Dalpa R&I Roadshow
09-13-2018, 12:50 PM
#101
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Joined APC: Feb 2011
Posts: 760
This is excellent information, however it is incredibly complex. And in that lies my issue. If this plan is to give us a guaranteed ROR in perpetuity (similar to an annuity guaranteeing a certain level of income in perpetuity), it would need to be structured similar to an annuity. The managing firm, in order to provide these guaranteed RORs would need to be quite risk averse and use instruments as mentioned in the article. The management of this type of plan is time consuming, cumbersome and creates regular turnover. What this equates to, in my mind, is high fees for small returns.
This is precisely what I am trying to get at, I realize I'm not doing a good job of it. The financial industry is based solely on generating fees at the consumer level (you and I). They fill your brain with so many phrases, terms, tax rules, IRS codes and then they sprinkle on a little bit of fear. But, wouldn't you know it, they have the solution for you. Quite honestly, I believe they do a very good job of handling the tax portion of it, but not so much the investment portion of it.
These plans that the R&I are exploring are so complex when the reality is that taking money, putting money in index, sitting/waiting and hiring a good accountant is all we need. It's very simple, but the financial industry doesn't want us to understand that, and so they create these complex, convoluted and dynamic products that are designed to move dollars from our pockets into theirs. I don't fault them, thats what businesses do, but I choose not to participate.
So, I'll reiterate what I desire to see, increase DC to DPSP up to max allowed by IRS, DSPS Cash can then go to fill up any one of the following accounts at our choosing;
1-HSA
2-Deferred compensation plan
3-Our pockets
4-Some other optional tax advantaged account
The nuances of a cash balance plan make my head spin and I dedicate a significant portion of my daily life to this stuff.......Doesn't mean it's not worth considering, but I would certainly like to see some alternatives.
This is precisely what I am trying to get at, I realize I'm not doing a good job of it. The financial industry is based solely on generating fees at the consumer level (you and I). They fill your brain with so many phrases, terms, tax rules, IRS codes and then they sprinkle on a little bit of fear. But, wouldn't you know it, they have the solution for you. Quite honestly, I believe they do a very good job of handling the tax portion of it, but not so much the investment portion of it.
These plans that the R&I are exploring are so complex when the reality is that taking money, putting money in index, sitting/waiting and hiring a good accountant is all we need. It's very simple, but the financial industry doesn't want us to understand that, and so they create these complex, convoluted and dynamic products that are designed to move dollars from our pockets into theirs. I don't fault them, thats what businesses do, but I choose not to participate.
So, I'll reiterate what I desire to see, increase DC to DPSP up to max allowed by IRS, DSPS Cash can then go to fill up any one of the following accounts at our choosing;
1-HSA
2-Deferred compensation plan
3-Our pockets
4-Some other optional tax advantaged account
The nuances of a cash balance plan make my head spin and I dedicate a significant portion of my daily life to this stuff.......Doesn't mean it's not worth considering, but I would certainly like to see some alternatives.
Last edited by mispoken; 09-13-2018 at 01:06 PM.
09-13-2018, 01:15 PM
#102
Gets Weekends Off
Joined APC: Jun 2015
Posts: 1,638
Originally Posted by mispoken
This is excellent information, however it is incredibly complex. And in that lies my issue. If this plan is to give us a guaranteed ROR in perpetuity (similar to an annuity guaranteeing a certain level of income in perpetuity), it would need to be structured similar to an annuity. The managing firm, in order to provide these guaranteed RORs would need to be quite risk averse and use instruments as mentioned in the article. The management of this type of plan is time consuming, cumbersome and creates regular turnover. What this equates to, in my mind, is high fees for small returns.
This is precisely what I am trying to get at, I realize I'm not doing a good idea of it. The way the financial industry is based solely on this alone, by generating fees. They fill your brain with so many phrases, terms, tax rules, IRS codes and then they sprinkle on a little bit of fear. But, wouldn't you know it, they have the solution for you. Quite honestly, I believe they do a very good job of handling the tax portion of it, but not so much the investment portion of it.
