Help with Deferred Compensation Account Asset Allocation

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
MickMal
Posts: 35
Joined: Wed Mar 13, 2019 12:52 pm

Help with Deferred Compensation Account Asset Allocation

Post by MickMal » Fri Mar 15, 2019 11:45 am

After reading “The Bogleheads’ Guide to the Three Fund Portfolio” and “The Simple Path to Wealth”, I have been re-evaluating my portfolio and recently posted on the forum asking for advice on consolidating my IRA into my 401k. After input from helpful Bogleheads and consideration, I transitioned the combined 401k/IRA account into the Vanguard 2045 Target Fund (approximately $400k).

I am 43 years old (married/no children) and planning to retire before 2045 and will not touch the 401k money until age 70. Currently I contribute the maximum limit of $19k to the 401k.

Earlier this year I was given the opportunity to contribute to a Deferred Compensation Account and started contributing approximately $75k per year. My plan is to have the option to retire at 60 and use the money saved in the Deferred Comp account to bridge my income until age 70 when my wife and I can receive the maximum Social Security monthly payment and begin taking distributions from the 401k.

Since the 401k/IRA has been simplified, I am now focusing on the best course of action for the Deferred Comp account.

I could use advice on an ideal asset allocation as I am wondering if I am naïve to put 100% into the Fidelity VIP Index 500 fund (0.10% expense ratio), letting it grow for the next 2-3 years before adding bonds and international or would it make better sense from the start to include International and a Balanced portfolio for diversification purposes?

Additional Funds to consider:

Vanguard VIF Total International Stock Market Index
Vanguard VIF Balanced portfolio (0.23% expense ratio)


VIF Balance Portfolio Investment Strategy:
The investment seeks to provide long-term capital appreciation and
reasonable current income. The Portfolio invests 60% to 70% of its
assets in dividend-paying and, to a lesser extent, non-dividend-paying
common stocks of established large companies. The remaining 30% to
40% of Portfolio assets are invested mainly in fixed income securities
that the advisor believes will generate a reasonable level of current
income. These securities include investment-grade corporate bonds,
with some exposure to U.S. Treasury and government agency bonds,
and mortgage-backed securities.

Category Description: Allocation—50% to 70% Equity
Funds in allocation categories seek to provide both income and capital
appreciation by investing in multiple asset classes, including stocks,
bonds, and cash. These portfolios are dominated by domestic holdings
and have equity exposures between 50% and 70%.

Bir48die
Posts: 133
Joined: Fri Dec 18, 2015 11:25 am

Re: Help with Deferred Compensation Account Asset Allocation

Post by Bir48die » Fri Mar 15, 2019 12:23 pm

You're in the same boat I was in at your age. Was allowed to participate in a Deferred Comp program which did allow me to retire at 60. I diverted every raise and the same %'s of every bonus into this pool where at the end I think I was into the mid 30's percentage of my compensation. I'm now starting year 4 of 10 in draining it down.

I don't have any issues with target funds. They serve a purpose and help set an asset allocation inside an portfolio. At your age having 90%+ in equities is no big deal and I'd continue with that for some time. I like having a balanced fund as part of the portfolio for a couple of reasons. It allows you to have some large company dividend paying stocks that might weather any storm. Secondly it would allow me to not put all my eggs in a one target fund. Whether you want to have a significant portion in international stocks is up to you. Currently many are not performing as well but they also have their cycles when our markets can be down. So, a portion of all three funds you mentioned would be attractive to me.

I kept my allocation during my time in these three areas. It was only until two years into my drawing down that I moved to a 60/40 AA to be a little more sensible and ride out any downturn that would occur.

Though this put me in a larger % of tax deferred money overall, now it's like getting a paycheck once a year. Yes I pay taxes on it but the withholding now allows me to cover my CG's from my taxable account. Good luck.

Topic Author
MickMal
Posts: 35
Joined: Wed Mar 13, 2019 12:52 pm

Re: Help with Deferred Compensation Account Asset Allocation

Post by MickMal » Fri Mar 15, 2019 12:45 pm

I appreciate the advice and glad to hear the plan paid off for you. With many of the international funds not performing well, it may make sense to allocate a small portion of the portfolio to it.

