Deferred comp. what would you do

[papadad111]

Hi all. Good friend asked me for advice yesterday so thought I would query the smart minds here.

FIREd in very early 50's. Doesn't want to touch his main nest egg for 4-5 years. He claims he can access retirement accounts at age 55 penalty free based on his company retirement account setup - that's what he wants to do. Plan B would be a 72T at age 55. Anyway. His AA is 70/30 in those retirement funds (and about that overall excluding house worth 300k and a rental worth 150k). Total deferred retirement accounts are around 1.5M excluding his deferred comp. total NW around 2m.

So... He has a deferred compensation program that has 250k gross in it before tax. It is currently in a cash / short term account. It can be invested in funds similar to a 401k. Eg. Vanguard / Fidelity etc. About 20 options.

He claims it must be paid out by design in 4 annual installments in January each calendar year for the next 4 years, i.e., pays in 2017-2020.
So each year for next 4 years he will get Gross 62K at current level. Payout comes with 1099 and Triggers regular income, I used 30% for fed and 6% state taxes as they have a few small sources of income as well as dividends, interest and rental income.

Anyway, he wants to keep it all in cash for the next 4 years to mitigate risk - claims the amount in there is enough for next 4 years to avoid dipping into his retirement accounts. I felt that was very conservative and
I had suggested maybe he put half into the market since its a 4 year duration. Not exactly short term but not long term either.

What would you all suggest?

 

[Big_Hitter]

correct - he can't control the timing of the payments due to IRC 409A rules


what's wrong with keeping it in a cash account?

 

[euro]

Deferred comp plans can be tricky and often come with many options but also many restrictions, so I would double-check just to make sure he knows all of his options. Assuming he does, and with a 70/30 allocation for the rest of his assets, leaving his next 4 years' worth of income in cash strikes me as conservative, but not crazy.
What cash investment options does he have? Such plans often have a "fixed interest" option that produce very lucrative yields. For example, the deferred comp plan my megacorp has, currently provides fixed interest option at 3.5% which is obviously far above any other cash-equivalent yield you can get in the open market. Worth checking out - for me, that was a no-brainer.

 

[papadad111]

correct - he can't control the timing of the payments due to IRC 409A rules


what's wrong with keeping it in a cash account?

Nothing really wrong with staying in cash for the next 4 years.

Was just seeking opinions of what others might suggest. To me the cash option seemed too conservative. Loses ground to inflation. Etc etc.

 

[papadad111]

Deferred comp plans can be tricky and often come with many options but also many restrictions, so I would double-check just to make sure he knows all of his options. Assuming he does, and with a 70/30 allocation for the rest of his assets, leaving his next 4 years' worth of income in cash strikes me as conservative, but not crazy.
What cash investment options does he have? Such plans often have a "fixed interest" option that produce very lucrative yields. For example, the deferred comp plan my megacorp has, currently provides fixed interest option at 3.5% which is obviously far above any other cash-equivalent yield you can get in the open market. Worth checking out - for me, that was a no-brainer.

The only cash option is a short term money market like option. Paying 0.25% at best. That's what caught my eye when we looked at his paper work and online.

Other investment options are target date funds, a few vanguard funds such as institutional index and total USA bond funds, a gold fund and a couple mid cap and international funds. Choices are ok but some are a bit high in expense ratio though.

 

[Al in Ohio]

I like his plan to take 4 equal cash payments. Why take market risk at that juncture? You want to avoid that or risk going back to w*rk.


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