Is a Supplemental Savings Plan right for this couple?

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.