Analyzing Deferred Comp Options

Summary

Episode Summary: Analyzing Deferred Comp Options

Introduction

In this episode of Jill on Money with Jill Schlesinger, host Jill Schlesinger, alongside her co-host Mark, delves into the intricacies of deferred compensation plans. Released on February 17, 2025, the episode features a detailed discussion with a caller, Bob from Pittsburgh, who seeks advice on his wife's non-qualified deferred compensation plan. The conversation offers valuable insights into retirement planning, mortgage management, and financial strategies for high-earning households.

Caller Introduction: Bob's Financial Landscape [03:21]

The episode kicks off with Bob joining the show from Pittsburgh. He introduces his financial situation, highlighting his wife's employment as a physician and their sustained contributions to her non-qualified deferred compensation plan over 14 years. Bob shares his concern after learning that his wife must remain employed until age 60 to receive her deferred compensation as an annuity. If she leaves her job before then, the funds would be accessible only as a lump sum.

Understanding Deferred Compensation and Annuity Options [04:05]

Mark engages Bob with a series of questions to better understand the specifics of the deferred compensation plan:

• Age Considerations: Bob's wife is 47, and he is 51. This places them several years away from the age 60 threshold for annuitization.

• Employment Stability: His wife has been with the same employer for 14 years and enjoys her role as a physician.

Mark probes into the potential flexibility of the plan, questioning whether the funds can be rolled over or annuitized if his wife decides to change jobs in the future. Bob clarifies that the plan is non-qualified and payable upon termination of employment, ruling out the possibility of returning to the former employer to access annuitization benefits later.

Financial Breakdown and Retirement Planning [07:04]

Bob provides a comprehensive overview of their financial status:

• Deferred Compensation Contributions: $20,000 annual contribution from his wife, with a $5,000 employer match over 14 years, growing to over $750,000.

• Personal Retirement Savings: Bob maintains a rollover IRA with $250,000, contributing approximately $9,000 annually.

• Adjustable Rate Mortgage: They have a $1 million jumbo loan at 2.4% interest, with an ARM set to reset to 4.4% in August 2026. They plan to pay off the mortgage by 2027.

• Brokerage Account: Established in 2016, holding around $650,000, with ongoing contributions of $6,000 monthly.

• Lifestyle and Expenses: Their monthly expenses amount to approximately $25,000, reflecting a "lifestyle drift" common among high-income households.

Mark commends their robust saving habits, noting, “They are spending a lot of money, but they're saving 150 grand a year” ([14:34]). This exemplifies disciplined financial management despite high earnings and expenditures.

Strategic Financial Advice [17:18]

Mark reassures Bob, emphasizing the strength of their financial foundation:

• Retirement Assets: With $2 million in retirement assets and $650,000 in brokerage accounts, their net worth is projected to approach $5 million in the next five years.

• Deferred Compensation Flexibility: Mark advises not to worry excessively about the annuity requirement, highlighting that the lump sum received is substantial and can be reinvested strategically.

Notable Quote:

"If you think about every million dollars will probably generate around 30, 35 grand a year without plowing through it. So in your case, again, this doesn't account for inflation...if you had five million and you could generate 175, $200,000 a year from your portfolio, that's in five years." ([19:20])

Conclusion and Key Takeaways [20:27]

Mark summarizes the discussion by highlighting the importance of:

• Flexibility in Financial Planning: Understanding the terms of deferred compensation and exploring options for portfolio growth.

• Disciplined Saving and Investment: Maintaining high savings rates and diverse investment portfolios to ensure financial stability.

• Lifestyle Management: Balancing high earnings with controlled spending to sustain long-term financial health.

Mark encourages listeners to reach out for personalized financial advice, reinforcing the show's mission to provide actionable information for optimizing one’s financial future.

Final Thoughts

This episode serves as an informative guide for individuals navigating deferred compensation plans and high-income financial management. Through Bob’s real-life scenario, listeners gain practical insights into retirement planning, investment strategies, and the balancing act between saving and spending. Jill and Mark effectively demystify complex financial topics, making them accessible and actionable for their audience.

Notable Quotes:

• Mark on Savings Rate: “They are spending a lot of money, but they're saving 150 grand a year.” ([14:34])

• Mark on Deferred Compensation Flexibility: “I absolutely would not worry about it. You're in great shape.” ([19:14])

• Bob on Financial Strategy: “I've been putting it in the brokerage and I'm glad that I've done that because in hindsight, I've been making much more money in the brokerage account.” ([16:54])

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For more detailed insights and personalized financial advice, visit jillonmoney.com and explore their resources or contact the hosts directly.

