SparkySmith

Great discussion in the previous two threads on the minimum cash balance defined benefit plan. I've learned a great deal. I made a spreadsheet that will let us test some of our assumptions. Public permissions are view only, but feel free to copy it and make changes to test your thoughts.

Modify the yellow blocks to change the assumptions. The comments contain some explanation of the terms.

The spreadsheet compares two scenarios:
1) A MCB plan. You set the starting and retirement salaries, prescribed rate of return for the plan and the increased contribution provided by the company in the theoretical TA.
2) A raise in pay with no additional company retirement contribution. In this scenario I assume that the pilot invests the additional pay in a self-directed investment vehicle. You set the self-investment rate of return.

In both scenarios you can set an employee contribution to your 401k and all DPSP cash is invested for retirement (in the MCB plan in scenario 1 and in the self-directed vehicle in 2).

There are some assumptions I've made to simplify the math but I assess their impact as small. These are explained in the cell comments.

Hope this is useful.

Looks like somebody who is making $400k for the last six years of his career will have a MCB value of around $300k, which jibes with the ALPA gouge in the other thread. Beyond that, the values tend to be similar before the crossover at about 20 years assuming a 5% raise. This obviously does not address the flexibility of generic savings versus pension funds, the risks of underfunding and any other intangibles.

Hit me with problems or improvements.

Sparky

mispoken

Thanks for starting this. I’ll take a closer look at it on my laptop when I’m able. How did you apply tax rates? Did you apply them progressively or did you just assume 30% off the top?

SparkySmith

You could call that rate “effective marginal tax rate.” I applied it only to the self investment option and applied it as a constant across the career. So every dollar of DPSP cash and of pay raise is taxed at that rate (reduced) before being eligible for investment. Not sure that answered your question.

Clearly there is the ability to cross tax bracket rates, so some averaging is required. Still, I think the applicable brackets are currently 32% and 38%, so we aren’t talking about a huge range for an estimator like this.


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SparkySmith

As I drive along wondering, “did I tax that? Did I add that twice?” It occurs to me that I need more columns to walk through the calculation next trip I’ll break those horrendous formulas up into steps so it makes more sense.


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mispoken

I ask because the reality is that most of us pay a much lower effective tax rate than the highest marginal rate we fall into. Obviously this will vary greatly across the pilot group, but I suppose this is just as easily entered in that box as your effective rate in place of your marginal rate.

SparkySmith

Right on. I made it an input so folks could propose their effective marginal rate.

And it only applies to additional dollars (raise and DPSP cash) so it is a marginal rate in that sense.

Gunfighter

Thanks Sparky. I love the idea of a shareable spreadsheet that people can modify with their own assumptions. I created one of my own here:

MBCBP vs Tax Efficient ETF

As I built the spreadsheet, I was somewhat alarmed how many times I had to subtract money that was filtered off by various agencies.

The point is to provide a snapshot analysis of a contribution in only one year and what happens to that money over a defined holding period. Variables that can be modified include marginal income tax rate on current earnings, marginal income tax rate in retirement, state taxes, ALPA dues, rate of return, holding period and inflation. Variables that are not included are the risk associated with a company DB plan and variability in market returns.

A quick analysis using 4.5% MBCBP and a tax efficient ETF returning 8.5% yields a break even period of 7 years. Beyond 7 years, the MBCBP begins to lose ground to the higher returns available elsewhere.

In summary, the MBCBP is a good vehicle for late career pilots looking to load up on cash as they head into retirement. It is a poor vehicle for those with more career ahead of them than behind. The details behind the optional nature of this plan are critical to how it is received by the pilots.