By Allen Giese, ChFC®, CLU®, ChSNC®
We talk to Special Risk FRS participants all the time who are on the brink of retirement. Almost all of them have deferred comp plans, but few of them have really taken advantage of how that plan can help them the most. If someone had just explained to them BEFORE they were ready to retire how valuable that plan is, it would have made all the difference. In this short video, you’ll learn what they wish they had learned about how to make that deferred comp plan more valuable to you.
Transcript:
Hey thanks for tuning in. I’m Allen Giese, President and founder of Northstar Financial Planners, your FRS Special Risk wealth manager.
All the time, I am talking to people who are just about ready to retire from an FRS employer. Almost all of them have deferred comp plans, but few of them have really taken full advantage of how that plan can help them… especially special risk folks because you tend to retire at younger ages. But the problem is, they are on the brink of retirement and the opportunity to strengthen that 457 plan has mostly passed. If someone had just explained to them, even just a few years earlier how much that plan is going to mean to them it would have made all the difference. But the window is now closing for them. But not for you.
Many years ago one of my closest friends brought to me his entire FRS retirement plan to review, including his deferred comp plan. Now he also shared with me the advice he was getting from the plan “Advisors” as well as some of the financial product salespeople that are out there. When I saw how poor that advice was I realized that we could make a real difference for so many FRS Special Risk families. Because of my friends experience and my nearly 30 years as a financial planner, our passion here at Northstar, is helping Special Risk FRS participants make better decisions with their finances and better achieve what is most important to them.
So in this short video, over the next 9 minutes, I’m going to show you the 4 things you can do right now to make your 457 plan better and stronger. And if you listen and do these things when it’s YOU on the brink of retirement, you’ll be glad that you did.
My first piece of advice is, as you might expect… choose the right investments.
But what are the right investments? It’s going to depend a lot on who you are, what you think of how markets work and your thoughts around how much risk you are comfortable with. You don’t have any thoughts about risk or have any clue on how markets work? Listen up.
For starters, because I KNOW this is how many of you choose your investments, throw away the past returns chart. You know that chart that shows what the past performance was for every investment in the plan over the last 1, 3 & 5 years? That will, in all likelihood, lead you down the wrong path. Throw it out.
But you NEED a strategy. Some people, for example, go on the belief that there are some fund managers that are smart enough or intuitive enough to pick good stocks over bad stocks and they somehow know when they should be invested and when they shouldn’t. Then there are others that say, that there is no real evidence that stock picking and market timing actually works or adds any value so you are better off using funds that buy and hold whole markets.
What you believe should be reflected in the fund choices you make. But it’s important you have a strategy if you are going to be picking and choosing different funds. If you don’t have any thoughts on the subject you might want to take a hard look at those retirement target date funds your plan offers and let them make the choice for you.
We definitely have some thoughts on the subject and if you want to know more about how we think you should be invested drop me an email and I’ll shoot you back our ideas on the subject to get you started.
The second thing you can do is actually participate in a meaningful way. In other words… look at what you are contributing and maybe think about increasing your contribution if you can. Listen, this is all you are really doing… You’re sending money today to your future self you will be tomorrow. And for doing this the IRS is going to give you a nice little tax break on your income tax return this year as well as potentially when you retire.
Which reminds me of an interesting little tidbit a lot of people aren’t aware of that is a somewhat unique benefit for deferred comp plans. Did you know, you can use your deferred comp plan in retirement to pay up to $3,000 per year in insurance premiums on a pre-tax basis? Think about it… that’s a pretty decent deal you have there that basically very few people outside of government can get.
So anyway, putting $50 per paycheck into your deferred comp is nice, but it’s really not going to get you anywhere. The max you can put in is $19,500 this year in 2020… or $750 a paycheck if you’re getting 26 paychecks a year. And that’s without utilizing any of the catchup provisions. If you can do that you will be happy you did when you get to the end of your career.
We talk about a lot more benefits the deferred comp plan offers you in our book “A Public Safety Officer’s Guide to the Florida Retirement System”. Get one today by just sending an email and asking us for it… it’s yours free. We’ll even pay the postage.
OK. Third, here’s something not a lot of you are aware of, and some of you who are aware of it should probably forget about it. It’s the SDO or Self Directed Option account. This is the deal where your deferred comp provider, like ICMA or Nationwide, has teamed up with another large discount brokerage house, like TD Ameritrade or Charles Schwab, and allows you to open an account over there yet still keep it all inside your deferred comp plan. The advantage? A LOT more investment choices, including individual stocks and mutual funds that your deferred comp provider doesn’t offer on their platform.