Transcript

[Jill Schlesinger]

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[Mark]

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[Jill Schlesinger]

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[Mark]

Welcome to the Jill on Money Show. It's Monday, February 17th. It's President's Day and so US markets are closed today and, and maybe you have a day off, which is nice. I have the day off. But we always like to come to you on these kinds of days because you know, we don't like to disappoint. So if you've got a financial question as you are doing something interesting on your President's Day, then give us a holler. Go to Jill on money dot com, click the Contact Us button, write us a note. And when you write that note, if you don't think you're going to be coming on the program with us, give us a lot of detail. If you do think you want to come on the program, check the box. And you know what? Mark will do everything else. He's the best executive producer in the world. Yes, ladies and gentlemen, I can say that very clearly. And while you're on the website, don't forget there's all sorts of stuff there. You can see the blog, there are Videos. There are resources, and, of course, a link to our subscription service, which is called Jill on Money Live. Our next webinar is coming up soon, soon, soon. Just in a few weeks. Ed Slot Thursday, March 6, 7 Eastern Time. And Ed is a CPA. He's an IRA. He's a retirement expert. He is the man who really was able to explain to me in the clearest way why a Roth is so important. So if you want to join us for the Ed slot webinar, you've got to be a member of Jill on Money. It'll cost you 45 bucks for the next 12 months. You'll get Ed three more webinars, lots of content. It's all really cool stuff, all behind the paywall. All right, now, on to you. Let's talk to Bob. He's on the line from Pittsburgh. Hello, Bob, how are you?

[Bob]

Hey, Joe. Good. How are you? Mark?

[Mark]

He's all right. He's not coming on. He's in a bad way. I don't know where he is today. I just want to be clear that Mark has been a very good spouse today because his wife had a very minor procedure and he complained all about it, but he did take her and everything is fine. And so, you know, make sure she's still awake and breathing. Okay?

Mark, I haven't seen her in at least 90 minutes.

That's exactly what I'm saying. I think you have to go in there, Bob. I want you to know I'm watching this show on hbo, Max. Max called the Pit. So I feel like I am very comfortable talking to you a lot about Pittsburgh, at least the emergency room that is supposed to be in Pittsburgh. Now. I feel very close to you. What's going on? How can we help you out?

[Bob]

So my wife has a deferred compensation through her work, and she's been employed with the same place for about 14 years now. And we've been contributing to the deferred compensation that the whole time.

[Mark]

Okay.

[Bob]

I contacted her administrator of this plan to ask a question. And during this Q and A with this administrator, I was told that she needed to be employed with her position until the age of 60 in order to have her deferred compensation paid in an annuity. I was kind of caught off guard, realizing that all the deferred comp that we've been putting into her count is going to be payable in a lump sum to us if we were to leave before the age of 60.

[Mark]

And so weird. Okay, wait a second. Hold on a second. I have so many questions. Standby. First of all, how old is your wife?

[Bob]

She is 47.

[Mark]

Okay, so we got a ways to go before 60. And how old are you, Bob?

[Bob]

I am four years older.

[Mark]

Okay, so you're 51. Okay. And so does she work for a nonprofit or a school or something like that?

[Bob]

No, she does not. She's a physician. And so she's worked for the same company.

[Mark]

So in other words, I just want to make sure that we're going to ask the right question because I may want you to go back to them. They're saying, okay, you have to be here until age 60 if you want to annuitize the money that's in this contract. Otherwise, if, let's say she were to leave. Okay, here's the big question. And you left the money in that account? Okay, you just left it there. You didn't take the lump sum. The money stayed in that account. And she goes off, you know, let's say next year she goes off and she's working for some, you know, fancy private practice, does her thing, makes a lot of money. And then at age 60, could she go back to the former employer and then say, now annuitize that contract?

[Bob]

I wish. No, it is a non qualified deferred compensation plan. It is payable upon termination of her employment.

[Mark]

Okay. Does she hate her job or does she like her job?

