might cause some of the no’s to reconsider.
-Bo
05-26-2023, 11:29 AM
#114
Senior by choice
Joined APC: Mar 2008
Posts: 427
I don’t think I have ever gotten excess 401k cash. Is it combined company/personal contributions over $56k? So by lowering your own contributions you have some control over how much and how soon in the year money would go into the MBCP? Or is it just the $19k 401 limit?
05-26-2023, 11:42 AM
#115
Just lucky to be here
Thread Starter
Joined APC: Sep 2021
Posts: 92
05-26-2023, 11:53 AM
#116
Gets Weekends Off
Joined APC: Mar 2008
Posts: 3,902
been reading over AA’s version of our contract -er, I mean their brand new AIP…
The cliff notes verbiage in the section under MBCBP indicates their spillover funds will be “self directed”. Sounds like they might get to choose their own investments (perhaps within a selected menu of funds?). Anyone want to chime in on the future possibility of adding additional investment options to our program? Perhaps that hope might cause some of the no’s to reconsider.
-Bo
The cliff notes verbiage in the section under MBCBP indicates their spillover funds will be “self directed”. Sounds like they might get to choose their own investments (perhaps within a selected menu of funds?). Anyone want to chime in on the future possibility of adding additional investment options to our program? Perhaps that hope might cause some of the no’s to reconsider.
-Bo
05-26-2023, 11:59 AM
#117
Gets Weekends Off
Joined APC: Apr 2007
Posts: 4,613
Numbers
1) Income above $330,000 triggers DC excess.
or
2) Individual contributions that create combined annual contribution above $66,000 ($73, 500 with catch up) trigger DC excess.
Scenario 2 is pilot controlled below $330,000 so there is no forced confiscation of DC excess in that scenario (except 2023 where some pilots may have front loaded)
Scenario 1 is a function of $ x hours. Assuming 1,000 hours per year and 10% PS, most Captains hit the threshold. B717 and year 3 A220 will fall just below the mark.
Without premium pay, FOs won't break the threshold. It takes 1,140 hours at the top FO rate to exceed $330,000.
For the portion of the list exceeding $330,000, lets take a look at the impact.
$400k generates $11,200 DC excess which is a rounding error at that income level.
$500k creates $27,200 which is 5% of income and a meaningful amount
$600k creates $43,200 or 7% of your income. This matters.
If your W-2 is 400k, your marginal bracket is 24% after a few deductions, so there is no meaningful tax arbitrage assuming you will be above $190k of taxable income in retirement. Above 90K, you are still in the 22% bracket. If you are currently single and plan to retire married, there is also a huge tax arbitrage opportunity. If you are currently married and retire single, you could be in a higher bracket with lower income. That is an entirely different topic of financial advice.
Earners at 500k have 29% of their annual retirement contribution in the MBCBP. Earners at 600k have 39% of their annual retirement contribution in the MBCBP. It will take disciplined annual rebalancing to correct such a lopsided annual contribution for younger high earners.
Meaningful tax arbitrage happens when you are above $400k of taxable income when contributing and below 400k taxable in retirement. Most of us don't break into the 400 club until 15 years of service. That could happen between 38 and 55. $500k is probably reserved for the 50+ crowd who are also closer to the withdrawal age and benefit from a larger stable return portion.
That range could also come into play for in service withdrawals. This is where the plan could have value for pilots with taxable income outside of Delta.
Next year, we can expect the limit to rise with inflation as do the hourly rates. The 17% DC contribution will create more excess above the threshold.
400k (adjusted upward) generates $11,900
500k (adjusted upward) generates $28,900
600k (adjusted upward) generates $45,900
I find it interesting that real estate seems to be the most commonly mentioned asset for those opting out. With a sample size of one, I can attest that my "taxable" real estate portfolio has dwarfed the returns on my tax advantaged Delta plan. At 57, I would opt in and take in service withdrawals as I see fit. Under 50 and making over 400k, there are too many great options and that money shouldn't be tied up for a decade. In between the two are thousands of individual calculations without a clear answer. If you don't expect to exceed 400K of annual earnings until reaching your 50s, the impact is minimal no matter what you decide.
My opinion is the absolute best answer*
*for me
DYODD, YMMV, BWYWWWYB,
or
2) Individual contributions that create combined annual contribution above $66,000 ($73, 500 with catch up) trigger DC excess.
Scenario 2 is pilot controlled below $330,000 so there is no forced confiscation of DC excess in that scenario (except 2023 where some pilots may have front loaded)
Scenario 1 is a function of $ x hours. Assuming 1,000 hours per year and 10% PS, most Captains hit the threshold. B717 and year 3 A220 will fall just below the mark.
Without premium pay, FOs won't break the threshold. It takes 1,140 hours at the top FO rate to exceed $330,000.
For the portion of the list exceeding $330,000, lets take a look at the impact.
$400k generates $11,200 DC excess which is a rounding error at that income level.
$500k creates $27,200 which is 5% of income and a meaningful amount
$600k creates $43,200 or 7% of your income. This matters.
If your W-2 is 400k, your marginal bracket is 24% after a few deductions, so there is no meaningful tax arbitrage assuming you will be above $190k of taxable income in retirement. Above 90K, you are still in the 22% bracket. If you are currently single and plan to retire married, there is also a huge tax arbitrage opportunity. If you are currently married and retire single, you could be in a higher bracket with lower income. That is an entirely different topic of financial advice.