But you know how in life a lot of times an advantage for one person can also be a disadvantage for another? Like, someone who really understand high performance automobiles vs someone who doesn’t but they both get in a Lamborghini’s and open them up… one is apt to kill himself. Well, there’s a lot of people out there utilizing the SDO that would probably be better off if they didn’t. Basically because they don’t know what they are doing. Go back to reason number one… if you don’t really have an idea what your investment strategy is then giving yourself more choices isn’t going to help you… it’s just going to make things more of a mess for you and you’re probably not going to have a very good experience.
We here at Northstar feel like we know how to make the best of an SDO account and have it actually help you and be worth it… but that doesn’t mean YOU should open up an SDO in your deferred comp… especially if you don’t know what you are doing. SO… if you have a good game plan and know you’re stuff it can be an awesome advantage. If you don’t… my advice is stay away from it.
Let’s say for a second that you needed to borrow some money and I was gonna loan it to you. I’ll charge you a nice little rate of interest and even give that interest back to you. But, here’s the deal… any money you borrow from me you have to pay the IRS twice on it for income taxes. You have to pay income taxes two separate times on any money I let you borrow. Would you think that’s a good deal?
I know I wouldn’t. Yet that is in essence the deal when you take a loan against your 457 plan. “But you’re paying yourself back the interest!” you say. I hear that all the time. WHO CARES? How much interest are we talking about anyway? 5%? What’s your top tax bracket? If you’re making over $80,000 you’re paying at least 22% in taxes. That’s what you should be worried about.
See, here’s the deal. Take a loan against your deferred comp plan so you can add that spa to your swimming pool or whatever it is you want to do. You’ll typically have 5 years to pay that loan back. Where’s the money going to come from? From your paycheck, right? They take the money right from your paycheck. Super easy. But the problem is they take it AFTER they take taxes out. It’s not an above the line deduction. So you are paying the loan back with after-tax money. That’s a tax. Tax number 1.
Now fast forward a few years and it’s time to retire and actually use the money in your deferred comp plan for whatever you want. So you take the same dollars out you put in with your loan payments and wham, you get taxed again! Tax #2! There’s no credit for the fact that you put money back into the plan with after-tax dollars. The IRS treats it as if it went in pre-tax and has never been taxed. Even though it has.
Now if you really need it, my advice is to consider this the last place you go to get money. The last place… After you’ve exhausted all other possibilities. Then, maybe, it makes sense. It probably means you’re in some kind of trouble and it may be worth it then. But not for home improvements or vacation funding or things like that… that’s just lousy planning. And expensive!
OK… The number one question we get from FRS Special Risk participants thinking about retirement is if we could give them a second opinion on what it is they are doing, just to see if they are on track or could be doing something better. And the answer is absolutely! And it doesn’t cost you anything other than some of your time. And one of three things is going to happen if you take us up on our free second opinion offer.
First possibility is that you are doing everything well, we see no place to add any value and we tell you that. Basically it’s an “atta boy or atta girl” and we tell you to stay the course. Don’t change a thing. You’re going to feel great because you just got confirmation that you are on track.
The second possibility is that we’re going to see that you could indeed use some help, you’ll benefit from it and we can help you. We’ll tell you what we can do, how it’ll help you and what it’ll cost you to work with us. Keeping in mind of course, that the value you receive has to be greater than the benefits you pay. That’s a good deal and you’ll be glad you reached out.
And the third possibility is that we’re going to see that you could use some help but we’re not the right firm to do it for you and if that’s the case we will point you in the right direction to the kind of help you need. Again, it’ll be to your advantage to have gone through the process because you’ll be better off for it.
I have one last thing to share today. I got a new car not too long ago. The reason I’m telling you that is because of the way I got it. You see, I lease my car through my business and the lease was coming due on my old car. Now I hate getting new cars because I don’t have time for the hassle and I’m always feeling like I’m getting just slightly taken… which of course, I probably am.
But I got a call from a broker that convinced me to just try him and he sounded really convincing. So I did. I actually had him quote me the EXACT same make and model I was currently driving and you know what? He came in literally hundreds of dollars per month LESS than I was currently paying. For exactly the same car but three years newer. I’m driving that car today and the deal was exactly as promised. No hidden tricks or fees or anything else. Just a few hundred dollars less per month in payments.
Here’s what I know to be true… Sometimes in life, for whatever reason, we’re put in front of someone that actually has a good offer that will make us better off. But like with my car… I had to take a little leap of faith to let them prove themselves to me that indeed they could do what they said they could do. And they did.
So can we. And the sooner you reach out, the sooner we can start helping you achieve what is most important to you.
Schedule a complimentary consultation with a fee-only financial planner to discuss your personal situation in more detail.