I have been participating in a non-qualified deferred compensation plan at Megacorp for 15 years. I can defer a certain % of base and bonus pay pre-tax each year. It has proved a good decision for me (I am well aware of the risks) and represents about 15% of my overall savings. My other savings are in taxable (59%) and deferred 401k/Roths/HSA (26%).
For reference, I typically file in today's 32% to 37% tax bracket depending on stock option exercise and I'll withdraw in the 12 or 22% bracket.
I will retire in a few years and use this account to cover much of my expenses over the next decade. If you're not familiar with these plans, they have an arcane set of rules regarding distributions. The most egregious is when you make a change, you must push it out by 5 years. The options for distribution are lump sum or spread over 5 or 10 years.
So, for example if I deferred income in 2018 for 6 years and have specified to distribute a 5 year installment, payout will be 20% per year in 2024, 2025, 2026, 2027, and 2028. If I change to lump sum, it now must be 100% in 2029 (or later).
Here's my question: I am enrolling for the 2020 plan year and I have a mish-mash of distribution elections in previous years since I was trying to "smooth it out." This means combos of 5 and 10 year distributions stretched over about 12 years. I want to simplify and clean it up. There is also the possibility that I will suffer the dreaded "one more year" syndrome when the time comes and I want to be able to push out distributions in the early years to accommodate. The current plan makes that difficult- I'd have to change multiple years.
What I am considering is to change all my past (and future) distribution elections to lump sum. This simplifies my withdrawals and if I want to push anything out down the road, I only have to change one year's election. Basically, bite the bullet now and simplify.
Here's what the net is in terms of my spending requirements. For example, at age 51, my "Now" distribution adds up to about 108% of my budget. At age 54, my "New" distribution is 0 and I have to cover all my spending from taxable.
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Age 50 51 52 53 54 55 56 57 58 59 60 61 62 Now 65% 108% 80% 95% 45% 63% 75% 65% 56% 39% 88% 9% 5% New 67% 60% 67% 67% 0% 19% 47% 87% 97% 86% 89% 61% 0%
The bad: I have a few low (even 0) % years, requiring me to cover the gap from my taxable accounts (plenty available). I also reset the clock and would have to delay another 5 years if I make changes down the road.
What would you recommend, if you've ever gone through the same planning?