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For Walmart and Sam's Club Officers, the Walmart Deferred Compensation Matching Plan (DCMP) has the potential to supercharge your savings and shorten the path to retirement.
This week we are discussing the case of Samantha (50), a Walmart Vice President, who wants to retire in 7 years. The issue is that Samantha and her husband, Madison, have invested heavily in their children's upbringing and have not accumulated much wealth for their retirement.
Now with all their children graduated from college, the couple knows they need to save aggressively to achieve their goal of retiring at age 57. The key questions that the couple needs help solving are:
1.) Will the Walmart DCMP result in significantly more wealth at retirement?
2.) With a target retirement age of 57, will the DCMP distributions cover living expenses until age 67 when they plan to start Social Security and take distributions from the 401(k) account?
Walmart DCMP Case Study: Samantha, the Walmart VP
Samantha and Madison invested heavily in their children's upbringing including extracurricular activities, family vacations and private university educations. And, while the couple would make the same decisions all over again, the heavy spending minimized the amount the couple saved for their own retirement.
Outside of Samantha's Walmart 401(k) and a small inheritance that Madison received from his mother, the couple has little savings to fund their retirement.
Fortunately, Samantha is well-compensated by Walmart and the couple's expenses are expected to become more manageable without any private college tuition to pay.
So, should Samantha contribute to the Walmart DCMP?
Scenario 1: Samantha Does Not Participate in the DCMP
First, let's look at the scenario without participating in the DCMP.
Samantha's $850,000 income puts the couple deep in the highest tax brackets with taxable income of $796,000 and $247,000 tax bill.
Despite the high tax bill, the couple still has ~$400,000 after expenses to invest in their joint investment account each year. This persistent savings strategy along with Samantha's 401(k) contributions result in a portfolio worth $4.9M after 7 years - at a 6% real growth rate.
Assumes a 6% growth rate / Ending Net Tax value is $4.6M based on a 20% effective tax rate.
Scenario 2: Samantha Does Participate in the DCMP
Now, let's look at the scenario with Samantha contributing 100% MIP and 50% of Base Salary to the Walmart DCMP - a total of $340,000 per year.
Deferring that $340,000 of income - that otherwise would be taxed at 35 - 40% - results in a much lower tax bill of $121,000 vs $247,000 in the first scenario.
After expenses, taxes and the $340,000 DCMP contribution, the couple still has $200,000 to invest in the joint brokerage account for a total of $540,000 (vs. $400,000 in scenario #1). This savings strategy results in a portfolio value of $6.1M vs. $4.9M in the first scenario.
Assumes a 6% growth rate / Ending Net Tax value is $5.3M based on a 20% tax rate / The DCMP is projected to make 10 annual payments of $384K which would have an effective tax rate of 20% using the 2024 MFJ tax table.
What is the Best Option for Samantha?
Now, we must consider the after-tax value of the two portfolios since the DCMP holds pre-tax dollars. Assuming a 20% tax rate in retirement, the DCMP Scenario results in a $5.3M after-tax portfolio vs $4.7M in the scenario Samantha does not participate in the DCMP.
Net of taxes, the DCMP scenario resulted in ~$600K more wealth than not participating in the Plan. Additionally, the DCMP is expected to make 10 annual installments of $384K - which is more than enough to cover Samantha and Madison's living expenses while they bridge the gap from retirement to the start of retirement benefits such as Medicare, Social Security and 401(k)/IRA distributions.
The Takeaway: The couple would benefit from contributing aggressively to the Walmart DCMP. The reduced tax bill allows for more savings to be invested resulting in more wealth to fund their retirement. As long as Samantha is confident that she will continue with Walmart until retirement, participating in the DCMP is a clear best option to meet their goals.
Wrap-Up
While the decision for Sr. Directors to participate in the DCMP could go either way - see previous article focused on a Sr. Director - it is often more straightforward for Officers due to their high tax rates and shorter timelines to retirement. An effective DCMP strategy has the potential to accelerate retirement by 1-2 years as well as fund those initial years of an early retirement.
If you have any questions on the Walmart DCMP or want to see if working with Taurus Financial Planning makes sense for you, feel free to reply to this email, schedule time on my calendar below or view our archive of DCMP articles. I'm happy to help!
Mark Chisenhall, CFA
Financial Advisor
Taurus Financial Planning, LLC
Taurus Financial Planning is a Fee-Only Wealth Management firm based in Bentonville, AR. The firm offers comprehensive financial planning, tax planning and investment management to corporate executives across the country.
Taurus Financial Planning is a Registered Investment Advisor with the State of Arkansas. This information is provided as a guide to assist you in your financial planning. The specific examples are provided for illustration purposes only and are not representative of specific investments or guarantees of future returns. Please consult with a professional for specific questions regarding your particular situation. If there is any error or inconsistency between this document and the official company plan documents, your company plan documents will govern.
This publication is for informational purposes only and is not intended as tax, accounting or legal advice or as an offer or solicitation of an offer to buy or sell or as an endorsement of any company security fund or other securities or non securities offering. This publication should not be relied upon as the sole factor in an investment making decision. Past performance is no indication of future results. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any recommendations made by the Author, in the future, will be profitable or equal the performance noted in this publication.
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