Building Your Wealth as a Pilot at Delta Air Lines
Understanding Your Company’s Compensation and Benefits Plan
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Do You Know the Answers to These Important Questions?
What can you do now to maximize your compensation and benefits plans as a pilot at Delta Air Lines to ensure you will be able to meet your financial goals, such as:
- living comfortably in retirement
- sending your children to college
- paying off your mortgage
- buying a vacation home
- building a reserve fund to weather unforeseen circumstances such as furloughs or layoffs, or health events impacting your medical certificate renewal
- supporting charitable causes
- How should you invest your Delta Pilots Savings Plan and other investments today to build wealth and be positioned appropriately for retirement by age 65?
- How much of your overall investments should be in company (DAL) Stock?
- Are you taking advantage of tax savings strategies available to you?
- Is your medical insurance plan the best one for you and your family?
- If you are unable to fly (temporarily or longer), will you and your family be financially secure? What moves should you make now to ensure you have adequate protection?
- Should tragedy strike, will your family be secure without your income?
- Do you have proper insurance coverage in place to protect your assets and income?
- Are your beneficiary designations for your life insurance and retirement plans and the titling of your assets coordinated with your overall estate plan?
As an airline pilot, you have a unique set of skills and circumstances unlike many others in corporate America: ongoing Class 1 medical certifications, extensive recurrent training, highly volatile industry-specific risks, and a pre-defined retirement finish line. Brightworth serves as an advisor for busy airline pilots who desire ongoing expertise to help them address and monitor important areas of their financial strategy, including their retirement, investments, taxes, cash flow, risk management, college funding, estate planning, and charitable goals.
Flying and planning have many analogies, but an obvious one seems to sum it up: a well-executed flight plan increases the likelihood of reaching an intended destination. While your destination timeline may be pre-determined as a pilot, many important financial and non-financial aspects factor into crafting a thoughtful plan. Our team is dedicated to making sure you maximize your planning opportunities to allow for a smooth transition into retirement with as few surprises as possible through our focus on the following areas.
Pilots Savings Plan
Your 401(k) is a critical component of your retirement planning due to the tax advantages and Delta’s company contribution.
For many pilots at Delta, the Pilots Savings Plan is their primary savings vehicle. It’s convenient, the company contributes on your behalf, and your savings are automatically deducted from your paycheck. You will be amazed at how quickly you can build a nest egg for retirement within your 401(k) plan because of these features. As such, you should consider setting up automatic monthly savings with all your investment accounts. It is a great way to build wealth systematically and keep your lifestyle in check.
Every Delta pilot should plan to put the maximum amount into the 401(k) plan each year. For those under age 50, in 2021 this deferral amount is $19,500. For people age 50 or above in 2021, the maximum deferral amount is $26,000 (including a $6,500 catch-up contribution). Make sure you set up your election for the catch-up contribution too. Once you are regularly maximum funding your 401(k) plan each year, try to never reduce your savings election.
Your Delta Pilots Savings Plan includes both your voluntary contributions and a company contribution. The company makes a safe harbor non-elective contribution (NEC) which is currently 16% of your eligible compensation.
You have the option to make either before-tax or Roth 401(k) contributions. The difference is the taxation of the money you put in now and once you need funds in retirement. With the before-tax 401(k) plan, the money you contribute lowers your income taxes in the year of contribution. You will be taxed later once you take withdrawals in retirement. With a Roth 401(k), you contribute on an after-tax basis, so you do not reduce your taxes today. However, withdrawals after age 59 ½ are tax-free as long as you’ve had the Roth 401(k) open for at least five years.
Your Delta Pilots Savings Plan offers a list of investment choices that you should select in conjunction with your overall investment strategy. Additionally, Fidelity offers the BrokerageLink platform, allowing you to self-direct your portfolio using a broader universe of investment choices or seek professional investment management.
Brightworth can provide ongoing investment management services for your Delta Pilots Savings Plan through the Fidelity BrokerageLink platform. These funds can be rolled over to an IRA by doing an in-service distribution upon reaching age 59 ½.
Owning company stock can provide an opportunity to participate in the financial success of the company, but it’s necessary to weigh the risks in the context of your overall investment allocation.
As a Delta employee, you have the opportunity to own company stock through your retirement plan. It’s important to weigh the risks of holding too much company stock and ensure proper diversification across all of your investments. Diversifying inside your retirement plan can be an easy and tax-efficient way to reduce your concentrated stock position since you do not pay capital gains tax when you sell company stock inside your retirement plan.
Planning Tip: For someone who has been investing in company stock in the 401(k) plan for a very long time and has low “cost basis” shares, a tax strategy known as Net Unrealized Appreciation (NUA) may be beneficial.
This strategy allows you to distribute some or all of your company stock from your 401(k) plan at retirement and pay long-term capital gains tax on any shares you sell. Ordinary income taxes will be due on the cost basis of the shares distributed, not on the fair market value of the shares.
