HOW WILL THE NEW TAX BILL AFFECT YOUR BOTTOM LINE?

INTRO [00:00:00]Do you think the 401k is a scam? The next time you fly with a pilot, he tells you the 401k is a scam. Ask them, Hey, why do you think that? Where do they invest their money instead? I have no doubt they will have zero problem sharing it with you.
EPISODE
[00:00:53]Well, welcome back everyone to another episode of Pilot’s Portfolio. On this show, we talk all things personal finance and how it relates to your life as a professional pilot and your financial wellness. My name is Timothy P. Pope. I’m a certified financial planner specializing in the planning needs of the professional pilot. And today I want to ask you guys. What I think is a really interesting question. I know you guys have flown with folks who have made this allegation and I want to know what you think. I also wanna give you some education around it, and then I’d love to hear your feedback. But before we jump into today’s episode we got an email from Mike b so you guys know that we’ve recently just wrapped up the comparison of the major, four major airlines passenger carriers there, and your loss of medical, right. So we did American, Delta, Southwest, and United, and Mike B reached out. He had some feedback about that. So let’s read his email. He says, hi Tim. I’m a new listener to your podcast. However, I’ve heard you a few times on the 21-5 show.
[00:02:01]It says, I’m a U-P-S-O who just rounded my fourth year at the airlines, so that’s awesome. He says, I really enjoy your series on the loss of medical at the major passenger carriers. It was interesting to hear the nuances of the different airlines and the union plans and how they could affect your potential during a loss of medical situation. He says, I’m wondering if you can do an episode for UPS and FedEx. While I don’t think purposefully the major cargo carriers usually get left out of analyses like this when I listen to podcasts and read online forums. I even frequently get asked by outsiders. Do you ever think you will fly for a real airline?
[00:02:41]It says the fact of the matter is previous to the contracts currently at the passenger carriers, the major cargo industry had led the way on compensation and benefits and probably paved the way for these industry leading contracts at the passenger carriers. Ultimately, when you do these deep dives in benefits and compensation, it would be wonderful to be included with
the real airlines. Thank you, Mike. Well, I gotta say thank you, Mike for your email. Mike flies for UPS is obviously an advocate for the cargo carriers. I think Mike makes a great point that UPS and FedEx have largely been a destination airline for a lot of pilots. And no doubt some of the benefits they’ve enjoyed have helped the passenger airlines and their bargaining.Their recent bargaining cycle a few years ago. So what do you guys say? Do more cargo listeners want to hear a UPS and FedEx comparison on loss of medical? You can write a review and let me know in the review, or you can send me an email info@pilotsportfolio.com. If you are a cargo pilot, support Mike B and let us know that you’d like to hear this comparison and we will develop it.If we do that means that we’ll need to update our loss of medical comparison chart, which I do believe is complete and just waiting to be released. So we’d have to update that. So, thanks Mike. For the email and the request, let’s see what we’ll do about that. [00:04:12]And that brings up a good point guys.If you have a request that you want to hear or a topic you want to hear about or a problem with, with something that I’ve mentioned in the past shoot me an email info@pilotsportfolio.com. Alright, so that brings us to the question that I wanted to ask you. And the question is. Is your 401ka scam? I know you’ve all flown with somebody who says like, you know, 401k is a scam. They don’t put any money into it, and that’s okay. That’s fine. And you know, they’re probably telling you where they’re putting their money instead. And I work with clients and, you know, I’ll hear that from time to time. Oh, you know, somebody else flying with it, you know, they say the 401k is scam. And I usually go, well, well, that’s interesting.
[00:04:56]I, I wonder. Why they believe that and where they’re putting their money instead. So if you’re somebody who thinks the 401k is a scam, believes that, then shoot me a note. I’d love to read your email. So what I want you to do is, let’s take a step back. Before the 401k and just think about this idea of saving for retirement in the idea of saving for retirement is simple. The idea is that one day you will not be able to do the same job that you’re doing today and earning the same income that you’re earning today. And when that time comes, how will you provide for your needs in 20 or 30 years that remains after you stop working? Right? Retirement is not the end.
[00:05:37]It’s just the beginning of a different phase of life for you and as a pilot right now, that age, is age 65, and so saving for retirement is this idea that, when you set that parking break for the final time, you don’t necessarily want to decrease your standard of living, not out of necessity. I mean, if you do so, it’s because,You know, it’s your choice, but you don’t necessarily want to do that
because, hey, you know, my income has dropped significantly and I’ve got nothing saved up. So that’s why we save for retirement. Now, before today’s popular 401k plans companies had pensions for their employees, and you’d work for your company for so many years.
