SPIRIT AIRLINES SHUTDOWN: WHAT PILOTS SHOULD DO NEXT

[00:00:00] I wanna speak directly to Spirit pilots and their families who are working through a really difficult time and situation right now, right? So first and foremost, guys, this is hard. Nobody plans on waking up and suddenly having to rethink their next paycheck, their next potential several years, their retirement timeline, or even what the next stage of life looks like.

But that is what our friends at Spirit Airlines are finding themselves in. Today, I’m not gonna focus on the headlines, nor speculate. What I’d like to do is just talk to pilots on the practical side of about your money. I’ve heard a lot and seen a lot of resources about hiring and, you know, what to do, how to land on your feet, and so on, but I really wanna talk about the money side of things because when uncertainty like this is increased, what, what becomes incredibly valuable is clarity.

You’re listening to The [00:01:00] Pilot’s Portfolio, the show dedicated to guiding professional pilots towards a future of financial success and stability. Fly along with your host, Timothy P. Pope, as he provides financial planning insights and answers to your burning questions and dives into real-life stories from fellow pilots who share their successes and cautionary tales.

The Pilot’s Portfolio takes off now. Welcome to this episode of Pilot’s Portfolio. Guys, glad to have you along with us today. My name is Timothy P. Pope. I’m a certified financial planner specializing in the planning needs of professional pilots and also principal at 360 Aviation Advisors, where we help successful professional pilots who are ready to engage in financial planning with a well-rounded focus on retirement Investments, and tax.

So we help our clients plan for and navigate life’s inevitable [00:02:00] transitions, and guys, we are talking about one of those transitions today. Like, nobody ever wants to wake up and find themselves here, right? Nobody plans on waking up and suddenly having to rethink their next paycheck, their next potential several years, their retirement timeline, or even what the next stage of life looks like.

But that is what our friends at Spirit Airlines are, are, are finding themselves in. So we all love aviation, but aviation has always been a really– a cyclical business as a whole, but then also for specific companies, right? So airlines expand, airlines contract, mergers happen, bankruptcy happen, hiring booms happen, furloughs, and all of that, right?

And it’s one of the reasons why pilots who have been in the industry for a while, they often develop a different relationship with money than someone working in a more stable industry. Because along the way, those pilots who have had time in the seat, they understand that, hey, look, [00:03:00] a high income that’s attached to sometimes a volatile system needs to be planned for.

So first things first, the order of business today, it’s not about optimizing your long-term plans and so on. We’ll get to that. The order of the day is: how do we be stable? How do you land on your feet? How do you take care of your household, take care of your family? How do you make sure the runway that’s– the remaining runway that’s in front of you is manageable?

Let’s do all of those things first before trying to solve those long-term financial questions all at once. It’s reasonable to also wonder, “Hey, what does this mean for my retirement? Am I still on track? Do I have to start over? Should I move my accounts?” Like, that is normal, and those are good questions to be asking, but we’ll get to those.

Let’s get you stabilized. Let’s think about the next six to twelve months, right? And to be honest with you, during the good times, this is why we spend so much time talking about having an emergency fund, having liquidity, and understanding your cash flow in your own home, [00:04:00] and also making sure you have access to brokerage accounts.

And it’s not because we expect disaster around every corner, but because flexibility certainly matters, and I think times like this demonstrate why that flexibility matters, right? So your emergency fund, all of a sudden, overnight, has become very important. Access to your investments and the cash that you can raise from your investments in your brokerage account automatically has become very important overnight.

So what I’m gonna encourage you to do is, number one, understand your household burn rate. Okay, so when I say burn rate, I mean, what does it cost you to run your household and your family every month, right? So do you have a mortgage on your property? What is that? What is your insurance cost? So that could be life insurance premiums, car insurance premiums, umbrella policy insurance, right?

So all the insurance premiums that you are going to maintain, what do those cost you? What does it cost you to eat? So going grocery shopping or going out to eat to feed the family, [00:05:00] what does that cost? Do we have notes on our cars? What are those note payments? Do you have younger children that are in activities?

Or maybe they’re, you know, high school age or college age, and you still support them to some degree. What does that cost you? Thinking about healthcare, right? At the time of you listening to this episode, very likely you’re in between Spirit and your next carrier. So how are you going to cover healthcare costs, right?