These plans that the R&I are exploring are so complex when the reality is that taking money, putting money in index, sitting/waiting and hiring a good accountant is all we need. It's very simple, but the financial industry doesn't want us to understand that, and so they create these complex, convoluted and dynamic products that are designed to move dollars from our pockets into theirs. I don't fault them, thats what businesses do, but I choose not to participate.
So, I'll reiterate what I desire to see, increase DC to DPSP up to max allowed by IRS, DSPS Cash can then go to fill up any one of the following accounts at our choosing;
1-HSA
2-Deferred compensation plan
3-Our pockets
4-Some other optional tax advantaged account
The nuances of a cash balance plan make my head spin and I dedicate a significant portion of my daily life to this stuff.......Doesn't mean it's not worth considering, but I would certainly like to see some alternatives.
This is precisely what I am trying to get at, I realize I'm not doing a good idea of it. The way the financial industry is based solely on this alone, by generating fees. They fill your brain with so many phrases, terms, tax rules, IRS codes and then they sprinkle on a little bit of fear. But, wouldn't you know it, they have the solution for you. Quite honestly, I believe they do a very good job of handling the tax portion of it, but not so much the investment portion of it.
These plans that the R&I are exploring are so complex when the reality is that taking money, putting money in index, sitting/waiting and hiring a good accountant is all we need. It's very simple, but the financial industry doesn't want us to understand that, and so they create these complex, convoluted and dynamic products that are designed to move dollars from our pockets into theirs. I don't fault them, thats what businesses do, but I choose not to participate.
So, I'll reiterate what I desire to see, increase DC to DPSP up to max allowed by IRS, DSPS Cash can then go to fill up any one of the following accounts at our choosing;
1-HSA
2-Deferred compensation plan
3-Our pockets
4-Some other optional tax advantaged account
The nuances of a cash balance plan make my head spin and I dedicate a significant portion of my daily life to this stuff.......Doesn't mean it's not worth considering, but I would certainly like to see some alternatives.
The Cash balance plan doesnt give a fixed income stream like a traditional DB. This gives a fixed rate of return. The ROR hasnt been decided yet. It could even be a range (ie 0-5%), but the ROR doesnt change, even if the sp500 is +30% or down -30%.
Again, at retirement it looks like you have the choice: take the cash and roll it into an IRA... OR.... forfeit all your money and receive an annuity based on how much is in your account and prevailing market conditions. (If offered this plan I will not be taking the annuity option. If I can't roll it into an IRA, I am not interested in this plan at all.)
The con to the plan is low rate of return.
The pro is deferred taxes, potentially making up for low ROR, with less risk.
Fees havent been disclosed yet. IBM, Northrop Grumman, city governments like Memphis, FedEx, doctor groups, law groups, are some of the companies that have cash balance plans.
09-13-2018, 01:19 PM
#103
Gets Weekends Off
Joined APC: Apr 2007
Posts: 4,458
Originally Posted by jetnwa
Trip7/Gunfighter,
A few points, there is a difference in capital intensive aspects and liquidity. Unless there is a market meltdown, one can execute a "sell" trade on their stock positions by the close of business of the markets and be "out". Are you saying you can do that with real estate? It sure didn't work for Bear Stearns or Lehman Brothers. Real estate is very capital intensive and may be illiquid at times.
First off, liquidating real estate due to a market meltdown is somewhat of a false premise. An economic collapse will hurt real estate speculators and could put them in a tough spot, but it has little impact on income property investors. A specific piece of property can be il liquid, but the business of owning income property isn't. Over time an investor builds up a portfolio with varying degrees of equity in each property that could be accessed via a cash out refi within 30-45 days. Beyond that a smart investor has cash and replacement reserves. My company holds a reserves in Berkshire Hathaway, S&P 500 ETFs, and cash. I am looking forward to a meltdown where some of those reserves can be deployed. Each investor has different ratios and those are determined by individual risk tolerance and specific assets being held. Being fully invested is foolish, keep appropriate capital reserves.
