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Charlie High Income Pilot Money Guys Pilots Retirement Retirement Mistakes

If I Could Tell Every Airline Pilot One Thing…

If I Could Tell Every Airline Pilot One Thing…

If I could tell every airline pilot one thing it would be, save more money! I know it’s not rocket science, but like eating healthy and exercising – it’s not easy to do! 

As a Certified Financial Planner professional and an airline pilot myself, I understand how saving more can be a major challenge. If you’re just starting out with the airlines, you’ll make a lot more money as your career progresses but saving the right amount is never easy! I bet you won’t be surprised to know that some of these challenges are our own – new car, vacations, airplanes … In addition to our own limitations and difficulties, the IRS caps your qualified retirement contributions annually. 

Here, I’ll discuss three steps to maximize your savings and investing opportunities that will not only allow you to invest more now but can also greatly reduce your taxes in retirement. 

Every airline pilot, regardless of income, can and should contribute to their non-tax-deductible IRA. 

You need a taxable brokerage account in addition to your 401k and IRAs. 

Build tax diversification into your savings now so you’ll potentially pay less income taxes in retirement. 

Why save more?

Many airline pilots we work with have been employed by multiple airlines in their careers. Typically, this means they have had to start over with savings and investing multiple times. Furthermore, most airline pilots at major airlines made a transition from either the regionals, corporate or military careers. Most likely, those pilots took pay cuts to make the move to their major airline of choice. There are two important takeaways from this:

1) If you are a young pilot aspiring to work at a major airline, save your money now for that eventual transition, and

2) If you are a more senior airline pilot, but because of our tumultuous industry you were late to start saving for retirement, ​simply maximizing your qualified retirement accounts may not be enough. 

Every airline pilot, regardless of income, can and should contribute to their non-tax-deductible IRA 

I’ve found that some pilots with whom I’ve flown believe they make too much money to contribute to an IRA. Not true! Many pilots misunderstand the tax rules for contributing to IRAs. It is true that most airline pilot incomes are too high to contribute to a ​tax-deductible​ IRA, as well as a Roth IRA. However, anyone, regardless of income, can contribute to a non-tax-deductible IRA.

Although contributing to a non-tax-deductible IRA is beneficial, the best reason to contribute is to then convert your traditional IRA to a Roth IRA. This strategy is commonly referred to as the backdoor Roth IRA. There are no income limits on converting your traditional IRA to a Roth IRA, however there are a few things to consider before you choose to execute the backdoor Roth IRA strategy.

The process of converting your traditional IRA to a Roth IRA can be simple, but make sure you are aware of the tax rules that pertain to Roth IRA conversions. For example;

  • If you already have other IRA accounts, then all or a portion of your conversion to Roth IRA could be taxable.
  • One strategy to possibly avoid this taxation is to consider rolling your pre-tax IRA into your company’s 401k plan and then executing the backdoor Roth IRA the following calendar year.
  • Seek advice from your financial advisor or tax professional to make sure you follow IRS guidelines and make sure to correctly document the Roth IRA conversion on your tax return.

You need a taxable brokerage account in addition to your 401k and IRAs.

There is no IRS limit to how much you can save in a taxable brokerage account. You can withdraw your money anytime without penalties and there are very few limitations on your investment choices. You will not receive a tax deduction for your contributions to a taxable brokerage account, however, these accounts have other great tax advantages.

Essentially, you can create your own tax deferral on the growth of your investments as well as enjoy lower capital gains tax rates if you invest using low cost exchange traded funds (ETFs), individual stocks or low-turnover stock mutual funds. Make sure to avoid short-term capital gains by holding your investments for at least one year. Once you withdraw or sell the investments in your taxable brokerage account you’ll pay capital gains tax rates which are typically lower than ordinary income tax rates for a retired airline pilot.

Build tax diversification now so you’ll pay less income taxes in retirement. 

Sometimes we forget the entire reason for saving and investing now is to create your own paycheck during retirement. You can significantly reduce the income taxes in your retirement if you are intentional now and have a plan. Your goal should be to fill up at least three different types of investment accounts in order to increase tax diversification and potentially reduce your largest expense in retirement – taxes!

1. Pre-Tax 401k: Ordinary income tax rates upon withdrawal in retirement

2. Roth IRA and/or Roth 401k: Tax free in retirement

3. Taxable brokerage account: Capital gains tax rates

Bonus savings account: If it is appropriate for your family’s health care, consider using your airline’s high deductible health care plan so you can take advantage of the health savings account (HSA). The HSA is the only account with triple tax savings. They are tax deductible, they enjoy tax-free growth, and are tax free anytime they are used for qualified medical expenses.

One of your largest expenses (second only to taxes) in retirement will most likely be your healthcare expenses. Personally, I use my HSA as a healthcare 401k. Furthermore, once I turn age 65 I can use the funds from my HSA for any expenses with the understanding that I will pay ordinary income taxes on the gains if I use the funds for anything other than healthcare expenses.

 

Please reach out to us anytime. We’d love to hear from you because we’re here to help you navigate to your savings destination. Fly safe!

