Earning a perpetual income? Learn to replicate the Bobby Bonilla payment strategy for long-term payouts.
In a fascinating turn of events, retired New York Mets baseball player Bobby Bonilla is set to receive an annual payment of $1,193,248.20 on July 1, a tradition that began in 2011 and will continue until 2035. This unusual arrangement is a testament to the power of nonqualified deferred compensation (NQDC) plans, a lesser-known but potent financial tool for high-income individuals, including professional athletes.
The Mets' calculation of Bonilla's compensation was based on the time value of money, a common practice in NQDC plans. Interestingly, this isn't an isolated case; the Mets had previously deferred part of pitcher Bret Saberhagen's compensation in 1993.
NQDC plans are employer-sponsored agreements that allow certain highly compensated employees to defer a portion of their income to a future date, such as retirement or separation from service. Unlike qualified plans like 401(k)s, NQDC plans are not covered by ERISA, do not have the same regulatory protections, and have no IRS-imposed contribution limits. Participation is also restricted to select employees, typically based on job title or compensation level.
Here's how NQDC plans work: an employee elects in advance to defer a portion of their salary, bonus, or other compensation. The deferred amount is not taxed as income in the year it is earned but is taxed upon distribution, typically when the employee retires or leaves the company. The plan agreement specifies when and how deferred amounts will be paid out, which can be structured to provide income streams over time.
For high earners like athletes and executives, the benefits of NQDC plans are significant. Deferring taxable income allows participants to delay their tax liability, often until they are in a lower tax bracket after retirement. Moreover, the lack of contribution caps means participants can defer amounts well beyond qualified plan caps, enabling them to save and invest significantly more for the long term.
The flexibility in timing is another advantage, as it allows athletes and executives to plan around career transitions, such as retirement. For athletes with short professional careers, this can be particularly relevant. Furthermore, since many athletes and highly paid professionals earn above the IRS limits for qualified plans, NQDC plans provide a valuable vehicle to accumulate wealth tax-efficiently beyond these limits.
Notably, professional athletes often use such plans or similar arrangements to spread out large contract payments over many years, helping manage tax and cash flow. For instance, some sports contracts are structured to pay out installments long after the active playing career ends.
However, participants should be aware of the risks related to company solvency, as deferred amounts are unsecured liabilities. If a company faces financial troubles, the deferred compensation could be at risk.
Annuities can provide tax benefits, potentially giving policyholders a relative edge compared to Bonilla's income stream. The Mets agreed to an 8 percent interest rate on Bonilla's deferred income. Employees, particularly highly paid corporate executives, may agree to a nonqualified deferred compensation plan to help delay part of their income tax bill.
Investors are advised to conduct their own independent research before making an investment decision. Past investment product performance is no guarantee of future price appreciation. Annuities can offer regular income in retirement and are sometimes marketed as a "paycheck replacement". A retirement income fund (RIF) aims to give steady returns while retaining or growing the principal for near or current retirees.
Interestingly, the trend of unique compensation deals extends beyond baseball. Baseball all-star Shohei Ohtani and the Los Angeles Dodgers have agreed to a $700 million contract, with $680 million of that compensation to be paid out over a decade starting in 2034. The Baltimore Orioles are also paying half a million a year to retired baseball star Bobby Bonilla, demonstrating the value of diversifying income.
CDs, or certificates of deposit, can also generate regular income. CD ladders can be used to achieve this by using staggered term lengths of certificates of deposit. CDs are nearly risk-free, as they are FDIC or NCUA insured, up to $250,000 per depositor, per bank, per ownership category.
In conclusion, NQDC plans offer a unique and powerful tool for athletes and high-income individuals to defer significant amounts of income beyond traditional retirement plans, optimize their tax situations, and structure income for long-term financial security post-career. However, participants should be aware of the risks related to company solvency and conduct their own independent research before making an investment decision.
High-income individuals like athletes and corporate executives can defer a portion of their income to a future date using Nonqualified Deferred Compensation (NQDC) plans, such as Bobby Bonilla's contract with the New York Mets. These plans allow participants to delay their tax liability, often until they are in a lower tax bracket after retirement, and can defer amounts well beyond qualified plan caps, enabling significant savings and investments. However, it's crucial to be aware of the risks related to company solvency, and investors are advised to conduct their own independent research before making an investment decision.