[Bob]

No, she likes her job. She's, like I said, she's been doing it for about 14 years. We're high school sweethearts, so we went through college. She did her medical degree and then residency and fellowship and this is her first time, you know, big time job. She likes it. But you know, we have one child and he's due to graduate high school in 2030. That's coming up. He's in seventh grade. Now, since he's our only one and depending on what he decides to do with his life, we're somewhat flexible as to what we do with ours. Oh, and so my, my guess is that in 2030, you know, maybe if she wants to follow him, say we follow him, the option is there, but.

[Mark]

You know, but she just wants to know, like it, like, okay, so this is the rule, so be it. Let's figure out what, so what's in there right now in the non qualified deferred compensation plan? How much money's in there?

[Bob]

Yeah, so she puts in 20,000 and her employer matches five every year. So we've been putting in 25,000 for the last 14 years, but due to growth in that account, it's over 750 750,000.

[Mark]

Wow. How much does she make?

[Bob]

$800,000.

[Mark]

Listen to you. Thank you, Mark. I love that Sounder. Perfect. And Bob, are you also a physician? Are you working? Are you in the house taking care of this kid, making sure he doesn't have a kegger while you guys are out? What's happening?

[Bob]

Yeah, that's correct. The latter. I am a stay at home dad. Because of her age difference and stuff, I worked out of the house until she finished, you know, her fellowship and whatnot. And so when we had our son in 2013, I stayed home. So I've been home.

[Mark]

Do you have money in old retirement plans for your. What's in yours?

[Bob]

250,000.

[Mark]

Wow, that's great. Yeah, that's awesome. And is that pre tax?

[Bob]

It is. It's a rollover IRA, which I'm contributing the spousal, you know, great IRA.

[Mark]

So you're putting eight grand, seven grand plus the thousand because you're over 50.

[Bob]

Yep.

[Mark]

So you're putting away a lot of money. Although she's making a boatload of money, which is awesome. Do you guys own a home?

[Bob]

We do. And that was part of my next question to you. I have an adjustable rate mortgage on my home. I purchased it in 2012. You know, I was in the mortgage industry before I became a stay at home dad. And so I had this desire to pay off my home in 15 years. And so we're getting close to that 15 year desired payoff 2027. And so that's why I kind of took the interest rate risk early on with the adjustable rate mortgage. I had a jumbo loan, borrowed about a million dollars in 2012 using a physician loan to do it. And so I had very little down at that time to avoid pmi. And so I kind of took the interest rate risk on my own, which paid off my interest rates. 2.4%.

[Jill Schlesinger]

Oh my God.

[Bob]

And I have an arm that is. It's a 5.1arm, if you've probably heard of it.

[Mark]

Yes.

[Bob]

And so my f. My fifth year is due to reset in 2026. August of 2026. A little bit over a year from now.

[Mark]

Okay, what remains on this?

[Bob]

300,000.

[Mark]

300,000. What's the house worth?

[Bob]

1.5.

[Mark]

Wow. Okay. You want to stay in it or not? Like, because the only weird thing about this is, I mean, I know you have a year from, from this summer to make the decision, but the other thing is, like, if you're talking about in five years, you might do something else. Would that include Selling the house?

[Bob]

No. Ideally I would like to stay here in this house until my son graduates from his school where has been going to since pre K. That's ideally what I would like to do is upon him graduating school, then the possibility of selling then becomes a very realistic option.

[Mark]

Interesting. So you, we, we talked about the million bucks you guys have in retirement assets. Do you have a brokerage account as well?

[Bob]

Yeah, started that in about 2016 for the first time. And so it's around 650,000 in that.

[Mark]

Oh, what do you guys need to live on, do you know?

[Bob]

It's a big nut, Jill. I feel like the more money we make, the more we spend. I'm not going to come across very favorably on this, but it seems like about 25,000amonth is. Yeah.

[Mark]

Did you hear it? Do you hear him laughing in the background? That's Mark laughing. I'm not laughing. Please know that that is not Jill laughing, everybody. That's Mark laughing.

I knew this was the answer. How long has your wife been making the salary that she's making right now?

[Bob]

So she obviously didn't start off making 800,000 and her base salary has increased only twice in the 14 years that she's worked there. It's, it's basically just bonuses and.

[Mark]

Yeah, but to be, to be clear, you're making 800 grand, right. You're putting a bunch of money away. You're sucking money into both your retirement accounts, your brokerage account. I'll ask you about your savings and 529 and stuff like that in a second. But like, it's not surprising to me that you're spending that kind of money. You have what I like to call, or what people in the old financial planning world that I was in for many years, we call it lifestyle drift because when you're a resident, you're working your butt off.