865-240-2292

info@leadingedgeplanning.com

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this video will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Moreover, you should not assume that any information or any corresponding discussions serves as the receipt of, or as a substitute for, personalized investment advice from Leading Edge Financial Planning personnel. The opinions expressed are those of Leading Edge Financial Planning and are subject to change at any time due to the changes in market or economic conditions.

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Charlie High Income Pilots Retirement Mistakes

Trust Your Instruments, Not Your Gut, When it Comes to Flying AND Investing!

​As a brand-new pilot, one of the first things you learn is how to mitigate the risk of the potentially deadly physiological phenomenon known as spatial disorientation or spatial-D. In pilot speak, spatial-D is when your body is telling you one thing and your flight instruments (and airplane) are telling you something completely different. Sadly, spatial-D has claimed the lives of many pilots.

In this video, one of our newest Leading Edge team members and previous Marine F/A-18 fighter pilot, Mark Covell discusses just one example of spatial-D.  Mark shares how carrier pilots tend to feel like they are pitching up as they are launched off the carrier at night due to the massive acceleration from the catapult. During daytime, VFR conditions this is probably a non-issue. However, in weather, or at night, this type of spatial-D is potentially deadly.

What does spatial-D have to do with investing and retirement planning? Personally, I feel like all of 2020 could be compared to being catapulted off a carrier at night and not knowing what is up or what is down.

During the heat of the battle from February until the markets settled a bit in early April, investor emotions were all over the place. Years of stock market gains evaporated in days, even hours. Furthermore, many people thought, and the news media quickly suggested we were headed for the second Great Depression. And don’t get me wrong, anything was (and is) possible. Sometimes, the unknown can be truly scary.

One slightly humorous example of investor spatial-D was early in the pandemic when the shares of ticker symbol ZOOM shot up due to investors buying up shares as quickly as possible. Zoom Technologies, a so-called penny stock had risen more than 240% in the span of a month before the SEC suspended trading. Unfortunately, the traders failed to realize the ticker symbol ZOOM did not represent the Cloud Video Conferencing company Zoom they thought they were purchasing – Ticker symbol ZM.

Here is the headline from MarketWatch.com dated February 27, 2020.

In the airplane, pilots must fight spatial-D by cross-checking and TRUSTING their instruments. If, as an investor, you did not trust your instruments during 2020, it may have been very costly.

So, it’s a dark night and the weather is terrible.  What are the instruments you trust?  What is your primary and backup instrument? Here are four instruments that I think can save your investments as well as your financial sanity during uncertain times…

1. Cash reserves – Emergency Funds.

    • Having extra cash can prevent withdrawals from retirement accounts or excessive credit card debt in emergencies.  Studies also show having cash in a bank account makes people happy. In an article posted on PYMNTS.com,  “Can Cash Really Make You Happier”, Joe Gladstone, research associate at the University of Cambridge in the U.K. and co-author of two recent studies about money and happiness said,

“We find a very interesting effect: that the amount of money you have in your bank account right now is a better predictor of happiness than your aggregate wealth,” Gladstone explained. “Having more money in their bank account makes people feel more financially secure, which leads to an increase in happiness.”

2. Have a working knowledge of financial history.

    • You don’t have to be an expert or financial historian, but I believe being familiar with financial history is akin to training before you go on a flying mission.  Pilots call this chair flying.  Athletes and musicians use a technique called visualization that helps them prepare for uncertainty and reduce anxiety for a sporting event or concert.

3. Admit that times are scary, and you do not know what’s going to happen.

    • This may sound silly, but I’ve seen many people get themselves into a “square corner” because they assumed that something was going to happen when in fact there was no indication or possible way of knowing what the future may hold.  We have heard investors say “my gut tells me…” many times.
      • Some of the best investors in the world invest with the mindset of preparing to be wrong. That’s why diversification is not popular or “sexy” because it’s like admitting you don’t know what’s going to happen in the future, so you must prepare for multiple scenarios.  However, diversification can feel disappointing but prove to be a profitable strategy over the long term.

BlackRock Investment Management Company posted the graphic below on their investor education website about diversification and “S&P Envy” over the last 20 years.

4. Prepare and Plan by having a clear vision of your goals and priorities.

    • If you don’t understand the “why” behind your investments as well as why you’re investing and saving in the first place, you will most likely bail-out of your plan during difficult and uncertain times.  Changing your investment plan mid-crisis creates a very high likelihood that your investment returns will be significantly lower.
    • Simon Sinek started a movement by encouraging businesses to “Start with Why.” It’s a powerful mindset that leads to trust, inspiration and success.  I believe the same applies to your financial and investment game plan.

5. Remember that you are invested in companies – not politics.

    • Sometimes our politics clouds the investment and retirement planning picture.  This rule falls under the axiom; “control the controllable.”  If you’re allowing your politics to affect your investment game plan than you may want to see rule number 2 above.

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this video will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Moreover, you should not assume that any information or any corresponding discussions serves as the receipt of, or as a substitute for, personalized investment advice from Leading Edge Financial Planning personnel. The opinions expressed are those of Leading Edge Financial Planning as of 12/09/2020 and are subject to change at any time due to the changes in market or economic conditions.