If you are charitably inclined and incorporate a gift of shares to charity in the year of this transaction, you could greatly minimize the overall tax impact. Consult an expert before proceeding as there are many requirements for this to work properly. NUA should be evaluated before diversifying large amounts of company stock inside your 401(k) plan.
A solid investment strategy is the cornerstone to building and preserving wealth and should be designed to meet your specific cash flow needs, time horizon, growth requirements, tax objectives, and risk tolerance.
Successful investing requires a long-term perspective and discipline to avoid making short-term emotional mistakes. “Timing the market” is not an investment strategy, nor is looking at what did well last year and assuming that’s where you should invest your money. Investing is about looking forward, placing probabilities on various scenarios, and aligning your investments to be positioned well in multiple future environments.
As your timeframe for goals like college and retirement comes closer, consider adjusting your investments to be more conservative. However, since your time horizon in retirement could be as long or longer than your working years, stocks or other assets with growth potential should still be an important portion of your portfolio to outpace inflation.
Typically, the younger you are, the more equity funds you should have since you are most likely in accumulation mode. As you approach retirement, adding a few more bond, real estate, or alternatives funds makes sense.
Brightworth provides ongoing investment management services to our clients using sound investment disciplines with customized, innovative planning. The core of this system is a portfolio of carefully selected investments designed to enhance wealth while protecting capital over the long term.Through ongoing monitoring and evaluation, we can take advantage of opportunities and help mitigate risks for our clients.
As a W-2 employee, you have limited ways to save on taxes each year, but there are still valuable strategies which could help reduce your tax bill.
First, look to build your baseline retirement savings by taking advantage of before-tax plans available to you through your 401(k) and health savings account (HSA), if eligible.
Next, consider funding an IRA or backdoor Roth IRA to increase your tax-advantaged retirement savings. Keep in mind that the backdoor Roth strategy is best for those who don’t have significant Traditional IRA money since those account balances factor into the Roth conversion calculation and can impact the taxability of the conversion.
A college savings 529 plan can be a solid investment and tax savings strategy for education planning. Research your home state’s 529 plan as you may receive a state tax deduction on your contributions. With 529 plans, the funds grow tax-deferred and the withdrawals are tax-free (if used for qualified education expenses). Additionally, assets in a 529 plan are outside of the account owner’s taxable estate.
Some states offer tax credits for film, energy, and low-income housing. Purchasing these credits can lower your overall state tax bill as you buy the credits at a discount while receiving a dollar-for-dollar credit towards your state taxes in most cases.
Finally, implement charitable giving strategies that can help you save considerable taxes while fulfilling your charitable intent, especially those thinking ahead about funding charitable objectives in retirement. Above all, consider working with a qualified accountant familiar with compensation strategies and can advise you on various tax reduction strategies, especially in higher income years.
In addition to making cash gifts to your favorite organizations, donating appreciated investments like stocks in a brokerage (non-retirement) account can be a powerful tax savings strategy.
If you’ve held a stock for a long time and it has increased significantly in value, it could be a great candidate to donate. When gifted, you will receive a tax deduction for the stock’s fair market value and avoid paying tax on the capital gain that you would otherwise pay if you sold the stock. When you give stock to charity, and the charity sells it, neither you nor the charity pays capital gains tax on the sale. You can then use the cash you would have otherwise used to make the charitable gift to purchase the stock again in your brokerage account if you wish.
A terrific tool for charitable giving that has great tax and practical advantages is a donor-advised fund. A DAF is essentially a brokerage account with a charitable wrapper around it. A donor can transfer cash, stocks, real estate, and other appreciated assets into the account, the donated assets are sold with no capital gains tax due, and the cash proceeds become available to benefit qualified charities. You receive a tax deduction for the value of the assets in the year they are transferred into the donor-advised fund and could therefore maximize your deduction in a higher tax year compared to subsequent years.
You can direct how much and when to gift out the funds in the account to charities. This process makes for straightforward tax reporting, no more keeping track of various receipts, and more control over the timing of charitable gifts for tax savings purposes. As you approach retirement, a donor-advised fund can be a great tool to save taxes in higher income years and pre-fund a portion of your giving before you are in a lower tax bracket in retirement.
Additionally, beginning at age 70 ½ you can donate to charitable organizations directly from your IRA by making a Qualified Charitable Distribution (QCD). You cannot include a QCD as an itemized charitable deduction, but the distribution avoids being reported as income on your tax return. After age 72, a QCD can be counted toward your Required Minimum Distribution (RMD). Each IRA owner can direct up to $100,000 annually in QCDs. With the QCD strategy, a primary savings vehicle like your 401(k) can eventually become a great funding source to boost your charitable giving goals in retirement.
Having proper insurance coverage is critically important to protect from risks to your earnings potential and assets.
You may have the bulk of your health, life, and disability insurance through your group coverage. For health insurance, this is typically fine and provides adequate coverage. Your group coverage may not provide enough benefits for life insurance, and you may need to supplement with outside insurance policies. Supplemental disability insurance is particularly important to consider, which can be purchased specifically for pilots.
