Jun 5, 2014 Mistakes When Making Your Deferred Compensation Elections
You know the drill—every year the same difficult, complicated decisions about your Deferred Compensation must be made. How will you receive it? Over how many years? Averaged out or all at once? And once you make this decision, you are stuck with it. What we see most often is the decision being delayed until the last possible minute and often being ignored all together, pushed off until the next year or worse, making an eenie meenie miney mo guess. This lack of planning could inflict a cost compounded by the effect of lost future growth. To not dump your deferred comp, we recommend using these three steps to help guide your decision. First, take the time to pick a reasonable long term investment. Second, lay out a timeline of all past and projected elections and keep your eye on the tax. Third, don’t isolate this decision. When you are striving for the best possible outcome, you have to look at everything.
If you’re spending hours combing the Wall Street Journal and polling your friends for the best performing investment in the last 12 months you could be guilty of step number one, putting too much time into investment research. Mistakes two and three are where you need to spend most of your time. Sure, investment selection matters. But when you are dealing with long term investment decisions, it doesn’t need to be rocket science. Set your risk horizon in synch with your time horizon and start focusing on the big picture. You are really best served with a fix it and forget about it investment strategy.
Once you have your investment selection, take a step back and look at the big picture. It is a huge mistake to not review all of your past elections and look at them over time creating a rolling thunder of income and wealth for the future and not just creating an Endowment Fund for Uncle Sam. Having them all start at once and last over a short period of time, could just delay tax until you’re at a higher rate. Ouch! The real benefit of this view is treating the income management like tax management. The biggest reason to consider deferring your compensation should center on tax arguments. You need to know what it would cost you now and then estimate what your future income is going to look like. Many people mistake tax deferral for tax savings. It isn’t. Don’t make an election now that could cost you in the future.
Now onto the third step. Don’t look at the deferred Comp. Look everywhere else. Any good savings plan has an even better spending plan attached. Have you looked at Stock Options? Restricted Stock Options? Your spouse’s income and benefits package? Any election you are making without rolling up your sleeves and digging through this and more could end poorly. You need to make sure you have a plan that looks at your whole financial picture. This is going to require a dive into not just your investments, but your cash flow, your estate plan, your tax return and more. This is a great time to consult to a financial professional who can help you see the whole picture and make sure a deferred compensation election makes sense for your specific needs.
People are leaving money on the table by making bad choices with their deferred compensation. These plans are complicated and you make your permanent election once per year. Talk about pressure. It is difficult. There are a lot of factors to consider when you are making that election. The biggest mistakes you can make are focusing too much on investment returns, not reviewing past elections, ignoring taxes and not looking at the big picture. Follow these three steps to come out with the best path forward.
The opinions expressed in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. Securities offered through LPL Financial, member FINRA/SIPC. Investment advice offered through Leonard Rickey Investment Advisors, P.L.L.C, a registered investment advisor and separate entity from LPL Financial.
Leonard Rickey Investment Advisors, PLLC (“LRIA”), is an SEC registered investment adviser located in the State of Washington. Registration does not imply a certain level of skill or training. For information pertaining to the registration status of LRIA, please contact LRIA or refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov).
This is provided for general information only and contains information that is not suitable for everyone. As such, nothing herein should be construed as the provision of specific investment advice or recommendations for any individual. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. There is no guarantee that the views and opinions expressed herein will come to pass. This newsletter contains information derived from third party sources. Although we believe these third-party sources to be reliable, we make no representations as to the accuracy or completeness of any information prepared by any unaffiliated third party incorporated herein and take no responsibility therefore.
Any projections, forecasts and estimates, including without limitation any statement using “expect” or “believe” or any variation of either term or a similar term, contained here are forward-looking statements and are based upon certain current assumptions, beliefs and expectations that LRIA considers reasonable or that the applicable third parties have identified as such. Forward-looking statements are necessarily speculative in nature, and it can be expected that some or all of the assumptions or beliefs underlying the forward-looking statements will not materialize or will vary significantly from actual results or outcomes. Some important factors that could cause actual results or outcomes to differ materially from those in any forward-looking statements include, among others, changes in interest rates and general economic conditions in the U.S. and globally, changes in the liquidity available in the market, change and volatility in the value of the U.S. dollar, market volatility and distressed credit markets, and other market, financial or legal uncertainties. Consequently, the inclusion of forward-looking statements herein should not be regarded as a representation by LRIA or any other person or entity of the outcomes or results that will be achieved by following any recommendations contained herein. While the forward-looking statements here reflect estimates, expectations and beliefs, they are not guarantees of future performance or outcomes. LRIA has no obligation to update or otherwise revise any forward-looking statements, including any revisions to reflect changes in economic conditions or other circumstances arising after the date hereof or to reflect the occurrence of events (whether anticipated or unanticipated), even if the underlying assumptions do not come to fruition. Opinions expressed herein are subject to change without notice and do not necessarily take into account the particular investment objectives, financial situations, or particular needs of all investors.
For additional information about LRIA, including fees and services, please contact us for our Form ADV disclosure brochure using our contact information herein. Please read the disclosure brochure carefully before you invest or send money.