Is a Sup­ple­men­tal Sav­ings Plan right for this cou­ple?

The Denver Post - - BUSINESS - By Pam Du­mon­ceau Con­sis­tent Val­ues

At this time of year, when your com­pany in­vites you to join the Sup­ple­men­tal Sav­ings Plan, is it al­ways a good deal for you? This week we look at a cou­ple look­ing for an­swers on that very ques­tion.

The sit­u­a­tion

Mary, 50, and Tammy, 46, have been sav­ing and in­vest­ing for re­tire­ment since their first days in their ca­reers. They have one grown son, 27, on the slow but steady plan to fin­ish col­lege even­tu­ally. They pay for his ed­u­ca­tion, but not his liv­ing ex­penses.

Mary has worked in a pri­vately held med­i­cal sup­ply com­pany for over 20 years. Her 401(k) bal­ance is in­vested in mu­tual funds to­tal­ing $450,584 and she con­trib­utes $24,000 per year. Her com­pany makes a profit shar­ing con­tri­bu­tion of $0 to $3,500 per year de­pend­ing upon prof­its. Over the years she’s pur­chased com­pany stock val­ued at $336,829 and con­trib­utes about $6,000 per year to pur­chase more. She also has an in­her­ited ac­count of $196,167 that she is forced to take with­drawals from each year, a life in­sur­ance pol­icy with sur­ren­der value of $88,000, Roth IRA of $18,437, Health Sav­ings Ac­count with $20,249, and a bank sav­ings ac­count of $75,618.

Tammy is a ra­di­ol­o­gist and has a 401(k) at her med­i­cal prac­tice with a $200,099 bal­ance and is able to con­trib­ute $53,000 to the plan every year. In ad­di­tion, she has $23,492 in her emer­gency fund.

To­gether they own their per­sonal res­i­dence worth $600,000 with a mort­gage bal­ance of $300,000. They also have rental prop­er­ties in an LLC. The LLC has $25,754 in cash for rental emer­gen­cies. One of the prop­er­ties was a fix-and-flip dis­ap­point­ment that broke even. They put their own hard la­bor into it and will net about the same as they paid for it, $235,000 in ad­di­tional cash. Af­ter they sell the prop­erty, their LLC will own two other houses, a condo and a four­plex in Grand Junc­tion and Glen­wood Springs. Al­to­gether the ren­tals are worth $950,000, with mort­gage bal­ances to­tal­ing $380,000.

They wrote to What’s The Plan to ask what they should do about the Sup­ple­men­tal Sav­ings Plan be­cause their com­pany wants a de­ci­sion by Dec. 31. Mary has been in­vited to de­fer up to 75 per­cent of her in­come into the plan pre-tax, and the elec­tion may only be changed once per year, at the end of each year. The sev­eral pay-out elec­tions are tricky, and can be changed be­fore or af­ter leav­ing the com­pany. Tammy wants to pay off all of their prop­er­ties be­cause they would “save a ton of in­ter­est” and with­out debt, be able to save more to­ward re­tire­ment monthly.

The rec­om­men­da­tions

Mary and Tammy are in the top tax bracket and so the non­qual­i­fied de­ferred comp plan their com­pany of­fers is very at­trac­tive to de­fer in­come un­til Mary’s re­tire­ment goal of five to 10 years from now. We talked about the ben­e­fits as well as the neg­a­tives. Pri­vately held com­pa­nies do an­nual val­u­a­tions with their ac­count­ing firm’s au­di­tors, but are not sub­ject to the same fi­nan­cial scru­tiny as com­pa­nies that are pub­licly traded. The first ques­tion I asked is, “Is it im­por­tant to your ca­reer that you join the plan to look like a team player to man­age­ment?” When this is the case, I rec­om­mend a “gut check” ask­ing “how much you would feel com­fort­able de­fer­ring if the com­pany com­pletely goes bank­rupt and you lose ev­ery­thing?”

Over wa­ter­cooler talk, only a few peo­ple will know how much you con­trib­ute, the ma­jor­ity will just know you’re in the plan like they are. Mary didn’t be­lieve that was im­por­tant since she’s well­re­spected, been there a long time and has a large po­si­tion in the com­pany’s stock. A de­trac­tion of the plan for this cou­ple is that they al­ready have a con­cen­tra­tion of $336,829 of their net worth, and Mary’s salary in­come is de­pen­dent upon the prof­itabil­ity of the com­pany. Another de­trac­tion of most of these plans in gen­eral is if they de­fer in­come into the plan, it states clearly in the plan de­scrip­tion that the as­sets will be kept track of with book­keep­ing, but com­bined with the gen­eral as­sets of the com­pany and sub­ject to the cred­i­tors of the com­pany. When Mary and Tammy un­der­stood the cred­i­tor pos­si­bil­ity, they im­me­di­ately made their de­ci­sion not to join the plan.

Tammy likes the com­fort of having all of their prop­er­ties paid off, and they will be able to do that with the pro­ceeds of the prop­erty sale and cur­rent cash. Although one could make the case that the af­ter-tax cost of bor­row­ing is in­ex­pen­sive, my rec­om­men­da­tion is to fol­low her emo­tional lean­ing. Af­ter their sweat eq­uity dis­ap­point­ment in the fix-and-flip, I can em­pathize with wanting to take a safer ap­proach. Having the prop­er­ties paid off will be com­fort­ing, is guar­an­teed to save in­ter­est ex­pense, and will not hurt the cou­ple’s abil­ity to achieve their re­tire­ment goal.

This cou­ple clearly has good prob­lems to have. They were for­tu­nate to have ad­vanced ed­u­ca­tions, good in­comes, and some lucky real es­tate tim­ing. They’ve worked hard, saved a lot and are on plan to a healthy re­tire­ment. The cou­ple has much to be proud of and can con­tinue to in­still their work ethic and mind­ful sav­ings to their son.

Pam Du­mon­ceau has 23 years of ex­pe­ri­ence and is the prin­ci­pal of Con­sis­tent Val­ues, a Reg­is­tered Investment Ad­vi­sory firm in Green­wood Vil­lage.

Newspapers in English

Newspapers from USA

© PressReader. All rights reserved.