As this is being discussed with respect to retirement, let's take your stock sale to a logical conclusion where you would pay penalties, fees and taxes if you actually touched the money that came from a retirement account. How liquid is the MBCBP that your DPSP CASH was funneled into? How liquid is income property that is purchased with DPSP CASH? Absent being held hostage in a retirement account, you are correct in that within three days settlement period, you can turn a stock or mutual fund into cash. Sometimes instant liquidity is a bad idea! How have the panic sellers done in the last few downturns who sold on the crash vs. staying fully invested and riding it out?
With income property, it would take 30-45 days via a cash out refi to access the funds. Within certain constraints, there are no taxes or penalties on a cash out refi, up to the basis in the investment. There would also be fees associated with the refi that may or may not be offset by a change in the interest rate.
Lehman Brothers didn't go bankrupt because they owned income property, they went bankrupt by speculating and lying. Spent two hours and watch "The Big Short".
If you have the "Schlitz" to cover the cash flow aspects on multiple properties you owe debt (leverage) in a major downturn, then you are good to go. If not, you may be forced to liquidate at fire sale prices or at some point, file for bankruptcy.
A real estate speculator may find themselves in this position, however; an income property investor is far more insulated in a downturn. A demographic downturn, like what happened in Detroit would hurt, but that is why diversification among a few markets is a good idea. An economic downturn where people can't afford car or house payments establishes a stronger rental base. As long as the population stays flat relative to available housing, income property is fairly safe
Unless you have the financial horsepower to walk into a banker's office and secure a $1,000,000 line of credit to buy these portfolio of properties at once, you may be doing this over time. As interest rates go up, it will cost you more to service the debt with each acquisition.
The amount of horsepower needed is closer to a lawn mower than a sports car. Once you cross the threshold of one or two years experience, the banks will be calling you. The property, combined with rental income is what secures the note. A third year FO, with mortgages on 4 houses (including a primary residence) can get a $1,000,000 loan with 10-20% down payment in about 60 days. I won't post the case study here, but getting money is the easy part. Finding the right property to buy is what takes work.
As interest rates rise, rents tend to rise also. The beauty of buying income property when rates are high, is that you can refinance in the next market cycle when rates are lower and increase the cash flow. I have a very real example of buying a cash flowing property when rates were high and doing a cash out refi with lower rates a few years later.
How you run your money is your business. Plenty of people have made lots of money in real estate. Plenty of people have gone bankrupt as well. I am not naïve enough to believe that one always makes 12% on their money, just get the best tenants, you won't have to deal with potential litigation and your property manager will always be on top of things so you can sit back and enjoy a Mai Tai
Most of the real estate bankruptcies were speculators, not income property investors. The income property investors who go bankrupt are generally over leveraged with poor debt coverage ratios and had outside pressures that took down the income property. Some income property can be bought with non-recourse financing. This firewalls the property financially and keeps a real estate bankruptcy from escalating into a personal bankruptcy. This is generally the case with apartments, self storage, mobile home parks or other commercial assets.
One more thing, natural disasters, are you up on all of your insurance needs as an owner? "Everything" is covered? If not, someone will be on the hook for it all.
Yes, insurance is an absolute necessity. I've dealt with fire, hail, insurance lawsuits, tax lawsuits, broken HVAC, plumbing, electric and a host of other issues. I laugh when people don't want to "do" real estate because of the hassles. They are a very real aspect of the business, but it pales in comparison to the income and wealth you can generate. It is also far less work than flying airplanes for a living.
A few points, there is a difference in capital intensive aspects and liquidity. Unless there is a market meltdown, one can execute a "sell" trade on their stock positions by the close of business of the markets and be "out". Are you saying you can do that with real estate? It sure didn't work for Bear Stearns or Lehman Brothers. Real estate is very capital intensive and may be illiquid at times.
First off, liquidating real estate due to a market meltdown is somewhat of a false premise. An economic collapse will hurt real estate speculators and could put them in a tough spot, but it has little impact on income property investors. A specific piece of property can be il liquid, but the business of owning income property isn't. Over time an investor builds up a portfolio with varying degrees of equity in each property that could be accessed via a cash out refi within 30-45 days. Beyond that a smart investor has cash and replacement reserves. My company holds a reserves in Berkshire Hathaway, S&P 500 ETFs, and cash. I am looking forward to a meltdown where some of those reserves can be deployed. Each investor has different ratios and those are determined by individual risk tolerance and specific assets being held. Being fully invested is foolish, keep appropriate capital reserves.