If I am able to maintain the same or similar dollar amount contribution to the Deferred Comp account over the next 16 years, I should have a larger balance in the account than the 401k. For this year, I selected to receive the money once I leave the company quarterly over 5 years but for next year will change it to over 10 years. Is there an added benefit to receive a lump payment annually instead of quarterly?

Thanks again.

User avatar
corn18
Posts: 1606
Joined: Fri May 22, 2015 6:24 am

Re: Help with Deferred Compensation Account Asset Allocation

Post by corn18 » Fri Mar 15, 2019 12:57 pm

Why so much in a deferred comp plan? Are you in a high tax bracket now? Are you contributing to a taxable account? A backdoor Roth? A mega backdoor Roth (if available)? The reason I ask is liquidity. That is a lot of savings to have tied up in a deferred comp plan that has much higher restrictions on getting at it vs. taxable or Roth accounts.

You should consider the following to get more into tax advantaged accounts between now and 60:

1. Do a backdoor Roth every year for you and your wife. That would get about $231,000 (plus growth) between now and age 60.
2. If your 401k allows it, do a mega backdoor Roth. I am putting about $27k/year into after tax and then do an in service rollover to a Roth. If you can do this, then you will have another $450k (plus growth) @ age 60.
3. Invest in taxable accounts and deferred comp (maybe you are doing this already)

If you decide to retire before 60, you have a lot of Roth dollars that can be used to bridge to 70. And it's all tax free if you do it right.

But, if you are set on deferred comp, just treat your whole portfolio as one. Since this money will be taxed as ordinary income when you withdraw it from the deferred comp plan, I would max bonds in the 401k and deferred comp. Go for high growth in the Roth and taxable accounts.
Don't do something, just stand there!

Topic Author
MickMal
Posts: 35
Joined: Wed Mar 13, 2019 12:52 pm

Re: Help with Deferred Compensation Account Asset Allocation

Post by MickMal » Fri Mar 15, 2019 1:37 pm

I am contributing so much to the deferred comp plan because I like the benefit of conveniently being able to save more for retirement with the money taken out before I receive my paycheck as well as deferring the taxes.

After the deferred comp and 401k contributions, I am not in a high tax bracket and currently not contributing to a taxable account on an ongoing basis. For liquidity needs, we have $60k split between a money market account (for 6 months living expenses) and Vanguard Total Stock Market Index fund.

Additionally we have $800k+ equity in our home with a $500k equity line (zero balance) that is available to us should we ever need access to additional funds.

I have only recently read a bit on the backdoor Roth and after your post checked and my 401k does not allow a mega backdoor Roth or any after tax contributions. I appreciate the input as I am definitely interested in exploring all options that may help us best achieve our long term goals.

User avatar
corn18
Posts: 1606
Joined: Fri May 22, 2015 6:24 am

Re: Help with Deferred Compensation Account Asset Allocation

Post by corn18 » Fri Mar 15, 2019 2:00 pm

MickMal wrote:
Fri Mar 15, 2019 1:37 pm
I am contributing so much to the deferred comp plan because I like the benefit of conveniently being able to save more for retirement with the money taken out before I receive my paycheck as well as deferring the taxes.

After the deferred comp and 401k contributions, I am not in a high tax bracket and currently not contributing to a taxable account on an ongoing basis. For liquidity needs, we have $60k split between a money market account (for 6 months living expenses) and Vanguard Total Stock Market Index fund.

Additionally we have $800k+ equity in our home with a $500k equity line (zero balance) that is available to us should we ever need access to additional funds.

I have only recently read a bit on the backdoor Roth and after your post checked and my 401k does not allow a mega backdoor Roth or any after tax contributions. I appreciate the input as I am definitely interested in exploring all options that may help us best achieve our long term goals.
Got it. Just be careful. There are events that can trigger a lump sum payout of deferred comp that could result in a huuuuuge tax bill. Change of control is one of them. If your company is bought or merges, that can trigger a lump sum payout of ALL deferred comp at the time of the transaction. That is happening right now in my company and there are a lot of folks I know that had their deferred comp withdrawal / retirement plans blow up on them. Imagine putting $75k a year into a NDCP to save the 25-30% tax hit at the time of deferral, only to get it all back in one lump sum in the 37% tax bracket. Oops.
Don't do something, just stand there!

