Investing CBP

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Topic Author
eyemgh
Posts: 178
Joined: Thu Aug 29, 2013 11:50 am

Investing CBP

Post by eyemgh »

We’re selling a business and need to put some of the proceeds in a cash balance plan. The actuary says it needs to hit 5%. My investing experience has all been long term, but the money will only be in there long enough to satisfy the permanency rule (please no side debate on how long that is). Technically, since it’ll be well under 10 years, it’s a short term investment. Over performing can be easily mitigated, but underperforming, especially a loss, can’t. The fund has to be made whole. Any thoughts on how to get 5% per year without subjecting the money equities and thus to a potential loss due from market volatility? Thanks!
Valuethinker
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Re: Investing CBP

Post by Valuethinker »

eyemgh wrote: Thu Jun 24, 2021 12:59 am We’re selling a business and need to put some of the proceeds in a cash balance plan. The actuary says it needs to hit 5%. My investing experience has all been long term, but the money will only be in there long enough to satisfy the permanency rule (please no side debate on how long that is). Technically, since it’ll be well under 10 years, it’s a short term investment. Over performing can be easily mitigated, but underperforming, especially a loss, can’t. The fund has to be made whole. Any thoughts on how to get 5% per year without subjecting the money equities and thus to a potential loss due from market volatility? Thanks!
there is no low risk way to get 5% in the current environment as far as I know.

A stripped US Treasury Bond i.e. zero coupon (the US Treasury does not do this, but allows brokers to do so) is the safest return you can get. Somewhere around 1.5% over 10 years.

5% is the yield of very low grade corporate bonds - high yield/ junk. You can lose money
exodusNH
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Re: Investing CBP

Post by exodusNH »

eyemgh wrote: Thu Jun 24, 2021 12:59 am We’re selling a business and need to put some of the proceeds in a cash balance plan. The actuary says it needs to hit 5%. My investing experience has all been long term, but the money will only be in there long enough to satisfy the permanency rule (please no side debate on how long that is). Technically, since it’ll be well under 10 years, it’s a short term investment. Over performing can be easily mitigated, but underperforming, especially a loss, can’t. The fund has to be made whole. Any thoughts on how to get 5% per year without subjecting the money equities and thus to a potential loss due from market volatility? Thanks!
You don't; what you're looking for doesn't exist. To give you an idea of what is out there, my 401(k)'s stable value fund is paying 2.15%. MYGAs are paying 2.4%-3.2% depending on term, though I'm not sure if you could use them for your purpose. (https://www.blueprintincome.com/) Even junk bonds aren't yielding that.

Another way to think about: the S&P 500's nominal return has been about 10%. You're looking for half of its return with none of the risk.

You'll need to look at something like Vanguard LifeStrategy Income Fund (VASIX), which is about 20/80, but even that had a worst year of -10.5% with a low of -15%, taking about 2 years to recover to its original value.
UpperNwGuy
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Re: Investing CBP

Post by UpperNwGuy »

You are asking for the impossible. If such an investment opportunity existed, we'd all be in it, and it would be all over the news.
Rex66
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Re: Investing CBP

Post by Rex66 »

It’s likely a cash balance plan isn’t right for you.
The fees to start, maintain, and close along with the type of investing you prefer in it will make it such that the costs are more than the savings from tax deferral.
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anon_investor
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Re: Investing CBP

Post by anon_investor »

UpperNwGuy wrote: Thu Jun 24, 2021 8:10 am You are asking for the impossible. If such an investment opportunity existed, we'd all be in it, and it would be all over the news.
+1.
Topic Author
eyemgh
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Re: Investing CBP

Post by eyemgh »

Rex66 wrote: Thu Jun 24, 2021 8:27 am It’s likely a cash balance plan isn’t right for you.
The fees to start, maintain, and close along with the type of investing you prefer in it will make it such that the costs are more than the savings from tax deferral.
I knew conceptually that 5% at low risk wasn't attainable, or I would have done it in my whole retirement portfolio. I guess what I was really asking was what is the best way not to lose a ton so as to have to backfill the plan. The answer I came up with before posting was that there's no surefire, easy answer. Looks like the rest of you feel the same.