As this is being discussed with respect to retirement, let's take your stock sale to a logical conclusion where you would pay penalties, fees and taxes if you actually touched the money that came from a retirement account. How liquid is the MBCBP that your DPSP CASH was funneled into? How liquid is income property that is purchased with DPSP CASH? Absent being held hostage in a retirement account, you are correct in that within three days settlement period, you can turn a stock or mutual fund into cash. Sometimes instant liquidity is a bad idea! How have the panic sellers done in the last few downturns who sold on the crash vs. staying fully invested and riding it out?
With income property, it would take 30-45 days via a cash out refi to access the funds. Within certain constraints, there are no taxes or penalties on a cash out refi, up to the basis in the investment. There would also be fees associated with the refi that may or may not be offset by a change in the interest rate.
Lehman Brothers didn't go bankrupt because they owned income property, they went bankrupt by speculating and lying. Spent two hours and watch "The Big Short".
If you have the "Schlitz" to cover the cash flow aspects on multiple properties you owe debt (leverage) in a major downturn, then you are good to go. If not, you may be forced to liquidate at fire sale prices or at some point, file for bankruptcy.
A real estate speculator may find themselves in this position, however; an income property investor is far more insulated in a downturn. A demographic downturn, like what happened in Detroit would hurt, but that is why diversification among a few markets is a good idea. An economic downturn where people can't afford car or house payments establishes a stronger rental base. As long as the population stays flat relative to available housing, income property is fairly safe
Unless you have the financial horsepower to walk into a banker's office and secure a $1,000,000 line of credit to buy these portfolio of properties at once, you may be doing this over time. As interest rates go up, it will cost you more to service the debt with each acquisition.
The amount of horsepower needed is closer to a lawn mower than a sports car. Once you cross the threshold of one or two years experience, the banks will be calling you. The property, combined with rental income is what secures the note. A third year FO, with mortgages on 4 houses (including a primary residence) can get a $1,000,000 loan with 10-20% down payment in about 60 days. I won't post the case study here, but getting money is the easy part. Finding the right property to buy is what takes work.
As interest rates rise, rents tend to rise also. The beauty of buying income property when rates are high, is that you can refinance in the next market cycle when rates are lower and increase the cash flow. I have a very real example of buying a cash flowing property when rates were high and doing a cash out refi with lower rates a few years later.
How you run your money is your business. Plenty of people have made lots of money in real estate. Plenty of people have gone bankrupt as well. I am not naïve enough to believe that one always makes 12% on their money, just get the best tenants, you won't have to deal with potential litigation and your property manager will always be on top of things so you can sit back and enjoy a Mai Tai
Most of the real estate bankruptcies were speculators, not income property investors. The income property investors who go bankrupt are generally over leveraged with poor debt coverage ratios and had outside pressures that took down the income property. Some income property can be bought with non-recourse financing. This firewalls the property financially and keeps a real estate bankruptcy from escalating into a personal bankruptcy. This is generally the case with apartments, self storage, mobile home parks or other commercial assets.
One more thing, natural disasters, are you up on all of your insurance needs as an owner? "Everything" is covered? If not, someone will be on the hook for it all.
Yes, insurance is an absolute necessity. I've dealt with fire, hail, insurance lawsuits, tax lawsuits, broken HVAC, plumbing, electric and a host of other issues. I laugh when people don't want to "do" real estate because of the hassles. They are a very real aspect of the business, but it pales in comparison to the income and wealth you can generate. It is also far less work than flying airplanes for a living.
09-13-2018, 01:53 PM
#104
Gets Weekends Off
Joined APC: Apr 2007
Posts: 4,458
Originally Posted by Denny Crane
I'm sorry, I'm not following your logic here. How are you losing anything other than the ability to self direct that investment. This DB plan will go into your estate so how is it a hit to estate planning? I don't see how the $275,000 comes into the equation.