[00:06:16]And guess what? When you retired, you received a steady income provided by your pension benefits. Okay. There are still folks out there who enjoy a pension military, Federal workers, some employees of state and local governments also enjoy pensions. We think about teachers. There’s a few private companies.Who still offer pensions? There’s not many, but there are a few. And actually FedEx and UPS still offer pensions. So a shout out to Mike b where, you know, FedEx and UPS we’re, we’re including them. They offer a pension. They actually offer pension and 401k. I think it is worth noting that true to the trend the FedEx pension was on the chopping block of this last negotiation round. That’s not surprising at all. But it’s still there for now. So we’ll see what happens when that comes back up for a vote. But there must be a reason that over time, that these pension plans have died down in popularity, And if you’ve been around aviation for a length of time, does the term PBGC or pension benefit guarantee corporation mean anything to you? If it does and that, you know, that means you gotta know what this reason is, right? So, so the PBGC we started in 1974. because surprise, surprise, companies were failing to keep their promises, to keep their pensions funded, to keep their promises to employees.
[00:07:39]And so companies were realizing that pensions were costly to maintain, people were living longer. It was creating challenges for both the company and the workers. And, you know, if you’ve been around aviation for any length of time, this comes as no surprise because airlines all, I mean, most of all of ’em probably used to have, all the majors used to have a pension, and then through mergers and changes and bankruptcies and so on, those pensions have gone away.
[00:08:10]All right? And so now we enter the late seventies and early eighties, and the 401k is born. So let’s talk about the 401k and specifically the 401k plans that, that you guys have at the major airlines. So, as you know, the 401k is a retirement account with a huge contribution limit. Okay? So it’s up to $70,000 this year between your salary deferral, between any after tax non Roth contributions that you’d like to put in. And the company’s NEC, so 70 grand, you can make catchup contributions or special catchup contributions, you can go above that. All right? So fairly big contribution limits, and then you have this option to defer your own salary into the 401k account, right?
[00:08:59]So that just means, hey, I’m, instead of, having this as take home pay, I’m gonna put it in this retirement account and I’m gonna invest it. All right. And you can defer on a tax deferred basis, meaning you decrease your current year’s taxable income, and you pay taxes when you eventually pull the money out in retirement. So you could do that. You can opt to defer your own salary on a Roth basis, meaning you can pay tax now and then pay no tax on the gains when you pull it out in retirement. You can do a mixture of both. You can move some from the pre-tax to the Roth portion just, be aware there’s gonna be tax consequences if you do that.
[00:09:37]Unless you’re doing a mega backdoor Roth conversion, but that’s, you know, topic for another day. So there’s some flexibility in terms of how you set up your earnings to grow. Now, inside of your 401k, you get to direct the investments. Gone are the days when you know, you trusted an investment committee to work the investments. So you could have a pension benefit, right? So pension’s gone. Now you get direct control over the investments. You have that opportunity or that responsibility, however you feel about it. But that’s on your shoulders. I know all the major 401k plans and the investment menus, and you guys have excellent options in your investment menus.
[00:10:18]And, you also have brokerage windows. Alright, so if you wanted to take advantage of other investments that are not on the investment menu, but that were available in the brokerage window, you could do that. Your 401k plans are large. These are not small plans, so this means that with a large plan, you have some pretty attractive pricing on the investment options inside of those plans. Sometimes small 401k plans could have some pretty unattractive pricing, and so the idea with a 401k is, hey, if you save a portion of your income in your account over your career, and if you invest it early and invest it well, then ideally you should have enough to turn into income when you retire, right?
[00:11:07]It’s all about income. And so now as an airline pilot, if you are at the four major passenger carriers, you are receiving 17% of your pay into your 401k on your behalf. Next year, that’s going up to 18%. So you got your 401k, you got some other goodies, and you are automatically vested in the plan. So what that means is once the money hits your account, whether it’s your contribution, whether it’s the company’s NEC. The company cannot take it from you. Okay? So whether you stay, whether you go regardless of the health of the company, the company cannot take your vested dollars. Now, let’s talk about some of the other benefits that the 401k provides. There are some legal protections on your 401k.where you have unlimited protection against creditors, against civil lawsuits and against bankruptcy. Unlimited. That’s huge because it’s a good thing that it’s unlimited because if you save early, you save often, and you allow
the market to do the work for you as an airline pilot. Your 401k will easily have multiple millions in it by the time that you retire.
[00:12:25]I talk to clients all the time about real estate investments. It’s a popular one, and one of the things that we talk about, particularly if they’re gonna have residential real estate, so quadplex on down. So we think single family homes, duplex, quadplex, so on. If you’re gonna have residential real estate, we talk about what happens if somebody slips and falls on your property. What happens if a tenant finds mold and sues you to pay their hospital bill because their health starts to deteriorate? Is your insurance going to cover you? Is your, is the liability held in your name or is it held separately? Can liability move from your property? To your personal assets and are your other assets protected?
