A Wiser Retirement®

173. Making the Most of Your Airline 401k

• Wiser Wealth Management • Episode 173

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Did you know that the world of airline pilots is rife with unique retirement planning challenges and opportunities? On this episode of A Wiser Retirement™ Podcast, Casey Smith and Missie Beach, CFP®, CDFA® discuss different 401k options for pilots. Crack the code of planning for retirement as a pilot with our in-depth discussion on the industry, pensions, non-elective contributions, and 401k's. Discover the benefits of a Market Based Cash Balance plan, and the financial implications between major and regional airlines, and comprehend how the ever-changing airline industry now offers more competitive salaries and 401k matching plans.

Learn how to manage money efficiently and capitalize on tax credits for a secure future. Understand why it's important to keep your savings in multiple buckets and get expert advice on how to invest wisely in ETFs while steering clear of annuities.

Download your free airline 401k allocation by clicking here.

Podcast Episodes Referenced:
- Ep 162: Is your retirement plan ready for takeoff?

Youtube Videos Referenced:
- Avoid Asset Managers Looking to Manage Your Airline 401k
- Delta Pilots- Market Based Cash Balance Plan

Learn More:
- About Wiser Wealth Management
- Schedule a Complimentary Consultation: Discover how we can help you achieve financial freedom.
- Access Our Free Guides: Gain valuable insights on building a financial legacy, the importance of a financial advisor for business owners, post-divorce financial planning, and more!

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This podcast was produced by Wiser Wealth Management. Thanks for listening!

Hadley:

Welcome to a Wiser Retirement Podcast. Before we get started with the episode, i want to tell you about a new e-book available on our website called Buyer Beware. Why do they keep trying to sell you that annuity? This e-book covers the various types of annuities, negatives to owning annuities and better investment alternatives to annuities. To download this e-book, you can click the link in the episode notes or go to wisere investorcom and you'll find it at the bottom of the page. Now on to today's episode.

Casey:

Welcome to a Wiser Retirement Podcast. We believe the best financial advice would always be conflict-free. I'm your host, casey Smith, guiding you to financial freedom today as my co-host, missy Beach. Hey, missy.

Missie:

Hey Casey.

Casey:

So today we kind of have a special edition of our podcast. A lot of our clients here a Wiser Wealth Manager, maybe about a third are in the airline business flying airplanes, airline pilots of a background in aviation. That's kind of naturally where our business was kind of born out of a long time ago. But I think that anyone who's saving into a 401k now can get a lot out of this podcast as well. So make sure you stay tuned.

Missie:

Universal advice.

Casey:

That's right. So in the pilot world right now there's been a lot of talk about market value cash balance plan And we're going to. So this is really what this whole podcast is going to be about. But we've got to kind of build up to that first. First of all, you know 401ks are relatively new. You know, when you think about in the scheme of things of investing, because a long time ago our grandparents, they all had pensions, right.

Missie:

Yeah, what half a century old Right.

Casey:

And so now we've kind of transitioned into 401ks. In the airline world there were pensions of all the major airlines but after 9-11, in the airline industry getting hit so hard, a lot of those were, you know, turned over to the government, which government guarantees pensions right. So in place of pensions, pilots, associations or unions have negotiated non-elective contributions. So essentially, an airline pilot is any of the major Delta, american, united. They're getting a percentage of their salary put into their 401k for them in lieu of pensions. So this started off at fairly modest rates and has greatly increased. Delta's newest contract, which is now the best contract on the street for now, is next year. We're putting in 17% of whatever the pilot makes goes into the 401k plan. And so what happens is, you know, you run into a period or you run into a problem in that there's a max number that can go into a 401k plan. But before I get started on that, let me backtrack a second. So you have. I keep talking about major. There's also regional airlines. So what Delta will do is they will, in this case they own a regional airline called Endeavour. Endeavour is the smaller jets that you fly on. The pilots in the flight attendants will be not wearing a Delta uniform. They'll have the same colors but it would say Endeavour on the wings instead of Delta.