Again, upon retirement the whole of your investment and investment return would be rolled over into an IRA in your name and would be subject to a traditional IRAs withdrawal rules.
Denny
Again, upon retirement the whole of your investment and investment return would be rolled over into an IRA in your name and would be subject to a traditional IRAs withdrawal rules.
Denny
09-13-2018, 02:04 PM
#105
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Thread Starter
Joined APC: Sep 2008
Position: Kickin’ Back
Posts: 6,971
Originally Posted by mispoken
Denny,
This will be something I try my best to get an answer on from the R&I Committee. What our money is invested in and the management fees associated with it are extremely important. I'll discuss with R&I and get back to the thread on that.
My thought so far, if it's not an annuity but there is a MANDATORY ROR, how does a company achieve this? My suspicion is through lots of bonds and lots of insurance. The end result; an annuity named something else like a "risk averse asset allocation". But again, before I totally commit myself I will speak to R&I about it.
Thanks for the input, this is a excellent and very necessary discussion to be had!
This will be something I try my best to get an answer on from the R&I Committee. What our money is invested in and the management fees associated with it are extremely important. I'll discuss with R&I and get back to the thread on that.
My thought so far, if it's not an annuity but there is a MANDATORY ROR, how does a company achieve this? My suspicion is through lots of bonds and lots of insurance. The end result; an annuity named something else like a "risk averse asset allocation". But again, before I totally commit myself I will speak to R&I about it.
Thanks for the input, this is a excellent and very necessary discussion to be had!
Thanks for participating in the discussion and committing to learn more form R&I! I too think it is essential that we have this discussion, especially for the new/newer hires. It will affect them the most.
Denny
09-13-2018, 02:11 PM
#106
Gets Weekends Off
Joined APC: Feb 2011
Posts: 760
Kind of getting into the weeds here, but I’m using the term, perpetual to express the fact that a financial management company will manage our money to generate a given rate of return, forever or until we terminate it. That’s all I’m getting at there, I realize we won’t be receiving a payment from this plan, per se.
So, now that we have that cleared up..... :-)
The fact that large entities such as corporations and governments use these just means that a lot of companies and their employees are probably paying too much in management fees and getting crappy returns on their money. I say that a bit tongue in cheek, because I can’t generalize 23,000 of these plans into one, but I think you get my point.
While my preference is to self manage all of my funds, if the vote is in favor of this, then so be it. I’m not opposed to this idea with a few tweaks. For instance, people from age 21-50 have their funds allocated into a more aggressive, mostly equities basket. A simple passively managed index would work. 50-60, the funds are moved into a moderate growth vehicle, part bonds, part equities. Age 60-65 the money is moved into a conservative bucket which is almost all fixed income securities such as high grade bonds. It sounds like these plans allow the flexibility to specify things like this, I’ll ask if it’s possible.
So, now that we have that cleared up..... :-)
The fact that large entities such as corporations and governments use these just means that a lot of companies and their employees are probably paying too much in management fees and getting crappy returns on their money. I say that a bit tongue in cheek, because I can’t generalize 23,000 of these plans into one, but I think you get my point.
While my preference is to self manage all of my funds, if the vote is in favor of this, then so be it. I’m not opposed to this idea with a few tweaks. For instance, people from age 21-50 have their funds allocated into a more aggressive, mostly equities basket. A simple passively managed index would work. 50-60, the funds are moved into a moderate growth vehicle, part bonds, part equities. Age 60-65 the money is moved into a conservative bucket which is almost all fixed income securities such as high grade bonds. It sounds like these plans allow the flexibility to specify things like this, I’ll ask if it’s possible.