[00:13:10]Right? So there’s all these concerns that you start to think about when you get into real estate. And in the passive income pilot, they, they recently had a great episode talking about separating your liability. It was of the more recent ones and it was pretty good. So we talk about that. But you don’t really ever think about that when it comes to your 401k because your 401k assets are protected. Like you never hear about, oh man, I had something happen and somebody sued me and they took away my 401k unless it was your former spouse. And that’s not funny, but that does happen. And we will talk about that in a moment but, these things, we don’t hear about ’em because your 401k assets have strong, strong civil protection and, unlimited bankruptcy protection. So it’s really not a thing. Now your IRAs and Roth IRAs, they also enjoy federal protection from bankruptcy up to $1.7 million until 2028. But there is no unified protection against civil lawsuits at the state level. We got 50 states in this country and each state can do it slightly different on how they interpret or they protect or fail to protect your IRA or your Roth.
[00:14:22]So just keep that in mind. Now, let’s talk about one thing that your 401ks and IRA. May not be protected from, and that’s a former spouse. Okay? So if you’ve gotten divorced or are in the process of getting divorced or know that, that may be in your future, just know that your TSP, your 401k, your IRA may very well be on the table through what’s called a qualified domestic relations order or a quadro. And that is a sad day when the judge will determine what percent. Of that account should be shared. to see that drop by 50%, sometimes less, sometimes more can be real hard. So, to just know that protections that you get from others does not extend to your spouse or former spouse.
AD
[00:16:14]You know, the other thing with the 401k is, you can elect beneficiaries. Just directly on the account. Okay? And when you elect beneficiaries, that means that the account passes by operation of law, super clean, super fast, super liquid avoids probate the state that the 401k is in, or you’re in, or the beneficiaries in, doesn’t matter.Unlike rental property. And by the way you wanna make sure you have beneficiaries on your 401k. And make sure that they’re updated and make sure it reflects your wishes. Okay, so, so everything I just said can apply to you because if you fail to elect beneficiaries on your account and you pass away, it will be messy.It will be slow and possibly extremely costly from a tax perspective to your heirs. I mean, they may be forced to liquidate the entire account. Just to split it if there’s no beneficiaries elected, so elect your beneficiaries. Alright, now one thing we know with both legislation, and regulation, it tends to be slow.
[00:17:21]But the 401k plan continues to adapt. When the plans first came out, you could only do pre-tax contributions, and then eventually they added Roth contributions and then eventually plans added brokerage windows. And here recently just August of this year, the president signed an executive order to have the Department of Labor to review and update guidance about including alternative investments inside the 401k. So alternative investments was defined as private equity, private credit, cryptocurrency, real estate, digital assets, and this is huge. Okay? This is a huge shift of what’s allowed in a 401k plan. Now, as I just mentioned, legislation and regulation tends to move slowly, so I don’t think this is happening tomorrow. DOL was instructed to review and update guidance about this and the 401k plan fiduciaries. Will likely move forward, you know, when they’re satisfied and they understand how they can uphold their fiduciary responsibility and include these asset classes at the same time, some of these, you know, have been historically reserved for accredited investors or institutional investors only.
[00:18:37]So I think it’s really interesting and I, you know, a question outstanding is how are these parties. 401k plan sponsors 401k, trustees and fiduciaries, and then also the sponsors of private equity, private credit, cryptocurrency, real estate and so on. How are they going to work to make sure these assets ’cause a lot of these things have lockup periods, particularly private equity, private credit, some real estate. They have lockup periods to allow the capital to work. Could be three years, could be five years, could be seven years, whatever. And you put the money in, you lock it up, and then, you know, hopefully you get a return at the end. And so, I’m curious how they’re going to align this if, this comes to pass. I’m curious how they’re, they’re going to align that structure logistically to deal with the whims of the masses. I mean, I’m, I’m sure you, you’re listening to this show, so you’re an astute investor. Have knee-jerk response in the markets. But I tell you, when you look at the data of
where money goes, when money markets are full, when equity funds are full and so on majority of people tend to have you know, move on whims. [00:19:38]Okay. So I think that’s interesting how they’re gonna satisfy that walkup period. Or will it change the walkup period? Sponsors of private equity and private credit are very interested to have your 401k dollars in there. I mean, there’s trillions of dollars in 401k and retirement assets. It’s a huge percent of the overall retirement landscape. I heard one, one stat of 20%, so they would love to have your 401k dollars in their investments. We’ve gone through all of this and I ask you the question. Do you think the 401k is a scam? Love to hear from you. The next time you fly with a pilot, he tells you the 401k is a scam. Ask them, Hey, why do you think that? Where do they invest their money instead? I have no doubt they will have zero problem sharing it with you. I also wanted to go through how much you should be saving based off your stage in life when it’s okay to throttle back on retirement savings. But, this episode’s already over 20 minutes long and so I think we’ll save that for the next episode. So that’s gonna do it today, folks. Thanks for listening to the Pilot’s portfolio, and I will catch you on the next one.