Casey:

Typically as a pilot in your career you would start at an airline like that or you come from the military to go directly into Delta. There's been it's gone back and forth depending on your regional, but there's been direct flows set up So when you get hired at Endeavour you fly there for so long you automatically flow into the Delta system. It used to be a guaranteed interview. Other airlines like Envoy and PSA on the American side. You get hired there. In eight years you for sure will be a American pilot. Delta's never quite gone that direction. I'm not exactly sure where it sits right now with Endeavour pilots but there is a nice steady flow. Now with a pilot shortage. There's really no pilot shortage at the majors. It'd be the regionals because they're the least paid.

Casey:

For example, when I first started flying for Colganair based out of Bar Harbor, maine, in my early 20s, my first year pay I think a total was maybe $14,000 or something like that. After tax It was very minimal. Maybe five years prior to me starting an airline career, guys and gals had to pay for their training So they would get hired, but then they owed the airline like $16,000 or $30,000, and then they'd have to pay it over time back to the airline. Isn't that crazy? Now it's flipped where you get signing bonuses and you get paid a lot more money that first year. In fact, i think if you have an experienced captain at a regional who wants to go to another regional, they'll give them a pretty healthy signing bonus as high as $100,000. I get these postcards in the mail all the time.

Missie:

Trying to lure you away.

Casey:

Right, They're not going to lure me away from Weiserweilth Management, but they're trying to just find any pilot that has a pilot's license, which I still have my pilot's license. So anyway, what we're talking about today wouldn't apply really to regionals. They aren't putting in a non-elective contribution into the 401k plans. They're still very much typical to what you would see at any other corporation A match up to 4%, if there is a match at all. A lot of the regionals don't even have matches still.

Missie:

Wow.

Casey:

The whole point is no one's going there looking for an airline career.

Casey:

They're going there as a stepping stone and so the airline's not going to invest in you in that way, when really what young people are looking for now would be an upgrade to captain as fast as possible to get the captain time to be able to qualify, to get to the majors Okay, and it's all kind of filtered through different paths. If you're a minority woman, especially a black female, you didn't need to have any PSE time, you would just go straight into the majors because they're just they weren't enough to check the boxes right, and I think that has kind of shifted a bit. Maybe those interviewing now would say I stand correct. I think I need to stand corrected on that. It looks like that really. It's just qualifications at this point. Delta used to have a college degree. They've, technically have dropped the college degree as a barrier to entry, which I don't necessarily need my pilot to have a college degree. I do need them to do math, and pretty quickly in their head if they had to. But there's tests for that at the very beginning. That's good.

Missie:

As a flyer, I kind of just want a pilot with the best qualifications.

Casey:

I don't really care about gender and race and all that.

Casey:

Yeah, they're trying to check their diversity boxes for their shareholders and all the other things that go with. That is what they're trying to do. Okay, so, so we know that that maybe this won't apply to your regional first time hire, but obviously when you get to Delta United American, alaska is the same way. Then Once you make 255,000 a year as a pilot, you can't put any more into a 401k, so you can put in I'm going to go with all the assumptions that you're under 50 years old, so you can put in 22,500, right, that applies to anyone with a 401k plan.

Casey:

That's the max If you're under 50 years old. That's the max you can contribute. If you're over 50, you can contribute up to 30,000 as long as you're over 50 years old. So once you hit that 225, and the company's putting in right now it dealt at 16%, but next year it'll be 17%, so let's assume we're already in the 2024. Basically, it's 255,000 a year. So if you max out your 401k and they're putting in the 17% at 255,000 a year, you've hit the $66,000 limit.

Missie:

The magic number Yeah.

Casey:

So there's a max that you can put into a 401k, not your max, just total between you and the company. So us, on the normal side of our 401k plans, for most 90% of workers, we don't ever have to worry about that, right, Unless you did like an after-tax contribution, right? So that's another thing to think about too. If you have excess income in your 401k plan. You work at a larger company. A lot of times their 401k plans are like you put in after-tax money, So you would put in money after-tax up to the 66,000, and then that extra that you put in you could convert to a Roth inside the plan. So that's called a mega back to a Roth.

