notEnuf

This fund is about what I expected. Diversified stable earnings with no real risk and the associated lower returns. I'll manage my cash overages to be minimal this year and see what ends up in there. I probably won't make it the total core low risk portion of my portfolio but will evaluate it in the next few years and opt out if the amount exceeds my target. The tax savings and dues savings are significant enough to try it out.

Trip7

IMO a fair comparison will be non-MBCBP post tax vs MBCBP post tax.

mispoken

it’s a good start but we also have to make an assumption of taxes on the withdrawals of the MBCBP as it’s simply deferring taxes. What is your assumption as to tax rate upon withdrawal and how does that change the equation? Perhaps we can use the ever popular 4% withdrawal rate?

Jughead135

Two quick questions:

- Has the LIRIX ("Institutional") vs LIRKX ("Retirement, Large") version question been answered definitively? Seems like the K-class has slightly better performance (due to lower fees), but otherwise they're the identical fund?

- Where are guys getting the 5% "target" for this fund? Is that some measurement based on past performance, or is that actually a stated goal of the fund (which I haven't found)?

notEnuf

Since you control the withdrawls, you control the taxes.

mispoken

That is true. If your plan is to never make a withdrawal from this I suppose you can assume for you it’s a 0% tax rate deferred to your heirs. Now, let’s talk about reality. It’s probably safe to assume that one will plan to use this money in retirement and make withdrawals, otherwise what would be the point? We have to take into account 401k, pension and other taxable withdrawals in order to get a clear picture based on our best guess. So, yes, you control your taxes to a point unless you’re subject to mandatory withdrawals or have some other stream of taxable income in retirement in which case you don’t control your taxes. On the MBCBP, perhaps you do as an option is to roll into a tax deferred annuity;

“At retirement, pilots can (1) elect to roll the accrued balance into an IRA, (2) take the balance as a taxable lump sum, or (3) take it as a tax-deferred annuity.”

2 of those options are taxable and not controlled by you. The IRS will figure that one out for you. Option 3 is further deferral if you choose.

so, back to my original question for an apples to apple comparison, what is the assumption for your taxable rate in retirement?

notEnuf

That's a difficult one to answer and each individual will be different. My example would be to maximize a withdrawal to keep me in a tax window with regular income tax brackets and capital gains. I have both tax deferred and tax prepaid funds that will be managed to achieve the goal.

Jughead135

There are two ways you can end up with the "excess" DC taxable income. If either or both apply, the additional comes to you as excess. There's a difference in ALPA dues between the two.

1. You reach the 415(c) limit [$66,000 for 2023] of total contributions (elective deferral and/or Roth 401(k); company DC; and/or "401a" after-tax). Once that limit is reached, you cannot make any further contributions; and DC that would have been applicable comes to you as excess (taxable income). I believe this is the type that ALPA does not tax, but I tend to get the two confused (i.e., I'm not certain).
2. You reach the employee compensation limit [$330,000 for 2023], at which point no further employer contributions are allowed. Again, the DC that would have been applicable comes as excess (taxable income), and this is the flavor I believe that ALPA does tax--but, not certain. Simple math shows that the max company contribution is therefore $330K @ 16% = $52,800. That's significant because it lags the total amount (which is itself based on 20%, i.e., $330K @ 20% = $66K)--so long as our DC is below 20%, "you can't get there from here" to max your 401(k) without making up the difference from elective sources.

tennisguru

I mean yeah, you're correct, but once you get into retirement tax rates everything pretty much a crap shoot. I simply wanted to look at overall account balances as I would tend to assume that when a person has a balance of X dollars, they will be withdrawing that at roughly the same rate whether the money is in in the MBCBP or not. As I said any withdrawals from the non-MBCBP would be taxed at long-term capital gains rates, which theoretically would be lower than the earned income rates of the MBCBP. But with the non-MBCBP you're also paying some taxes each year if your personal portfolio has turnover or earns dividends. In a broad sense that probably comes close to washing out the difference between that and the income taxes you'd pay on the MBCBP withdrawals, hence why I just stuck to a basic look at overall account balance as a comparison.

In the end there's just a whole ton of personal variables that each one of us will have in retirement that will have huge affects on our tax situation and how much each person needs to draw down each year from their various accounts. Roth accounts vs traditional, real estate income, military or other pensions, a working spouse, etc.

First Break

Lots of good info and discussion in the last several posts.

One piece a lot I think forget and are underestimating is the taxable nature of the gains achieved outside a qualified plan. (Again, with the caveat that real estate can be very tax efficient and if that’s your jam, full speed ahead!)

The $585k example above doesn’t take these into account. If you make a trade that is taxable at the short term rate you may have just handed back a huge chunk of your expected return. I think the effect this has on your outcome is being underestimated here.

In addition, I think that 5% may be a little low for a 40/60 equity/bond mix. On top of that, most pilots have lower risk assets already in their basket, meaning the opportunity cost of a more modest risk profile in the MBCBP is zero if you rebalance your 401k to account for the MBCBP.