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  • Deferred compensation plan

    Anyone have any thoughts on deferred compensation plans?  My company offers it, but I never really considered it, but the email is going around again this year.  I know it depends on financial situation:

    0) 35yo, married

    1) Income: ~500-600k, spouse ~100k, both employees

    2) Debt: 200k on home @ 2.75%, otherwise no student loans or other debt.

    3) 401k, HSA, and IRA maxed yearly

    4) 529: 20k/kid x3 kids (4yo, 3yo, and 1yo).  We put 6k/kid each year, but might increase to 14k/kid over the next few years.  Trying to hit about 100k of contributions prior to stopping.

    5) Expenses: ~10k/month.  This includes 3500/month for child care, mortgage, and all the other stuff.  This is our total expenses each month.

    6) Retirement: 401k ~150k

    7) Assets:  700k indexed out.  Waiting for real estate prices to go down so I can gobble up some commercial property.

    I'd never considered deferred compensation before since I always thought I could invest the money more efficiently for a better return, but seeing 39.6% taken away on every dollar above 445k makes me sad.

    Anyone else consider this?

     

  • #2
    Typically your situation matters less than the details of the plan.  It certainly sounds like there are good reasons with regard to taxes to use the deferred comp plan.  What do you know about the structure of the plan?  How is the money (your money) protected in event of financial problems at your employer?  My understanding of the "Rabbi Trust" structure often used is that is protects you well from management changes or other internal threats to the plan, but cannot protect you from your companies creditors.  I would look at it like a purchase of company stock and not invest more than you can lose.

    Raster

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    • #3
      My wife's company has a deferred comp plan, and we have contributed to it over the years. Raster nailed what I considered to be the two major issues:

      1. How is the money being invested?

      2. How likely is the company going to be around to pay it when you leave the company?

      In our case, the money is in a fixed income account that pays quite a bit more than you can get in many debt instruments, currently 4.5%, and it adjusts annually. Someone once told me to consider it as a bond held by the company as, in a sense, that is what it is--a promise to pay back your principal--your contributions along with investment return or interest--at a later date. My wife also has company stock (required to own at her level, 100% annual salary in company stock). I like to keep the sum of these two assets that depend on the health of her company--company stock and deferred comp account--less than 10% of our investible net worth.

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      • #4
        Like Raster stated above,  457 plans are highly variable, so read the specs on yours.  Esp. consider how it is dispersed if/when you leave.  There will be no tax advantage if you must liquidate it in a lump sum after 10 years, thus adding to that years AGI.

        As you are aware,  the biggest risk to a 457 fund  is creditor risk. How often do companies like yours go bankrupt?  As a general rule, I think 457 accounts work better at the end of one's career, when you are more certain of your companies financial health, and of the  dispersement  options.

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        • #5
          Ah thanks for the insight.  I'll definitely take a look at plan that is offered.  I feel like company health is pretty strong, but you never know with healthcare.

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