Missie:

We like that strategy.

Casey:

So that was something that we always talked about with pilots, but really at this point that's kind of mute. You wouldn't really do that anymore if you're making over 255,000, which most of them would be after just a few years in the company, based on the progression from right seat to left seat that we've seen. And even in the right seat they have what they call green slips, so they're picking up double time. It's like working overtime You have your chips that you bid for, but you can pick up extra work And that gets you closer to that 255 very quickly, or well over it.

Casey:

So what's happening now is with the market-based cash balance plan I think I used the wrong acronym earlier NBCBP that Delta just started. It allows you to continue to put your money into the 401k or into a separate 401k, essentially managed by the company. So when that money goes in, you cannot control the investment. The investment will be controlled by the managing party, which right now is supposed to be Price Waterhouse Coopers, which is basically showing it BlackRock Target Date Fund as being 40% bond, 60% stock. So if that's the case, then basically they're managing the money like you would a pension. So all the negativity about this plan, which I think, is like this is great, sign me up, right.

Casey:

All the negativity about the plan is, like people say, well, that fund's only returned 4% over the last you know 15, 20 years. What I could do better than that? So remember, if the for the pilots that affects us the most, it's not the ones making 255. You're putting a few dollars in this thing every year. It's to be one that making 355, 455, right, you're the ones putting in the most, which probably means you're near at least halfway through or near the end of your career. So in that case, your tax bracket, i'm gonna assume, between state and Fed is around 34%. So by putting money into the market-based cash balance plan, you're saving 34% Pre-tax right that's huge.

Casey:

It is huge. So what? how do you think that you're going to go make more than 34% Investing in something else after tax? You're not gonna do that. No, leave it the pilot. So we Think we could all smart anything, which is a great attitude to have when you're trying to figure out an emergency, but not, not necessarily, in your 401k plan Your portfolio now so it just doesn't make sense that you would avoid this.

Casey:

Plus, you know, as you age, you're gonna bring in more bonds into your portfolio anyway. So if you're really concerned about lower rate of return, then you could treat that as your conservative conservative allocation. When you're using what you can control in your normal 401k, which should be millions of dollars, you can use that More aggressively, so it actually all balances out to be the right risk allocation.

Missie:

That's yeah. Micaela and I had the same discussion last night that you know It's not a big deal. Don't get hung up on the allocation being so conservative, because it's not your only money.

Casey:

I mean, we've ran multiple Scenarios and Whether you live to 65, 75 or 99? it just doesn't it. It makes sense the that you would use the plan. Plus, what a lot of people haven't realized, well, the pilots have Is, you know, we pay union dues, we pay Alpe dues. So if you don't, if you don't put money into or for using it, the market-based cash balance plan, then those 2% union dues won't apply to that. So you're saving 2%. So that 34 is now 36%. So I think it's a. It's great. Originally there was some talk that the plan Would not be in your own trust and what that means is that if Delta went out of business, that money would go with it, and airline is One economic event from going out of business is very low margin business right.

Missie:

We already have Delta pensions that were turned over to the government exactly, exactly.

Casey:

And if they had been worse off, you know, potentially 20 or COVID and you could have been a whole another issue too, right? So it's it's. It's important to To the plan that this is your money, that's the pilots money. They can't take it away if they file bankruptcy now in a Deferred comp plan. That's very different.

Missie:

Oh yeah, but supposedly you're rolling the dice.

Casey:

There's. There's supposedly something else being worked on That that is related to like deferred comp, so I'll be interesting to see the details on that, as they come out like additive.

Missie:

You mean in addition to NBCBP.