What are other debt obligations that are not tied to a mortgage or your car but that need to be satisfied? So your burn rate is all of the money that you’re spending every month to run your household. And what’s nice about, I would call this a, uh, not even a nice to know, but maybe even a requirement, right?

Is understand, like, which of these are discretionary, which means, like, this is nice if we do them, and then which of these are non-discretionary, so which of these are required. Because what you can do is then have a conversation with your family, and you can say, “Hey, we’re in [00:06:00] great shape for X number of months.

But if I’m not on my feet at another airline by,” and you put the date in there because you’ve done the math, “we may need to look at trimming back some of these discretionary expenses, some of these nice-to-have expenses.” And you gotta be specific about which ones you’re going to trim back. And then you can discuss that as, “Hey, this is a temporary thing.

It’s only gonna be until we’re stabilized and back on our feet.” When everyone in the family is on board, when everyone in the family understands how this career disruption impacts them, I think they’re gonna be most– the more likely to help make those sacrifices and chip in. And that, just having everybody on the same page in the family, can take some stress off and free you up to focus on, you know, your next interview, your next airline, and where you’re going to land.

When we think about understanding what your burn rate is for your family, using the emergency fund, using the brokerage account, one of the hardest things is, in financial [00:07:00] circumstances or career disruptions like this, is that uncertainty. But just understanding the amount of runway that you have left in your family, that can lower a lot of anxiety.

Okay, we’re fine. It’s not pleasant. It’s frustrating. But we’re fine. We’re going to be fine. And I think that clarity Certainly it helps. Now I want to talk to Spirit pilots who were very close to retirement age. Because I got a lot– I said this earlier, a lot of the content that I’ve seen has been focused on other airlines stepping up, taking care of guys who are gonna, you know, apply and get hired, right?

And you know what? That’s good. And I actually I like to see that in the community, right? In the aviation community. But what about you guys who are or fairly close to retirement, and maybe you’re in your late fifties, early sixties. Some of you, this circumstance is not a, “I’m gonna land on my feet at a different carrier.”

You’re asking yourself, “Hey, do I really want to start over somewhere else at the [00:08:00] bottom of the seniority line?” Or you’re asking yourself, like, “Okay, I wasn’t planning on this, but can I retire earlier than expected?” Right? Maybe you’re age fifty-five, maybe you’re age sixty. You’re asking yourself, “How has this actually impacted my long-term retirement?”

Okay? You may have been planning for another five to ten years of earnings, of 401contributions, of savings. So now what does your long-term retirement look like if you take away those five to ten years? What kind of income do you need to close the gap? Of course, those are very specific questions, and the answers are going to be individualized based off of where you are in your financial journey.

I think everyone’s situation is going to be different. But because you are so close to retirement, if you don’t have good answers to those questions, I think there could be a lot of anxiety around those topics that surround the uncertainty here. So if you’re between the age of fifty-five years old and sixty years old, be advised of a [00:09:00] possible ten percent penalty ahead of you.

Let’s say you’re between fifty-five and fifty-nine, and you decide that you’re going to retire now. Be aware that when you roll over the funds into an IRA, and you take a distribution from that IRA, you may be subject to an additional ten percent penalty because you’re under the age of fifty-nine and a half.

And if you say, “Wait, hold on. Wait a minute. That’s not fair. I didn’t ask Spirit to go out of business. Like, I didn’t ask Spirit to shut operations down and to, you know, force me to move my 401.”” If you say that, you know what? That’s a very fair point, but that’s the reality of the situation, right? But with some careful planning, you may be able to avoid the extra ten percent penalty.

All right, so let’s think about this. If you’re age fifty-nine and you roll your Spirit 401into an IRA plan, hey, maybe you could just wait six months until you’re age fifty-nine and a half, and then you can begin taking distributions out of the IRA without the [00:10:00] additional ten percent penalty. Now, in fact, if you’re around age fifty-seven and fifty-eight and you’ve decided that you’re going to retire or be mostly retired, right?

You could look at requesting a distribution to yourself in the amount that you would need To get you to age 59 and a half and then roll the remainder into an IRA, okay? So that way you could avoid that ten percent penalty. All right? So I just wanna go over that one more time. Let’s say you’re fifty-seven, fifty-eight years old.

