Deferred compensation investment question

[WhenIsItTime]

Sorry - requires a bit of set up: Late 40's, retired. Was able to defer compensation at last employer. I chose a 10 year annual payout. Invested mostly in S&P 500 to date. Accumulated a meaningful balance that after income taxes will nearly cover my expenses during payout years (for first 10 years of retirement). This is 15% of my financial assets. So far, all good.

Interesting situation with it is the payout is taken from the account balance proportionally across the investments. My preference would be to keep portion in MM for next annual payout, but that only works on proportion. Question: Advice for investment strategy? Should it match my overall AA? Should it be more conservative since its the money I want to use first (yet has a declining 10 year life)? Welcome any thoughts.

Thanks in advance for consideration.

 

[SecondCor521]

Are you allowed to rebalance within the deferred comp?

What are the tax characteristics of the deferred comp?

What I do is have a global AA across all of my accounts and then rebalance to that AA periodically. In my case I rebalance in my traditional IRA so there are no tax consequences. Depending on the answers to the above questions, you could do similarly if you so decided.

I'm mostly living off my taxable account currently, which is 100% equities. Having all of my bonds in my IRA creates that side effect. Being 100% equities in my taxable and living off the taxable first does create the risk that a significant pullback in equities over an extended period of time could impact my plan. However, the market has been kind to me (i.e. I have been lucky), and it was a risk I deemed acceptable since my WR rate was so low and I was young enough to go back to work if needed.

 

[donheff]

I think I would turn it into a conservative bucket to fund living expenses for as long as it lasts and go heavily into equities in the rest (long term component) of my portfolio. Mainly because that is a simple approach.

Alternatively, if you think you can draw out living expenses longer with a more balanced AA within the deferred comp account, you could just track what is getting sold and, if assets get liquidated when you wouldn't have chosen to do so, you could reallocate assets in other non-taxable accounts to balance out the problem. But doing so would take a lot of attention to detail.

 

[Toocold]

Ideally, it should reflect a more conservative approach to reflect a shorter payout period, while further out retirement accounts should be more aggressive, and all they together should align to your target AA.

Practically (I'm in the same situation), I just keep things simple and I have a common AA that I apply across all my accounts. This makes my brain work less hard.

 

[WhenIsItTime]

are you allowed to rebalance within the deferred comp? Yes

what are the tax characteristics of the deferred comp? Was pre-tax going in like 401k, taxed at annual distribution as ordinary income.

What i do is have a global aa across all of my accounts and then rebalance to that aa periodically. In my case i rebalance in my traditional ira so there are no tax consequences. Depending on the answers to the above questions, you could do similarly if you so decided.

I'm mostly living off my taxable account currently, which is 100% equities. Having all of my bonds in my ira creates that side effect. Being 100% equities in my taxable and living off the taxable first does create the risk that a significant pullback in equities over an extended period of time could impact my plan. However, the market has been kind to me (i.e. I have been lucky), and it was a risk i deemed acceptable since my wr rate was so low and i was young enough to go back to work if needed.

this risk of shorter term money in equities is what i'm concerned about.

 

[WhenIsItTime]

Ideally, it should reflect a more conservative approach to reflect a shorter payout period, while further out retirement accounts should be more aggressive, and all they together should align to your target AA.

Practically (I'm in the same situation), I just keep things simple and I have a common AA that I apply across all my accounts. This makes my brain work less hard.

I think that is a smart answer. I've always invested heavily in stocks and done well thanks to market and time (not timing!). I'm think I'm just having a hard time backing off.

 

[stephenson]

I have same sort of Non Qualified Plan - mine is a “tracking” system - there is no real money in any account, but a “promise” from my former employer to pay based on the allocations (fewer options, as well).

As money was contributed, I stayed equities. After I quit, I added bond fund allocations. This was three years ago.

A few of the quarterly payouts have been with depressed markets, and a few with peaking markets. Don’t have much control over the timing.

I’m probably 60/40 in the account.

 

[Franklin]

Sorry - requires a bit of set up: Late 40's, retired. Was able to defer compensation at last employer. I chose a 10 year annual payout. Invested mostly in S&P 500 to date. Accumulated a meaningful balance that after income taxes will nearly cover my expenses during payout years (for first 10 years of retirement). This is 15% of my financial assets. So far, all good.

Interesting situation with it is the payout is taken from the account balance proportionally across the investments. My preference would be to keep portion in MM for next annual payout, but that only works on proportion. Question: Advice for investment strategy? Should it match my overall AA? Should it be more conservative since its the money I want to use first (yet has a declining 10 year life)? Welcome any thoughts.

Thanks in advance for consideration.

Like u I have a deferred non qualified account.Actually I have 9 years of deferrals which are treated as separate investment decisions. Each plan year has its own balance and we make investment allocations easily between about a dozen funds. Some plan years are spread out over 10 years and some remain deferred (meaning the payouts don't start for 10 years) . As you mention I keep the next 2 years of quarterly distributions in money market funds and invest the other year plans in equities. While these are great plans they can be confusing with how your employer handles the funds. (I could write a book on the pro's and con's). But similar to you I am living on my deferred comp for the next 10 years as a bridge to RMD's and SS. The direction u are taking is the correct way to cover your short term risks.

 

[WhenIsItTime]

I have same sort of Non Qualified Plan - mine is a “tracking” system - there is no real money in any account, but a “promise” from my former employer to pay based on the allocations (fewer options, as well).

As money was contributed, I stayed equities. After I quit, I added bond fund allocations. This was three years ago.

A few of the quarterly payouts have been with depressed markets, and a few with peaking markets. Don’t have much control over the timing.

I’m probably 60/40 in the account.

OK. Mine is funded mostly with my deferred comp and some company match. I control investments based on a few options. Some risk in that would be forfeited if company went under.

 

[WhenIsItTime]

Like u I have a deferred non qualified account.Actually I have 9 years of deferrals which are treated as separate investment decisions. Each plan year has its own balance and we make investment allocations easily between about a dozen funds. Some plan years are spread out over 10 years and some remain deferred (meaning the payouts don't start for 10 years) . As you mention I keep the next 2 years of quarterly distributions in money market funds and invest the other year plans in equities. While these are great plans they can be confusing with how your employer handles the funds. (I could write a book on the pro's and con's). But similar to you I am living on my deferred comp for the next 10 years as a bridge to RMD's and SS. The direction u are taking is the correct way to cover your short term risks.

Interesting. Yours sounds more complicated, but would allow for investment choices to align better with forced payout.