Trip7

40%? Is this money going in tax free and coming out tax free like an HSA does for medical expenses?

I betting taxes have to be paid somewhere. With the Trump sale on taxes, I'd rather pay taxes now and control the money my self. Deferring taxes for x amount of years down the road into some account I have no control over for a 5% return is IMO a terrible idea. If this plan is not optional it's an absolute No

Denny Crane

Well of course taxes have to be paid somewhere. But you are also gonna make that average 5% on 40% more. Are you gonna be making more in retirement than when you retire? If so, good for you! The vast majority of pilots will not. No, I cannot prove that but I sure think it's logical.

Let me go at this from a different direction. Out of your total investments would you say any of them are in the conservative arena. I believe most financial advisors would say an 80/20 division would signify a higher risk portfolio. Why not consider this the conservative side of your investment portfolio and you can alter your other investments to be higher risk?

Well I believe you are in a distinct minority with your pay taxes now attitude. Obviously more about this will come to light as time goes by. I would still encourage you to go to a roadshow and if you still feel the same way, let them, and your Reps, know your opinion. I would encourage you to find out all the facts before jumping to a conclusion.

Denny

Edit: And maybe, with your investment prowess, this plan is not right for you. I believe it is for the vast majority of pilots out there.

Trip7

Including tax savings, a higher return can be generated with far less risk outside of this "aimed at 5% return" plan. The obsession with saving taxes and not looking at the big picture is going overboard. Throw in mandatory and no control and this is without a doubt an absolute No. The only pilots I see this benefiting financially is those who would have spent the money on consumer goods and some would say they have the right to that option.

Moreover if i was in the minority on paying taxes now Roth IRAs/Megaback Door Roth IRAs would not be as highly desired as they are now. Taxes are cheap now. Pure mathematics and US Govt budgeting say they will have to go up in the future.

lake

Personally I like the supplemental annuity. Work for Delta for 20 years get $2000.00/ month when you retire. 30 years gets $3000.00/ month and 40 years gets $4000.00 month.
Pretty easy, simple to understand and benefits everyone in the seniority list.
Just saying!!!

tennisguru

The tax thing is an interesting math issue. Let's say someone has 20k per year in DPSP cash (I have no idea what's realistic, but the concept behind the numbers will still work).

Our current option is to take the cash, with the tax hit. Let's say after fed/state taxes, dues, etc you end up with 55% of that, or 11k. If you invest that 11k every year starting with $0 over 20 years @ 10% rate of return you'll have 630k in that account.

Option 2 would be this 5% VEBA/whatever you want to call it, the benefit being that you would get to put the full 20k in each year. That amount after 20 years would be 660k.

The math on those is very close, but of course the variable is what can you do with your own money. If you can average 11% instead of 10% that puts you at over 700k, 12% is just shy of 800k. Conversely if you can only do 8% you're only looking at 500k.

The one thing I don't know is how this union plan would be taxed on withdrawals after retirement. Is it ordinary income or long term capital gains? That would make a big variable that would need to be accounted for.

Either way I can see how the 5% "set it and forget it" plan appeals to some people. If they could push that yearly gain closer to 7% it'd really start to look much more attractive of an option for a larger number of pilots. A 7% ROR on the enhanced retirement option would push your 20 year account balance over 800k, which matches the 12% ROR if you took the DPSP cash tax hit.

CBreezy

$4000/ mo 40 years from now will be worth virtually nothing.

JamesBond

Mega Back door ROTHs are not for everybody either. I looked at my tax situation and that horse has left the barn. I am at my highest rate of taxation right now so it makes zero sense for me to do that.

Gunfighter

I viewed the R&I presentation online and there wasn't specific reference to excess DPSP cash being put into the "Modern DB" plan. It only said that it was a "Market Based Cash Balance Plan" (MBCBP) that was funded by company contributions.

IMHO redirecting DPSP cash anywhere but the pilots paycheck is the kiss of death on any of these plans. The first step in retirement improvement should be a bump up to 20%, so we hit the 415C limit with company contributions. The second step could include a qualified DB plan like the MBCBP, that is funded with company money, not redirected DPSP cash. That money should be invested in a mix of S&P Index and Total Market Index, with management fees equal to a similar fund at Fidelity or Vanugard (i.e. low). The historical return of those assets with fees included is closer to 8.5%

The fact that 2/3 of the pilot group receive DPSP cash makes us a huge target for a number of financial services firms looking to come in and with one "sale" gain control of millions of dollars. In return for managing that money, they will target a return that is about 60% of what an S&P index fund returns. It sounds to me like someone is trying to get 40% of our money through substandard returns. How is that different than losing 40% to taxes?

Trip7

I agree whole-heartedly. Likewise, this plan is 5% plan is not for everyone. Worst case it should be optional

PassportPlump

Agree 100%.

S&P 500 averages a 10% return.

Take my taxes now and I’ll go ahead and manage my own money. Including dividend reinvestment.

Go plug some numbers into this calculator and see for yourself. 5% rate of return? No thanks. What the expense ratio associated with managing our money?

http://www.moneychimp.com/features/market_cagr.htm

Plug numbers in. Google It.

Warren Buffet has a good example of back in the day had he taken the $114 he had saved (in 1942) and put it into the S&P 500 index fund, NOT putting in another penny.... that investment would be worth over $400,000 today including dividend reinvestment. Source: https://finance.yahoo.com/news/warren-buffett-says-couldve-turned-114-400000-230140222.html

This is a first world problem we are discussing. I for one have zero interest in any kind of DB fund unless it is purely company funded. If they want to do that out of the goodness of their hearts, then I am all for it. From where I sit, keep my 16% coming, pay me my DPSP CSH and let me invest it how I see fit. Backdoor Roth? Saving for kids school? Payoff my house? S&P index for my kids? The choice is mine, and the money is in my name.

If you’re doing well enough to save $55,000 per year you will be fine in retirement. Bottom line is, you can do a hell of a lot better than 5%.