You say, “Hey, you know what? I think I’m gonna go ahead and I’m gonna retire early. I might do a little something here and there to keep the hands warm and busy,” but, you know, you’re not joining another airline. Okay, cool. Maybe your 401is a couple million dollars, right? Well, what you can do is you’ve run your burn rate, you’ve run your numbers, you’ve figured out what it’s gonna cost you for the next two years, and you can take that money directly from the 401and then take that 401and roll it over to an IRA.

You live off the amount that you’ve taken out already. [00:11:00] There’s no ten percent penalty there. And then once you arrive to age fifty-nine and a half, the money that’s in the IRA is ready for you, and there’s also no ten percent penalty there. So, you know, that can just There’s gonna be a little paperwork and some number crunching to figure out, like, what’s best for you, but that’s another way to avoid that ten percent penalty.

Now, for those that are a little bit younger, say age fifty-five and fifty-six, and you determine, like, “You know what? I’m gonna mostly be retired. Maybe I might do something to keep my hands warm,” but maybe you’re not going and starting over at another airline. Okay, cool. There’s an option called substantial equal periodic payments that would allow you to take annual distributions from your IRA for a five-year period or until you reach the age of fifty-nine and a half, whichever is longer, and that option would avoid the ten percent penalty.

Now, there’s some calculations, and there’s some paperwork, so if you’re gonna do the substantially equal periodic payments or SEPPs, you’re probably gonna wanna work with somebody [00:12:00] to help guide you through that one. But that’s a way that you could take money out over a five-year period under the age of fifty-nine and a half without the additional ten percent penalty.

And now, all of these strategies here that we just talked about are– they’re re– you wanna think about them as a bridge strategy, and especially the SEPP, substantial equal periodic payment strategy. Like, that could be very attractive for somebody age fifty-five and fifty-six. Maybe it’s less attractive for somebody that’s age fifty-eight because that strategy would lock you into taking money beyond fifty-nine and a half.

It would lock that amount down for you, right? And we’re all about flexibility here, so we wanna give you, and you want for your family, the greatest amount of flexibility that you have given the circumstances. So these are all bridge strategies here. But you know what? If you have a well-funded brokerage account, you may not need any of the above strategies that I just talked about because you’re still able to access your investments in your [00:13:00] brokerage account.

You’re still able to convert those investments into cash and then take that cash and run your household. And this is one of the reasons that I talk to clients all the time about not having all of their assets in retirement accounts because while those retirement accounts certainly offer tax-free and tax-deferred growth, they do come with restrictions that limit your flexibility.

And in the case of sphere pilots right now, you guys need flexibility. So as we just discussed, retirement readiness is not just about account balances. It’s about flexibility. It’s about cash flow. It’s about healthcare, lifestyle expectations, and options. And quite frankly, I mean, an event like this, if you were planning to retire at age sixty-five, you probably had a number that was enough for you at age sixty-five.

But if you’re fifty-five, then that’s gonna change. That’s gonna change your whole plan because 10 years is 10 years, and that’s gonna mean something very different at age fifty-five. So, and guys, you know, honestly, for pilots in this [00:14:00] age range, uh, I think this episode pairs nicely with a recent episode where we talked about how to prepare for retirement during turbulent times, right?

And this is the exact kind of real-world turbulence that tests whether the underlying plan is resilient. A link to that episode will be in the notes here. Hey, pilot. Are you looking to save twenty percent on the sale or purchase of your next home? Let me tell you about a friend of the show, Beacon Relocation.

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Buyer credit varies in some states. Contact us for details. So moving on from pilots who are age fifty-five to fifty-nine, let’s talk about your 401 plan because a lot of times folks consider your 401. It is tied to the company in terms of Spirit sponsored it, but your 401 plan is still your money. The airline, yes, has ceased operations, but your qualified retirement assets have creditor protections, so it is unlike the any debts that Spirit cannot repay.

Your 401k is not going to be used to satisfy those debts. It is yours. And you guys have all become one hundred percent vested in company contributions [00:16:00] because the company has ceased operations there. So what’s in your account is yours. Now, I want to make this distinction here that it may, as you’re thinking about what to do with your 401k, it may be a good idea to just pause and to consider having a plan before you make your first movement, right?