Life insurance is most important during your working years while you are accumulating wealth to reach your long-term goals, and covering daily living expenses and debts. Your life insurance need may be the greatest during this phase, yet as you build wealth, your need for life insurance typically goes down.
You should run numbers with a professional to determine how much life insurance is right for you and your family. Consider the need to replace your income for a period of time, top off college savings, pay off the mortgage and other debts, and whether you want a retirement fund secured for your spouse or partner should something happen to you. Buying supplemental life insurance through your employer may be more expensive than securing it with an outside company, where you can also lock in your premiums for a period of time.
You must coordinate your life insurance beneficiary designations with your estate plan. The proceeds may not pay out according to your wishes unless you word the beneficiary designation accordingly. One common question to address with your estate attorney is whether your life insurance policies should be in a trust. If the answer is yes, you will need to complete the proper assignment and beneficiary change paperwork to transfer your group coverage into the trust.
Disability insurance is a critical type of insurance for pilots that replaces a portion of your income if you are unable to fly for an extended period of time. As a pilot, your ability to earn an income is your greatest asset, so you should adequately protect it. These coverages include both short-term and long-term disability insurance.
Some pilots may qualify for health coverage outside of company group insurance such as TRICARE based on their military background. For others, enrolling in one of the high deductible health plans (Gold, Silver, or Bronze) could be a good option for coverage depending on their health needs. These plans have become increasingly popular in corporate America due to their lower monthly premiums. However, as the name states, employees pay more of their first medical expenses each year until they meet their higher deductible.
A Health Savings Account (HSA) is available with the high deductible medical plans. It’s a great tool to take advantage of the “triple tax play”: contributions are pre-tax, growth is tax-deferred, and withdrawals are tax-free if used for qualified medical expenses. If you can build up this account and avoid using the funds for ongoing medical expenses, an HSA can become an excellent tax-efficient strategy to help pay for higher medical expenses in retirement. Plus, once you turn age 65, you can take penalty-free withdrawals from the HSA for non-medical expenses, similar to the tax treatment of withdrawals from a Traditional IRA or 401(k).
The 2021 maximum HSA contribution for singles is $3,600 and $7,200 for families. And if you are age 55 or over, you can deposit an additional $1,000. Furthermore, if your spouse is over age 55, you can open a spousal HSA for them and deposit $1,000. Don’t forget about your company contribution to your HSA each year. Delta will contribute up to $750 for both the employee and their spouse by meeting health incentives as part of the Delta Health Rewards program. The additional DHR contribution amounts for children differ depending on the plan.
The other medical plans are the Health Reimbursement Plan and the Delta Pilots Medical Plan. Note that if you are enrolled in one of these plans, you cannot contribute to an HSA. Delta will still contribute funds to a Health Reimbursement Account (HRA), but you cannot contribute to the HRA.
Finally, check to ensure you have sufficient liability insurance through your home/auto/umbrella policies. If you were to become involved in litigation without proper protection, your balance sheet and possibly paycheck could be at risk. Have your home/auto/liability insurance plan reviewed every few years. It may save you money and more importantly, address potential gaps in your coverage.
As a fee-only firm, Brightworth does not sell insurance but instead provides objective advice and analysis on this often confusing topic.
It’s important to periodically review your estate planning to ensure proper alignment with your legacy wishes and confirm the titling of your accounts and beneficiary designations.
Every adult needs at least a basic estate plan consisting of a will, a financial power of attorney, and a healthcare directive. These documents should be drawn up by a qualified estate attorney and reviewed at least every five years. As the estate tax laws change, your family dynamics change, and as you build your wealth, periodically reviewing your legal documents is necessary to protect your wealth and ensure that your final wishes would be fulfilled. Key people in your estate planning documents should know their roles.
Remember, beneficiary designations for life insurance and retirement plans need to be coordinated with your overall financial and estate plan. For example, if you have created a trust in your will to hold assets for minor children, but your 401(k) beneficiary designation still shows your child’s names individually as the ultimate beneficiaries, none of the 401(k) money will go into the trust you have created. This is one of the most common mistakes we see people make with their 401(k) plans – not having their beneficiary designations updated and coordinated with their estate plan.
Understanding the “ins and outs” of your compensation and benefits plans as a pilot at Delta is absolutely critical to making wise financial decisions, maximizing the options presented to you, and putting the pieces of the puzzle together into one coordinated strategy. Having a financial advisor who is knowledgeable and experienced with compensation strategies and who will do a “deep dive” into your plans can provide you with more confidence and peace of mind as you navigate your career. It will help put you on a better path to achieving your financial and life goals.
If you have questions about your financial strategy or would like a second opinion, we are happy to discuss your unique situation confidentially with you.
This information is based on information deemed to be factual and reliable. Please also refer to the Delta company plan documents and your benefits department.