Earners at 500k have 29% of their annual retirement contribution in the MBCBP. Earners at 600k have 39% of their annual retirement contribution in the MBCBP. It will take disciplined annual rebalancing to correct such a lopsided annual contribution for younger high earners.
Meaningful tax arbitrage happens when you are above $400k of taxable income when contributing and below 400k taxable in retirement. Most of us don't break into the 400 club until 15 years of service. That could happen between 38 and 55. $500k is probably reserved for the 50+ crowd who are also closer to the withdrawal age and benefit from a larger stable return portion.
That range could also come into play for in service withdrawals. This is where the plan could have value for pilots with taxable income outside of Delta.
Next year, we can expect the limit to rise with inflation as do the hourly rates. The 17% DC contribution will create more excess above the threshold.
400k (adjusted upward) generates $11,900
500k (adjusted upward) generates $28,900
600k (adjusted upward) generates $45,900
I find it interesting that real estate seems to be the most commonly mentioned asset for those opting out. With a sample size of one, I can attest that my "taxable" real estate portfolio has dwarfed the returns on my tax advantaged Delta plan. At 57, I would opt in and take in service withdrawals as I see fit. Under 50 and making over 400k, there are too many great options and that money shouldn't be tied up for a decade. In between the two are thousands of individual calculations without a clear answer. If you don't expect to exceed 400K of annual earnings until reaching your 50s, the impact is minimal no matter what you decide.
My opinion is the absolute best answer*
*for me
DYODD, YMMV, BWYWWWYB,
05-26-2023, 12:12 PM
#118
Gets Weekends Off
Joined APC: Sep 2009
Posts: 129
I think any qualified financial advisor would probably tell you exactly the opposite. The tax arbitrage available through one of these plans is amplified by time. The power of compounding interest comes from time, and the youngest pilots will benefit from these plans the most.
Again, don’t take anyone on this web board’s word on this, including mine. Seek input from a qualified advisor that you trust and make the best decision for your situation.
Again, don’t take anyone on this web board’s word on this, including mine. Seek input from a qualified advisor that you trust and make the best decision for your situation.
05-26-2023, 12:26 PM
#120
Gets Weekends Off
Joined APC: Sep 2009
Posts: 129
When you receive DC excess, you are paying the highest marginal tax rate on those dollars, because they are effectively the last dollars you earn. Depending on your state, you may be losing upwards of 40+% of your spill cash to taxes, not to mention the 1.85% to Ambrosi. The arbitrage has nothing to do with the “tax bracket” you will be in during retirement. It has everything to do with the effective tax rate of the dollars that are withdrawn from your tax deferred retirement plans while in retirement. If you are paying a 40%+ effective tax rate on ALL dollars you withdraw from your tax deferred accounts, you won the game of life and likely have substantial income in retirement outside of your retirement accounts. Most realistic scenarios for an average pilot have an effective tax rate or IRA withdrawals of no more than 20%, and even that would require a pretty large yearly withdrawal rivaling a pilots pre retirement active income.
Some quick googling of the difference between marginal tax rates and effective tax rates may help illustrate where we might not be lined up on how we view this decision.
On the investment return side, you have to consistently earn something like double the return of the MBCBP to overcome the tax arbitrage above to come out ahead for a middle of the road pilot with normal circumstances.
If you are gifted enough to make a 10-12% return every year, without losing anything, EVER, consistently for your entire career, i admit you may come out ahead. Pilots with the ability (or luck) to achieve this remarkable rate of return for multiple decades in a row with no losses are in a pretty rare demographic amongst our seniority list. If you know any of them, I’d gladly give them my password and pay a handsome commission to manage my accounts.
One place you and I are in violent agreement is that Real Estate can reliably eclipse these gains if one has the fortitude and desire to invest the time, energy, and risk tolerance required to be successful.
But I also applaud the union for thinking outside the box and trying to improve the retirement outcome for the average Joe who wants nothing to do with having a second job owning/managing real estate or actively trading their spill cash.
And there must be some value beyond “basic math” in this plan, as nearly every other major pilot group has disclosed they are actively seeking a MBCBP. I’ve seen it mentioned by UAL, APA, SWAPA, FedEx, JetBlue, and Alaska. To my knowledge, Delta is much further ahead than any of these other groups.
Some quick googling of the difference between marginal tax rates and effective tax rates may help illustrate where we might not be lined up on how we view this decision.
On the investment return side, you have to consistently earn something like double the return of the MBCBP to overcome the tax arbitrage above to come out ahead for a middle of the road pilot with normal circumstances.
If you are gifted enough to make a 10-12% return every year, without losing anything, EVER, consistently for your entire career, i admit you may come out ahead. Pilots with the ability (or luck) to achieve this remarkable rate of return for multiple decades in a row with no losses are in a pretty rare demographic amongst our seniority list. If you know any of them, I’d gladly give them my password and pay a handsome commission to manage my accounts.
One place you and I are in violent agreement is that Real Estate can reliably eclipse these gains if one has the fortitude and desire to invest the time, energy, and risk tolerance required to be successful.
But I also applaud the union for thinking outside the box and trying to improve the retirement outcome for the average Joe who wants nothing to do with having a second job owning/managing real estate or actively trading their spill cash.
And there must be some value beyond “basic math” in this plan, as nearly every other major pilot group has disclosed they are actively seeking a MBCBP. I’ve seen it mentioned by UAL, APA, SWAPA, FedEx, JetBlue, and Alaska. To my knowledge, Delta is much further ahead than any of these other groups.
In addition, this plan will be a small part of a DIVERSIFIED portfolio. Younger pilots will benefit the most from this plan.
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