I think natural, like, knee-jerk reaction, “Oh, the company went out of business. I’m gonna yank all my money from my 401k plan and put it somewhere else.” Okay, I understand it, but for some of the reasons we just spoke of above or just recently here, like, it may be best to have a plan. All right, here are your options.

You can temporarily leave your 401k plan where it is. The plan administrator will advise you of the deadline that you need to make a decision to move your assets by So you do have some time. Number two, you can roll the funds into an IRA. We just talked about that in relation to somebody who might be thinking about early retirement.

But even if you’re not thinking about early retirement, you can roll that into an [00:17:00] IRA. And then three, you can take a distribution to yourself, and that will certainly come with tax and, depending on your age, possible ten percent penalty. Even if you are planning to retire early, it may not be the best move to take a full distribution to yourself, because then let’s say you have a couple million dollars in your four oh one k, all of that becomes taxed all at once, and you immediately shoot up to the highest bracket.

That’s probably not what you’re interested in, especially if you’re thinking about several decades in retirement. But that is an option to take a distribution to yourself. If you roll the funds to an IRA and you’re going to another carrier, consider putting it into a separate IRA versus adding it to an IRA that you currently have.

Also, consider not adding any additional money to your Spirit funds if you put it into an IRA. And here’s why. When you get to your new carrier, most will accept what’s called roll-ins, and that’s going to be funds from another employer-sponsored [00:18:00] plan, so your Spirit four oh one k, as long as the funds are purely from another employer-sponsored plan and it’s not intermingled with your own funds.

So if you’re gonna go to a new carrier and you’re planning to put this money into the new plan, consider opening up a separate IRA, letting it sit there. Sure, you can invest it. Depends on, you know, how long it’s gonna be un-until you go to your new carrier. But also consider not putting any new money into that IRA.

And you also want to be aware of the backdoor Roth issue here. So as you guys know, you know, many high-income filers rely on the backdoor Roth IRA strategy because their income is too high to contribute directly to a Roth IRA. So if you roll a large pre-tax four oh one k balance into a traditional IRA, now you are going to create some pro rata complications that could affect future Roth conversions.

And so, you know, when you think about the backdoor Roth, let’s say you’ve already done your backdoor Roth conversion for the year, and let’s say you [00:19:00] move this Spirit four oh one k into an IRA, and it has pre-tax dollars there. If the Spirit money is still in that IRA on December thirty-first, your backdoor Roth conversion is going to be taxable according to the pro rata rule.

If you haven’t done your backdoor Roth conversion yet, and on December thirty-first you still have an IRA with Spirit pre-tax money into– in it, then you’re just gonna wanna be aware of the tax consequences and then make a decision, “Hey, do I do this before December thirty-first of twenty twenty-six? Do I delay my backdoor Roth conversion for some time betw– you know, between January one and April fifteenth of next year and just kind of double-dip?”

Right? So these are some of timing strategies where Just understanding just the timing of what you’re, you want to do could help save you some money there. You know, and when you think about these retirement account decisions, they’re also interconnected, right? So what you do over here can impact something else down the line.

And honestly, this is one of the [00:20:00] reasons that specialized planning matters because career disruptions are not just emotional events, they’re technical financial events as well. So taxes, retirement plans, liquidity, healthcare decisions, relocation considerations, retirement withdrawal timing, and retirement timing itself, all of these things start interacting at the same time.

At Three Sixty Aviation Advisors, helping professional pilots navigate those intersections is exactly what we do. You can learn more at threesixtyaviationadvisors.com. That’s three six zero aviation advisors dot com, and you’ll find the link in the description as well. All right, I’m gonna shift gears a little bit because there’s another side of this coin that could get overlooked, uh, I think in the fog of everything that’s going on, and that’s opportunity.

So obviously, nobody is going to voluntarily choose a career disruption or an airline ceasing operations [00:21:00] simply for tax planning considerations. Like, that’s not what I’m saying. But sometimes These events, they create financial planning windows that would not exist otherwise during peak earning years, right?

