How to design a retirement income stream with the AbbVie Deferred Compensation Plan

To begin with, let's address some quick queries: 

What happens to my deferred income and how is it paid back to me?

On a Distribution Election Form, you can choose when to receive your deferred income. This can be as soon as two years after the deferral has been made, or it can be deferred until retirement. Typically, employees defer income while their earnings are high, allowing them to create an income stream that will be taxed at a lower rate and serve as an additional income source from their investments, pension, or Social Security.

How does it get paid to me at retirement, or if I leave the company?

 If you choose to receive your deferred income at retirement, the payment process will differ based on your employment status when leaving AbbVie. If you are terminated from AbbVie before retirement but still wish to receive the deferred compensation, then the entire amount will be paid out within 90 days of your last day of employment.

However, if you retire from AbbVie voluntarily, the distribution elections made on your last election form will be followed. You have the option to receive your deferred income in substantially equal quarterly or annual installments over 15, 10, or 5 years, as a lump sum, or in substantially equal quarterly installments over 10 years if you have not made an election. Each piece of deferred income can have a different election, or they can all have the same election. If the balance in your Deferred Compensation Plan is less than $15,500, then the amount will be paid as a lump sum.

All these facts are great, but let’s put them into a scenario:

Paul and Jessica are both 45 and as they are both high earners, have the ability to retire at 55. Their annual household income is $600,000 and have $150,000 that they can defer to the DCP each year for the next 10 years.

Here’s what their options would look like: 

Total deferral amount over 10 years: $1,500,000

Final value given a 6% interest rate/year: ~$2,000,000

Payout and highest tax rate if using various payout methods:

As you can see, the tax rates are vast between the lump sum and 15-year payout showing a clear advantage to creating an income stream that covers a longer period. Not only does this longer period allow for the lower taxation of this deferred income, but it creates a longer period where other sources don’t need to be tapped for extra income.

If Paul and Jessica were to retire at 55, they would be waiting at least 12 years for their Social Security benefits (collecting at FRA), almost 5 years before most tax-deferred accounts could be accessed without penalty* and 7 years before they could access payments from their AbbVie pension plan without decreased benefits. If this were a current client sitting in front of me, I would likely suggest that they choose a long payout period.

Layering payout options

Let’s look at another example:

Daniel is 50, single, and will be retiring at age 58. He’s starting to save late in his career. Over the next 8 years, he will be contributing $50,000/year to the DCP. At retirement, he will embark on five years of global travel before he settles into his paid-off home to focus on his hobby of water-color painting.

Here are Daniel’s facts:

Total deferral amount over 8 years: $400,000

Final value given a 6% interest rate/year: ~$500,000

Payout and highest tax rate if using various payout methods:

As Daniel will be retiring at 58, he doesn’t have many investments he can access. His retirement accounts have another 18 months until he 59.5*, his full pension won’t be accessible until he is 62, and as he started to save late, doesn’t have many non-retirement funds to access. To fund his travel, he could take the 5-year payout, and as his expenses will be less when he settles down, he can then access his pension and other accounts to fund that lifestyle. While this won’t give him the best tax rates, it fits his goals and desires better than going for the longest payout.

As it can be seen from these two examples, designing the income stream portion of the AbbVie DCP is specific to your situation. Not only does it need to factor in your current situation, but also your spouse’s benefits (if applicable), desired lifestyle after retirement, and other financial assets available to you that can be sued to provide income. 

This is one topic I spend a lot of time on with clients. If this is something you’d like conversation on, please let me know. 

*While the 401(k), if left at AbbVie, can be accessed after age 55, we’re assuming it will be rolled over to an IRA at retirement to access better funds and lower costs.