As for is it worth it...maybe not...but probably.

I say maybe not, because much more of the sale than I anticipated is characterized as Category VII (83%). That's where goodwill falls. Category VII is taxed as a LTCG. It may be wisest to just pay the tax and move on.

On the other hand, the sale is not small (just over $1.8M). We can defer over $800k into a CBP.

I'm gonna have to sharpen the pencil and ask my genie what future tax policy will look like.

Thanks all!
Rex66
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Re: Investing CBP

Post by Rex66 »

Even more reason not to do it.

You are going to end up losing money on this given the tax advantage you have and opportunity cost of trying to invest excessively conservative.
Topic Author
eyemgh
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Re: Investing CBP

Post by eyemgh »

Rex66 wrote: Fri Jun 25, 2021 8:50 am Even more reason not to do it.

You are going to end up losing money on this given the tax advantage you have and opportunity cost of trying to invest excessively conservative.
Once I saw that breakdown, that was my thought too. I’ll run the numbers with my accountant when I can get in. Thanks!
Rex66
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Re: Investing CBP

Post by Rex66 »

Be mindful that these folks usually have business connections with those recommending the plan.

You also have all the issues about possible plan compliance given desire for short plan. Could be a disaster at many levels just to hope you pay less than current long term capital rates. I wouldn’t do it and I have a defined benefit plan.
Topic Author
eyemgh
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Re: Investing CBP

Post by eyemgh »

Rex66 wrote: Fri Jun 25, 2021 9:27 am Be mindful that these folks usually have business connections with those recommending the plan.

You also have all the issues about possible plan compliance given desire for short plan. Could be a disaster at many levels just to hope you pay less than current long term capital rates. I wouldn’t do it and I have a defined benefit plan.
My accountant and the administrator have a collegial relationship, but that’s it.

The administrator has been in the industry for a LONG time. He’s done many of these and is very familiar with the permanency rules. He doesn’t give investment advice or sell products of any kind. He’s also cognizant of the fact that I wouldn’t be served well by paying the administration fee any longer than I’d need to in order to meet the permanency rules. I trust him, and I don’t trust almost anyone in that arena. :P

I just need to run the numbers, including state taxes, and see where it lands.
Topic Author
eyemgh
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Joined: Thu Aug 29, 2013 11:50 am

Re: Investing CBP

Post by eyemgh »

Well here's a wrinkle that I hadn't thought about. My state taxes LTCG as income...10%! :shock:
Rex66
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Re: Investing CBP

Post by Rex66 »

They must be able to do this calculation for you. That’s what they do. If they can’t (assuming current tax laws) then that says something.

By the way I’ve used 3 TPAs and they all had been in the business for decades. They don’t stay in business unless they have a bent towards recommending these things. They should be able to plug in your state info and spit out an answer for a few hundred bucks.

You seem to be thinking about future taxes. If you believe taxes are going up, that’s makes it harder to recommend these. Once taxes are up then some like to make an argument that they might come down by retirement.
Topic Author
eyemgh
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Joined: Thu Aug 29, 2013 11:50 am

Re: Investing CBP

Post by eyemgh »

Rex66 wrote: Fri Jun 25, 2021 11:58 am They must be able to do this calculation for you. That’s what they do. If they can’t (assuming current tax laws) then that says something.

By the way I’ve used 3 TPAs and they all had been in the business for decades. They don’t stay in business unless they have a bent towards recommending these things. They should be able to plug in your state info and spit out an answer for a few hundred bucks.

You seem to be thinking about future taxes. If you believe taxes are going up, that’s makes it harder to recommend these. Once taxes are up then some like to make an argument that they might come down by retirement.
He's good. He's just out of town for two weeks. :D
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