Casey:

Yeah, so really, in this case, i don't see any negatives In the math that we've, that we've been able, we've been able to do. I think that if you're you know. First of all, it's important to recognize that if you're a Delta pilot You're listening this you're not opting in, you have to opt out. You're already opt-in by default, so you have to say no, i don't want to do this. And if you were recently hired in the last couple months, you're in it anyway. You don't even get the choice.

Missie:

That's true. So if it's the plan for everybody, hired now forward.

Casey:

Yes, Correct is. This is a added benefit. Once you hit that, once you hit that income. I'm out now for United Piles listening. This is coming to you So you can watch all this and learn from all this, because you'll be rolling this out, i think, fairly soon.

Casey:

Something else I want to note, here too, is Roth and traditional. So when you think about your future and this applies to anybody listening to this podcast We don't know what future taxes look like. But when you look out into the future, i Want to have options, but you're at the same time Doing everything. Pre-tax now saves you a lot of money and If you're over the age of I think it's around 34 We'll say 35 to be safe if you're over the age of 35, starting to do a Roth at a high income level Just doesn't make sense, because if you take that 34 percent hit, it takes a long time to get back to the break-even point in your in your account. So if you can let it all go in pre-tax and let it grow and you pay tax on the out, on the other end, you tend to have more money at a certain age.

Casey:

Now There is younger people. That's not necessarily the case because they have decades to make up for it. Then it's free income that keeps growing. So what I like to see is just multiple buckets. So maybe you have some Roth from the past and that's great. But let's assume you get hired with zero. Then maybe the first couple years you could be doing all Roth, but then after that you're going to switch to all pre-tax because that makes the most sense. But then you should have excess income if you're managing your money correctly, if you're not living beyond your means, and if that's the case, then You know you're. The market-based catch value plan is our balance plan is gonna be growing with With you and and that's company money going in there, not not your money. So in the end you want to put excess money hopefully into like a brokerage account.

Casey:

We call it the Opportunity Fund here. Yes, but if you can put money into an Opportunity Fund and you build that up over time, maybe that's a second home, maybe that's something that you want to do. Is the big RV or most piles when they retire actually just don't want to move. They're tired of moving And they have big ideas in their 30s, maybe even early 40s, but time they hit 65, they're just tired And a lot of them just stay home.

Casey:

But ultimately in that Opportunity Fund, let's say that's available for retirement. You can live off of that between 65 and 70. It probably be very low tax. If you've done your tax laws harvesting, you've built up tax credits going forward or capital gains credits going forward over decades, you'll hit retirement with this really large IRA but also no taxable income potentially, or very low taxable income for 10 years And you can use that opportunity to convert IRA to Roth And so that's like that's how I like seeing these options. Now, if the tax bracket similar to what it is today, you could just do IRA withdrawals. That's not that big of a deal in retirement.

Missie:

No, not at all.

Casey:

So that's something to think about as you're looking at. The whole picture is that it's not. Retirement savings doesn't have to be inside the 401k only. You can create other non or tax efficient buckets outside that stay away from annuities. Don't do that, but I think a tax efficient ETF portfolio, low cost, would be the way to approach that.

Missie:

Yeah, very liquid, i mean. so your money is always your money, just really a click away.

Casey:

Exactly.

Missie:

You know one thing we didn't mention about the market based cash balance plan, for those that are concerned about how conservative they think it is. You know the 40 60 mix is that at age 59 and a half you have the ability to do in service withdrawals. Yep, so you can start to get out and then invest it however you'd like to, and so you're not stuck with that conservative nature forever.

Casey:

Right, yeah, and they also have an annuity option If you want to annuitize it at the end, and I would never recommend doing that unless you're just really really bad with money, i mean in that case, you're not listening to this podcast. Yeah, good point. All right, so let's talk a minute about something related but a little bit different. So there's been a big push from a couple of companies here at Atlanta, texas, located for managing pilots brokerage links, so I just wanted to give my two cents about this.

Missie:

Yeah.