[Jill Schlesinger]

She's a resident.

[Mark]

You don't make a ton of money together. You got the, like, everything's happening. You're not spending that much money. Right. You're just not. And so this happens all the time. So is your wife in a part of the medical world where she can keep doing this, you know, for, let's call it 10, 12, 15 years?

[Bob]

I, I really think what she does, she's so sub specialized.

[Mark]

Yeah.

[Bob]

She can work part time. She's got people working for her that do this and that's how I know that it could be done. She could work one day a week, two days a week and make, you know, two, three hundred thousand dollars pretty Easily.

[Mark]

That's nice. And so how long do you want to like push it? Like the 800 grand. Right. So if you say like until this kid. Can we commit that like at least it's five more years.

[Bob]

100. I was gonna. 20, 30. I can commit to, you know, saving what we're saving.

[Mark]

Yeah.

[Bob]

And spending what we're spending, Unfortunately. But from 2030, you know, until age 57 to 59 for her. Yeah, I could really see it, you know, downshifting to a part time. Two or three.

[Mark]

I get that. And then like she makes basically as much as you need to float your lifestyle. Yeah, yeah. So we did brokerage, we did retirement cash on hand, just, you know, savings.

[Bob]

Yeah. About 100,000 in, you know, just a rainy day fund. And then I have a depleting fund where vacations, car purchases. About 100,000 also. And then she's got a 401k for about 950,000.

[Mark]

Whoa, whoa, whoa, whoa, whoa.

Hello.

Hello. That was a funny extra.

Just another million dollars here.

Okay, so 401k is 950. And where's that from? That's part of this. That. So she's got the non qualified deferred comp and a 401k.

[Bob]

Correct.

[Mark]

And so she's putting away 20 grand into her deferred comp. They match five grand. He's also putting in the 23,000 this year. 23, five into the 401k and they.

[Bob]

Match 13, five or 14,000.

[Unknown]

What?

[Mark]

She can't leave this job.

[Bob]

I call it the golden handcuffs now.

[Mark]

Especially with five more years. For sure.

[Bob]

Yeah.

[Mark]

Okay, so wait a second, Mark, check this out. So there's 25, then another. You said 13. They matched.

[Bob]

Yeah, 13, five. Yeah.

[Mark]

Oh, my gosh.

Before he gave us this amount, this, this additional million. I was going to say they're a little white.

Yeah.

Makes. But now they got another million dollars.

[Bob]

Okay, I feel better.

[Mark]

I'm glad you do. And so we have here. I'm just doing some quick math. Are you putting money into the brokerage account on an ongoing basis? Yeah.

[Bob]

6,000Amonth, so.

[Mark]

Oh, my God. So 61 grand is going into retirement. Mark. So that's between both of them. Okay. Meaning the employer and the employee. Right. His wife and the employer. 61. Oh, wait, wait, wait. Hold on a second. And now I got his eight going into the IRA. So there we have 69. So then 69 and which is 78. And then you just did six grand a month. So that's 72. So just to be clear, Everyone, I mean, they are spending a lot of money, but they're saving 150 grand a year. 150 grand a year. Holy moly. That's great.

[Bob]

Yeah. And obviously that doesn't include the amount of money that I've been putting into the outstanding principal on the mortgage to get it paid off in 15 years.

[Mark]

Right. Stop doing that. My God. But okay, hold on. So what about a 529 for the kiddo?

[Bob]

Yeah, 1,000amonth for that. It's got 185 in it.

[Mark]

Now, last question. Do you guys. Before we move on life insurance and estate planning, where do you guys have.

[Bob]

Yep. Listen to you long enough to know that you were going to ask me that. Yes. She's got a. Well, she's got a 5 million term policy. I have a million term policy. But that doesn't include her employer provided insurance.

[Mark]

Don't knock her off because that 5 million is tantalizing. But she's got a lot of money to make and I think you like her. You've been high school sweethearts.

[Bob]

Yeah.

[Mark]

Right.

[Bob]

All good this year.

[Mark]

Yep, amazing. Okay, so if we, if you were just paying this arm right now for another year. Right. Because you said we're going to be. We're going to adjust In August of 26, what is the amount of the adjustment that you would be facing? What's the number of points in that first year?

