By Greg Hutto, CFP®, CFA®
Over the years, your financial benefits and compensation packages have piled up like the stuff in your storage unit or the third bay of your garage. When you were younger, the benefits were easy to track and understand: typically, some life and health insurance and a 401(k). As you’ve moved up the ladder, your benefits—especially the financial compensation packages—have become much more complex. You’ve likely had friends who didn’t know what they had, when it applied, when it vested, and what happens with each benefit upon separation from your employer.
Many Fortune 500 corporations used to provide financial advisory service teams as a perk, but due to legal concerns, many have moved away from this practice. If you’re like most successful corporate executives, you’ve done the best you can in this area. You’re probably keeping track of some of it yourself, and perhaps working with an advisor who was referred to you by a colleague.
Problems With The Conventional Approach
The problem that most frequently arises in this scenario: neither the executive nor the advisor can see the complete picture. Your advisor cannot determine the best strategies for maximizing after-tax returns of your benefits unless you start at the source. What is the source, you ask? The source is the plan document governing each particular benefit. The plan documents provide critical information, such as IRS codes and distribution provisions, which details when, how, and under what circumstances you are able to obtain benefits.
You and/or your advisor could do what many do: follow a cumbersome piecemeal approach and attempt to construct an understanding of your benefits from the plan documents. This path will require digging through hundreds of pages of legalese. You and your advisor will need to make several calls to different attorneys in order to eventually find one who specializes in executive benefit planning before finally arriving at what you really need to know. I’m worn out from just writing that last sentence, but that’s what you’re facing if you want to start at the source: the plan document.
What You Need To Know
Here’s what you need to know about each financial package that you have coming to you:
- How will the income be treated for tax purposes? (Ordinary income or capital gain? Can you defer any of the income?)
- How will your earnings and bonuses be calculated? (What contribution will your employer make, if applicable?)
- What will you receive if you’re terminated? (Unfortunately, the bold print giveth and the fine print taketh away.)
- What will you (or your heirs) receive if you pass away during your employment?
- What will you receive if you become disabled, and when?
- What will you receive when you retire?
Seems rather daunting, doesn’t it? The process takes time, but when you have the plan documents in hand and you know exactly what to look for, most executive benefit packages really aren’t too hard to decipher. Chances are, you and your advisor have better things to do with your time than learn all these details, though.
A Top-Down View
I use a tool called the Executive Benefit Spreadsheet to capture the pertinent information about each retirement benefit in a grid format. The example provided here shows a hypothetical scenario of different benefit types. This format lays out what you need to know to maximize the after-tax returns of all your benefits.
Greg Hutto, president and CEO of Heritage Retirement Advisors, comes from a family of educators, so it’s no wonder he holds a bachelor’s degree in business from Texas A&M University, and a master’s degree in education from Tarleton State University. He spent years as a teacher and coach before entering financial services in 1996. After 14 years in the industry working for such powerhouses as UBS Paine Webber and Raymond James, Greg founded Hutto Retirement Advisors LLC in 2010, now Heritage Retirement Advisors. He holds both the Certified Financial Planner® (CFP®) and Chartered Financial Analyst (CFA®) designations. Additionally, he is the founder of Heritage Tax Advisors LLC. Greg and his wife, Angie, have three children. He likes to cycle, play golf, travel with his family, and he’s still trying to convince Angie of his dream of being husband-and-wife truck drivers, or at least working and living on the road in an RV! To learn more about Greg, connect with him on LinkedIn.