Casey:

So we did the math here, And if you are in your early 30s, you get hired at any of these majors and you contribute money to these plans And a half a percent management fee is added to that. You're looking at over $2.5 million in management fees.

Missie:

Over the course of your career. Wow, which is crazy.

Casey:

So in all these major plans they have low cost index funds Very, very low cost Like the average cost is around 0.03 ofa percent in the Delta plan They say basically free.

Casey:

Basically free Companies carry the admin cost. So S and P 500,. you can research this. It's called SPIVA. SPIVA report comes out every six months And it shows what active managers do versus the passive indexes, not just the S&P 500, that's one we always talk about, but any index that they're supposed to be tracking. it compares them. So the stats get worse in other asset classes. but we'll talk about the S&P because that's what everyone knows. Over a 20-year period you have a 2% chance of a manager, professional manager, outperforming the S&P 500.

Missie:

I don't want to take that bet No.

Casey:

I wouldn't either. Over a 10-year period, it's like 6% chance. Over a 3-year period, it's much, much higher, like around 35-40% chance. So in the short term, which is where the mutual funds get their marketing from?

Casey:

right, because they market only the best times, not the worst times. But that being said, what makes you think paying a half a percent to an active manager to place trades in your brokerage link is going to be successful? If you're playing the long game 10 plus years you have a very, very high probability of doing better, but not tinkering with your portfolio and sticking to really four investments. You've got the S&P 500, so your large cap. You've got your mid cap and small cap right in your international And then, of course, you add bonds to that. But for most people aren't active bond traders, they're more active stocks, right? So if you think about those stocks, their equities, then why on earth would you hire someone to manage your brokerage link for you?

Missie:

Not for millions of dollars.

Casey:

Yeah, and I'm so passionate about this. I saw this when I was flying and actually created a website. We recently revamped it. But if you go to our website, wiserinvestorcom, you scroll down near the center there's an airline tab that will take you to the pilot retirement website, right, and you can download we track all the major 401k plans.

Casey:

You can download free allocations. These allocations were built using, you know, just modern portfolio theory, right Risk adjusted portfolios. You take a risk quiz. Risk quiz helps you identify which portfolio could be right for you, but you can move up or down based on how you feel about that, And you let you rebalance it once a year and that's it. That's all you have to do Right there on our website Right there And it's free.

Missie:

Free, some wiser Right, and it's free.

Casey:

So this is something that started when I was doing the Alpa workshops for ASA, alpa Atlantic Southeast Airlines. This is something that I started for our own guys because people were just making a mess of their portfolios And at the time we had a lot of things in our portfolios that were not passive And after a merger it all greatly changed. But in the end, you know, piles have got to stop thinking that you can beat something. And then it's not just pilots, it's human nature.

Casey:

Anybody listening to the podcast who has a 401k plan. We had a pretty dismal 2022. Right, but that's one year out of many, many years You've looked. The last decade invested was in pretty good for people who are patient. Yeah, and that's what you have to be as patient, just set it in the portfolio, take a look every 12 months and rebalance.

Casey:

That's really all. It's what I call long-term healthy asset classes. Yes, these are asset classes that have always made money. The cost of entry is very, very low. Now, when you hit retirement, things change. The delta, for any 401k plan, for that matter, is not built for retirement. No, when you go to build a 401k plan, these aren't random funds to get put in there. There's an investment policy statement and it all starts with a census of the employees. Typically, there's no employees there of any significance over the age of 65 or 70. Right, and so, therefore, the plans get built for younger people. So, when you retire, how you manage bonds is different. How you build, how you manage your cash reserve is different inside the plan, inside your 401k plan. So you do need an asset manager to be successful in retirement. Oh, absolutely.

Casey:

But, you don't need that asset manager there charging half a percent, right.

Missie:

No, but you need to make sure that you've got it well allocated with those index funds, correct?

Casey:

And to give you the confidence that you have everything correct.

Missie:

Exactly.