[Bob]

The maximum it can go up each year is 2%.

[Mark]

Okay, so for right now it's 2.4%. Then it'll be 4.4%. Right? Correct. I basically have until 27.

[Bob]

Yes, you do. And that, and that coincidentally is 15 years from the time I took it out in 2012. My game plan.

[Mark]

But you don't really have to pay it off. I mean, you could.

He's going to pay it off.

Okay. All right, forget it. Okay. Thank you, Mark. Thank you for. I was about to try to convince you not to pay it off, but since Mark has just told me, obviously. So.

[Bob]

Well, I will say this. I've listened to you long enough where I, instead of paying on the principal as a curtailment, I've taken that fifteen hundred dollars I was paying after hearing you tell me not to. And I've been putting it in the brokerage and I'm glad that I've done that because in hindsight, I've been making much more money in the brokerage account. So basically the money is in my right pocket to pay my left pocket eventually.

[Mark]

Right. So for, for the next couple of Years. You can let the rate float. You can, you can stay where you are. You again. You, you're great. You're 2.4% for another year and a half. Then after that it'll be 4.4% for another year and we can kind of make a decision at that time, right?

[Bob]

Yep. Yep.

[Mark]

Okay, that sounds good to me. Then where else do we see a problem? Let's think. Let me think. I don't want you to worry about the stupid non qualified annuity. Who cares? Like you're making a ton of money. She's making a ton of money. You don't have to annuitize this thing. You'll be fine. You'll be fine. She'll get a lump sum. Let's say in five years, let's say the kid's like, you know what, I want to move to New York. Going to Columbia, goes up there. And now you guys are just want more flexibility. Want to come visit Jill and Mark and your kid in New York City. And she'll keep working and doing her thing and so what? So you take that money and you roll it over, everything will be fine. But I don't see why you're all.

[Jill Schlesinger]

It's just that you didn't know about it.

[Mark]

That's why you're, that's why it got to you a little bit.

[Bob]

Yeah, I mean my, my, my plan was to obviously have funds from the time that she retired to the time that we could, you know, take money out of her 401k at 59. So the brokerage account was set up as that bridge account. And so this, this deferred compensation plan was my, also my bridge to get to the retirement account that, you know, the 401k that she had and that.

[Mark]

Who cares? We'll get you there. I don't think this is a big problem. But Mark, now that you know that there is $2 million in retirement assets, 650 in brokerage. Maybe it'll be more like 350 after he pays the mortgage off eventually. And they're socking away 150 grand a year. Do you feel better about the game plan?

I do. In just in five short years they'll have, you know, they'll be approaching $5 million.

So one really fun rule of thumb that, you know, I hate rules of thumb or rule of thumbs. If you think about every million dollars you have saved. Okay, if you think about it this way, every million dollars will probably generate around 30, 35 grand a year without plowing through it. So in your Case, again, this doesn't account for inflation. This is a very crude way of thinking about it. But if you think about it, if you had five, you know, if you had $5 million and you could generate 175, $200,000 a year from your portfolio, that's in five years. You won't even need to do that because you're probably not gonna. I just don't believe, based on the way you've just laid out this whole situation, that you're going to. You're going to have her go from, you know, full time. She'll then go a couple days a week, then you'll scale down, then we'll decide whether or not you're keeping the house or not. All these things are in flux. I think you're in good shape, and I would not worry about the annuity. I abs that's like. It's a funny thing to be surprised by it, but I absolutely would not worry about it. You're in great shape. You save a ton of money and you spend a lot of money. So good for you. Have fun, all right?

[Bob]

No, I. I will.

[Mark]

If you're like Bob in Pittsburgh and you have a household income that's pretty high, you know, it might scare you to look at that expense number. On the other hand, you're making a lot of money. And this does happen, gang. It really does, especially for people who kind of work their way up and then, boom, you're in this much different, you know, you're in a different bracket, you're in a different time in your life. So don't worry about it. But do get in touch with us if you need some help kind of figuring out what next steps might be for you guys, just go to jillonmoney.com, click the contact us button, and while you're there, sign up for the free weekly newsletter. We'd love for you to do that. And you can subscribe to us right here on the Odysee app or wherever you find your favorite podcast. Try to do something nice for someone else today. Change your work, change your wealth, change your life. Thank you for listening. We'll talk to you tomorrow.

[Jill Schlesinger]

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