What is Deferred Comp?

What the HELL is deferred comp? You’ve heard about it a thousand times. You might even be putting a few dollars from every paycheck into it. I’m willing to bet, though, that no one has ever actually explained how it works. Perhaps even MORE importantly, why it is so incredibly important to you in the future. This article could easily be 5-6 pages, but I’m gonna cram as much into the next few paragraphs as possible.

Let me preface this by saying very, very clearly that NOTHING in the following article is meant to advise any individual person or group on HOW to invest or WHAT to invest in. PLEASE consult an investment professional before making ANY decisions about how you should invest.

Your Deferred Compensation (457) plan* is a name for the retirement account that is offered to public service employees. It’s similar in function to a 401k that a company might have. The following is a very rough description, but it basically works like this:

What’s a “security”? There are a TON of different securities out there, but we will focus on the 2 most well known.

Stocks- AKA Equities/ more aggressive investing. You own a proportionate piece of whatever company you’ve bought stock in. These are the side of the market that generally makes most of the gains over the life of any retirement plan. The younger you are, generally speaking, the more invested in equities you should be. There is obviously more RISK with investing more aggressively, but also potentially more reward.

Bonds/ fixed income/ less aggressive investing. A company owes you money that was lent to them. Just as the previous paragraph was the MORE risky side, this side is generally LESS risky. Again, less risk often equals less reward. As someone gets older, many retirement funds will automatically reallocate from the more aggressive to the less aggressive. Those are often called “target date funds”. A good rule of thumb- take your age, subtract it from 100. The remainder might be close to the percentage of your retirement that should be in the equity side of the market vs. the fixed income side. Mutual funds- Most retirement accounts are VERY heavily invested in mutual funds. What are they? Let’s say you have a bunch of stocks and bonds of different companies. We can use Walmart, Apple, or whatever company you’d like to add in there. Take one share of each companies stock/ bond and put it into a pile. Let’s say there are 200 companies represented in this fictitious “stack of stocks” (it might sound ridiculous, but lets say each share

is made of glass). Take the entire stack and shatter it on the floor. Pick up one small piece of each share of stock and place it into a bucket... That’s a mutual fund. An undivided interest in a larger portfolio of securities. Not without risk, but diversified risk. Your deferred comp plan offers mutual funds in it of one kind or another, from one company or another. I can’t tell you what the stock market will do tomorrow, but I can tell you what its done in the past. It has a great history of returning more than was originally put in. If you think about it, when you retire, your pension won’t increase very much over the years. Let’s say you receive $4,000 a month when you retire. Well, if you look at the history of money and its value, every 18-20 years, the value of the dollar is almost invariably diminished. This means that you’ve gotta spend more to buy a gallon of milk, a candy bar, a car, whatever. Unless you’re retired from a very kind municipality, your pension will NOT double over that 20 year period. So, the money you’re getting is worth LESS than it once was, so how are you going to afford to LIVE after you’ve stopped working completely? In short, your deferred comp plan is one of the best options to mitigate the damage done to the time value of money as long as you contribute to AND withdraw from it correctly. The most common question I get: “How much is enough to fund the 457”. Every single person is different. Reach out to an investment professional to gauge where you stand now vs. where you want to be in the future. PLEASE PLEASE PLEASE FUND YOUR DEFERRED COMP AS THOUGH YOUR FINANCIAL LIFE DEPENDS ON IT! It just might. You can reach out to me 24/7 with any further questions. It’s an honor to serve those that serve us.

*You can’t invest in stocks directly in a 457(b)-retirement plan.

You can contact him at (410)-302-2992 and visit at www.tacticalfinancialgroup.net

Brian K. Shea, Principal/ Owner Tactical Financial Group, *Financial Advisor offering Investment Advisory Services through Eagle Strategies LLC, a Registered Investment Advisor. Financial Services Professional offering securities through NYLIFE Securities LLC, Member FINRA/ SIPC, a licensed insurance agency. Tactical Financial Group is not owned/ operated by NYLIFE Securities or its affiliates.