Casey:

What we're offering for the pilots, or anyone who is in the same situation, is really flat fee planning For a flat fee. we're going to put together a real financial plan, not one just based on what we can sell you, because we don't sell anything, but one that's really based on how's your auto and home and umbrella set up? Are you really protected properly? What about your estate planning? How does that work into your overall financial planning? Right, yeah, how's your asset allocation in your 401k? But how is it also in your spouses 401k? What about that brokerage? Or how many IRAs have we said, hey, there's no reason to have this rollover IRA from your old place. roll it into your new 401k plan. get everything, consolidate things right, especially if you're one of these bigger, bigger airlines that have such low fees. But what we do is we just charge an hourly rate, going forward, to monitor and update the plan.

Missie:

Yeah.

Casey:

And to me that's a much more sensible way for people to be doing real financial planning. Tax planning is included in that right Real financial planning, not selling products and allows the pilot group to be able to focus on the long term with that in an unbiased way.

Missie:

Yes, and I think another area of our planning that pilots and all clients have found really useful is life insurance, because we look at it and we can tell clients if there's a gap in coverage.

Casey:

Right.

Missie:

You know I always say if that proverbial Mardibus comes and hits you today, like, is your family going to be okay? And we know that. you know Delta provides the opportunity for good term insurance, but still with the high income of pilots there's usually a gap Right. And what I tell my clients is you know that we sit on the same side of the table with you and we don't sell you anything. So you know, if we are telling you you need another half a million of term insurance, you really do.

Casey:

Right.

Missie:

And because we don't care where you go buy it.

Casey:

Correct.

Missie:

You need it.

Casey:

We do have some great referrals of people that we trust, absolutely, yeah. But yeah, you take it and you can buy it off the internet. Yeah, it doesn't matter. The point is that as planners, we just know that it's needed, but it's something that it's very I don't know. It's very interesting. We've had some clients come in recently from these firms that are doing the brokerage links, and so I've gotten a first hand view of the carnage. And it is really, it is major active trading. It's not even just like I was thinking, oh, this is going to be a lot of expensive media funds. It's not that the funds fees were exceptionally high, they're kind of average for what a broker would choose. There's just a lot of trades, a lot of trades.

Casey:

And that is unnecessary, and so that's what kind of prompted this, this podcast. We typically try to reach a broader audience when we're talking, but I feel like this. This one applied now because of what's so much is happening in the in the airline space, and you know an episode that you might want to consider listening to this episode one 62 is your retirement plan ready for takeoff? A friend of mine, evan Bogan, came in. He's the captain on a seven three here in Atlanta and we had a lot of fun comparing flight planning to financial planning and how that how that relates.

Casey:

I also have done a couple of videos on this online Avoid asset managers looking to manage your four airline 401k. and then one talking about the Delta pilot mark market based cash balance plan. That's on our YouTube channel, which is also called a wiser retirement. Thank you, missy, for joining me.

Missie:

Thanks, Casey. That was a really good overview of Delta's new plan and just in general for all pilots.

Casey:

Reach out If you guys have questions. happy to help our airline families.

Hadley:

Thanks for listening to a wiser retirement podcast. We hope you enjoyed today's episode. Make sure to subscribe wherever you're listening. That way you don't miss any new episodes. We'd also appreciate if you could leave a rating and review. If you have any questions about anything that was discussed today at the wiser investorcom, reach out. This episode was produced and edited by Ken. Hopefully.

Hadley:

This podcast is strictly for informational purposes only and is not to be considered as investment advice or a solicitation to buy or sell any financial products, securities, digital assets or any other investment vehicles or a basis to make any financial decisions. Wiser wealth management incorporated is a registered investment advisor with SEC. The host and or guest may personally own securities, digital assets or other investment vehicles mentioned on this podcast. Neither the host nor guest of the show are compensated for their participation and no referral fees are paid to or received by any host or guest for clients, listeners or similar interests. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial advisor, tax professional, insurance professional and or legal professional before implementing any strategy discussed herein. Test performance is not indicative of future performance.