User avatar
Misenplace
Moderator
Posts: 1980
Joined: Mon Feb 01, 2016 9:46 pm

Re: Help with Deferred Compensation Account Asset Allocation

Post by Misenplace » Fri Mar 15, 2019 2:15 pm

I used an executive Deferred Compensation Plan (DCP) to save for early retirement (and just pulled the 3rd out of 10 installments yearly installments since I retired 3 years ago), but I agree with Corn18 that you should max out all other tax advantaged space before you take advantage of it. There are a lot of restrictions on using the DCP from private employers, and other disadvantages such as being a non-secured creditor of the employer for the account balance. In other words, you don't completely own or control it. Also look very carefully at what happens if you are terminated or quit or are laid off. If, for example, you have to take a lump sum or start payments should you leave the company in 2025 for a better job, you may start paying tax at on money you deferred at the current low tax rates on double your salary just as the tax rates go back up. Because of those restrictions/disadvantages, and inability to predict the future, I did not put substantial sums into the DCP plan until 3-4 years before I retired.

Bottom line is that I think it is better to plan with a DCP when you are closer to retirement and the future is a little less uncertain. I personally know executives who got too much into their DCPs and regret it dearly because when they retire they will have very high incomes from the mandatory pay outs and very little planning room for managing taxes. If you think about it, being able to manage taxes is a very long lever in reducing expenses.

Also, I include it as part of my whole portfolio. However, I don't put money that I am going to use earlier in riskier assets, so my DCP portion is at 25% equities now. As payouts come, I rebalance in a retirement account to keep overall at 60:40.

Finally, using a DCP instead of a post tax brokerage account simply because it is easier, means you won't be able to tax loss harvest should markets tank.

Topic Author
MickMal
Posts: 35
Joined: Wed Mar 13, 2019 12:52 pm

Re: Help with Deferred Compensation Account Asset Allocation

Post by MickMal » Fri Mar 15, 2019 2:49 pm

Thanks and before deciding to contribute to the deferred comp plan, I considered potential events that could trigger a lump sum payment. I am fortunate that I have spent 10+ fulfilling years working for my employer and have no plans to leave (even for more money). Also, several years ago the company I work for was purchased by an extremely well respected multinational company that has been in business 150+ years so I can sleep well at night that ownership/bankruptcy should not occur anytime soon.

Topic Author
MickMal
Posts: 35
Joined: Wed Mar 13, 2019 12:52 pm

Re: Help with Deferred Compensation Account Asset Allocation

Post by MickMal » Fri Mar 15, 2019 3:37 pm

You bring up good points especially about the potential higher taxes when I retire. Since this is only my first year contributing to the Deferred Comp Plan, I will consider lowering the contribution and instead adding it to a taxable account, paying the taxes now so I can pay capital gains later on instead of the higher rate. This is all a learning experience for me and I appreciate experienced people sharing their knowledge.

User avatar
corn18
Posts: 1606
Joined: Fri May 22, 2015 6:24 am

Re: Help with Deferred Compensation Account Asset Allocation

Post by corn18 » Fri Mar 15, 2019 6:57 pm

BTW, I am definitely not trying to talk you out of contributing to your NDCP. I like mine, or rather, I liked mine. There are 2 types my company offered: 1. Deferred bonus 2. Supplemental. I haven't used the deferred bonus. But the supplemental is awesome. After I hit the IRS income limit for contributing to my 401k ($275k, usually happens in March when I get my bonus), I can keep contributing but it goes into the NDCP. The sweet part is they continue to match @ 5%. And I can invest in the same funds that are available in my 401k, which are pretty good (and cheap). With the upcoming change in control, all of my NDCP will be distributed as a lump sum this year. That along with everything else that vests (RSU's and additional bonus) makes for one hellofa tax year. I had a nice plan for the NDCP funds to bridge me to SS, but that is OBE.
Don't do something, just stand there!

krafty81
Posts: 278
Joined: Thu Jul 05, 2018 2:01 pm
Location: San Diego, CA

Re: Help with Deferred Compensation Account Asset Allocation

Post by krafty81 » Fri Mar 15, 2019 8:38 pm

How do I talk my company into starting an executive deferred comp plan?

Post Reply