09-13-2018, 02:31 PM
#107
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Joined APC: Sep 2008
Position: Kickin’ Back
Posts: 6,971
Originally Posted by Gunfighter
By front loading the DC plan with personal funds (75% until 415c limit), I am generally getting DPSP CASH for 9 months of the year from company contributions. I do this to maximize the amount of funds held as a Roth IRA. This lets me keep those funds as part of my estate, rather than being forced into RMDs. If 9 months of DPSP cash from company contributions were forced into a DB plan, I would effectively lose control of my own money. If DPSP cash is forced into some other vehicle outside of my control, it is a hiccup that can be overcome by stopping personal contributions and no longer taking advantage of the Mega Back Door Roth IRA. It isn't the end of the world, just the elimination of one piece of retirement and estate planning. My plan is to live on the DC and my real estate investments, while leaving the Roth IRAs behind. If my kids don't turn out to be responsible adults, that Roth IRA can be converted into a Tesla Roadster, a Cirrus SR22 and a mix of other toys without taking a hit on income taxes.
Denny
09-13-2018, 02:39 PM
#108
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Thread Starter
Joined APC: Sep 2008
Position: Kickin’ Back
Posts: 6,971
Originally Posted by Taildragger1
The way I read this is if you are too old to put anything in this, it is really meaningless. Correct me if I am wrong please.
Denny
09-13-2018, 04:09 PM
#109
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Joined APC: Apr 2007
Posts: 4,458
Denny,
You may be in a position to take advantage of a NQDC plan. There is some financial risk due to the company holding the money, but you could stuff away some now and take it out over the first few years of retirement.
The DB plan is intriguing IF funded directly by company contributions vs redirected DPSP CASH. I am somewhat skeptical of the management of the fund as the overall targeted return is well below what most would consider "market based". If we could create a "Modern DB" plan with funds invested in equities vs a 5% target that mimics bonds and t-bills, we might be on to something.
After watching the R&I Webinar for the second time, I still didn't find anything that indicated DPSP CASH would be redirected. We may be alarmed for no good reason.
I would consider the following order of priorities for negotiating additional retirement funding.
1 - 20% DC - Keep DPSP CASH
2 - Company funded HSA up to plan limits
3 - Company funded DB plan with efficient management
You may be in a position to take advantage of a NQDC plan. There is some financial risk due to the company holding the money, but you could stuff away some now and take it out over the first few years of retirement.
The DB plan is intriguing IF funded directly by company contributions vs redirected DPSP CASH. I am somewhat skeptical of the management of the fund as the overall targeted return is well below what most would consider "market based". If we could create a "Modern DB" plan with funds invested in equities vs a 5% target that mimics bonds and t-bills, we might be on to something.
After watching the R&I Webinar for the second time, I still didn't find anything that indicated DPSP CASH would be redirected. We may be alarmed for no good reason.
I would consider the following order of priorities for negotiating additional retirement funding.
1 - 20% DC - Keep DPSP CASH
2 - Company funded HSA up to plan limits
3 - Company funded DB plan with efficient management
09-13-2018, 04:33 PM
#110
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Joined APC: Mar 2015
Position: stake holder ir.delta.com
Posts: 10,026
https://www.airlinepilotforums.com/2673739-post104.html
https://www.airlinepilotforums.com/2673747-post106.html
So in other words...
You would like to have control of your money. Just to clarify. A return is always lessened when additional intermediaries are also fiduciaries of the investment. Whether it’s real estate managers, passive investing via a REIT, or calling a plumber adding distance between you and the investment always means complexity and additional cost or lower returns. This is especially true for investing for a guaranteed level of return no matter the vehicle.
I happen to think rare antique collectable motorcycles are the best return for my money. Should others be forced to share in this investment? If not, what level of insurance, insulation, cash reserves should we require to have an acceptable universal plan. Probably enough to make the returns minimal for the effort and complexity.
https://www.airlinepilotforums.com/2673747-post106.html
So in other words...
You would like to have control of your money. Just to clarify. A return is always lessened when additional intermediaries are also fiduciaries of the investment. Whether it’s real estate managers, passive investing via a REIT, or calling a plumber adding distance between you and the investment always means complexity and additional cost or lower returns. This is especially true for investing for a guaranteed level of return no matter the vehicle.
I happen to think rare antique collectable motorcycles are the best return for my money. Should others be forced to share in this investment? If not, what level of insurance, insulation, cash reserves should we require to have an acceptable universal plan. Probably enough to make the returns minimal for the effort and complexity.
Last edited by notEnuf; 09-13-2018 at 04:50 PM.
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