So for many Spirit pilots, this may be a, a significantly lower income year, and, you know, as a result, that’s gonna create opportunities for things like locking in taxable gains in your brokerage accounts possibly or Roth conversions, right? So maybe in previous years, converting a large amount of pre-tax money to, to Roth would have pushed you into, you know, the thirty-two percent or the thirty-five percent bracket, right?

Marginal bracket. But now, depending on what your income looks like for the rest of the year and the cash that you have on the sidelines to be able to pay that tax bill, a conversion might make sense at a substantially lower marginal rate, right? So there’s that. Also, there could be opportunities around realizing long-term capital gains and while your [00:22:00] taxable income is lower.

So long-term capital gains typically is zero percent, fifteen, or twenty, and then depending on where you fall, you either can throw on that net investment income tax, which is an additional three-point-eight percent. So maybe before, it would’ve cost you twenty percent to lock in those marginal gains plus the three-point-eight percent.

But maybe now, depending on the– your income for the rest of the year, maybe it’s only gonna be fifteen percent. Like, do we reset some of our basis? Do we lock in some of those capital gains? Again, when you think about tax strategy, it’s highly individualized. There’s no blanket answers. None of this is tax advice.

But what I am encouraging you to do is have someone in your corner to help you look for these opportunities while you’re doing things like preparing for your next interview and maintaining stability at home and getting ready for career phase two-point-O, right? So be aware that there could be some tax opportunities because of lower income this year.

The other thing is, uh, I mentioned, is grab your last [00:23:00] pay stub. Grab that and understand how much federal tax has already been withheld, how much state tax has already been withheld this year. ‘Cause what happens, especially if you had some seniority behind you, you were making, uh, you know, strong wages there at Spirit, and then when you go to another carrier and start back at the bottom, not only is it you’re gonna be making less money, but if you’ve already had a good amount of taxes withheld for the year, it might make sense to adjust your W-4 for the amount of taxes that you’ve already paid, so then your paychecks for the remainder of the year are slightly larger.

And that’s what you and your family could use and benefit from right now is, hey, maybe a little bit more money every paycheck if we can adjust our W-4 and then finish the year, you know, not really owing anything and not getting a really big refund back. So think about that. Grab your last pay stub, and make sure you’re aware of that.

You know, guys, I think that While [00:24:00] this circumstance is undesirable for everybody involved, for sure, I’m really happy to see that the aviation community has rallied around the Spirit pilots for sure. And everybody here is likely using a lesson that aviation has taught them from the very beginning, right?

So when conditions change unexpectedly, we’re taught not to panic. We’re gonna stabilize, we’re gonna aviate, we’re gonna navigate, then we’re gonna communicate, right? So you guys are gonna stabilize your financial circumstances first. You’re going to address anything that immediately needs to be addressed within your family.

You’re gonna come up with a plan, and then you’re gonna work through your financial reality to make the best of it. It’s not desirable, but you’re gonna make the best of it, of what you’ve got. If you’re a Spirit pilot or a family member trying to understand how this situation impacts your cash flow, your immediate needs, your long-term retirement planning, your short and intermediate term taxes, you don’t have to navigate this alone.

Visit three sixty aviation [00:25:00] advisors dot com. That’s three six zero aviation advisors dot com. You’ll find the link in the description there. And when you’re ready to evaluate your options, organize the next phase, and build a plan for what comes next, let’s schedule an appointment and let’s talk. As always, guys, I want to thank you, the listeners, for tuning in.

Let me know, write in, info at pilots portfolio dot com, if you have specific questions on how to navigate this event in your life, that the– all of the industry kind of watching and participating in one way or the other. And then also thank you to Beacon Relocation for sponsoring this show and helping you guys save money on your next real estate transaction.

So with that, we’ll see you on the next one. Thank you for joining this episode of Pilot’s Portfolio. If you found this information helpful, spread the word and share it with a pilot buddy. Or if you have questions and there’s something that you would like to hear discussed on the show, send us an email.

[00:26:00] You can find the address in the show notes. For those of you who are ready to learn how we help professional pilots with their financial planning needs, schedule an appointment. Until next time, keep the shiny side up, and we’ll see you on the next episode. Pilot’s Portfolio is hosted by Timothy P. Pope.