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This week, we are focusing on the Walmart Deferred Compensation Matching Plan (DCMP) and how it can be integrated into a Walmart Executive's financial plan. The Walmart DCMP is the most effective tool available to lower taxes for Walmart Leaders to potentially save $100,000s in taxes over their lifetime. At the same time, the Walmart DCMP is nuanced and mistakes are expensive! There is a reason we focus on the Walmart DCMP so much.
We are reviewing the Case Study of Samantha, a Walmart VP aiming to retire in 5 years. We will see how Samantha and her family utilize the Walmart DCMP to solve for issues related to taxes and funding a long retirement.
If you are interested in learning more about how Taurus Financial Planning can help you build wealth within Walmart, please feel free to schedule an introductory call.
A Walmart Deferred Compensation Matching Plan Case Study - Samantha the Walmart VP
Samantha (48) is a recently promoted Vice President at Walmart. She enjoys working at Walmart but is looking forward to an early retirement in 5 years.
Samantha's partner, Madison (51), is a high school math teacher in the Bentonville school district. Samantha and Madison have 2 kids, Grace (20) and Spencer (16).
Samantha and Madison enjoy Northwest Arkansas but are considering moving to Texas or Florida in retirement. Both states do not have state income tax.
Below is a current snapshot of the Family's Financials.
The Key Issues: Taxes and Retirement
Since Samantha's promotion to Vice President, she has noticed that her tax bill is significantly higher. She expected her taxes to increase along with the bump in pay, but she was shocked by how much.
Samantha is concerned about retiring in her mid-50s, several years before traditional retirement benefits start such as Medicare Coverage, Madison's Pension Plan, Social Security and Access to Retirement Accounts. She wants to make sure they can financially bridge this ~10 year gap.
Samantha is hoping that the Walmart DCMP can help address these key issues:
Reducing taxes during their remaining working years.
Bridge the ~ 10 year gap between retirement and the start of traditional retirement benefits.
Executing a tax efficient withdrawal strategy in retirement.
1.) Reducing Taxes Now
Currently, Samantha and Madison have gross income of $805,000. They deduct contributions to their 401(k) and 403(b) accounts and the Standard Deduction totaling $80,000. These deductions only bring their total taxable income to $724,800 resulting in a total federal tax liability of ~$203,000.
Tax Rates are based on 2023 tax brackets for a Married Filing Jointly Taxpayer. The figure does not include State Tax.
Samantha and Madison are still in the highest tax bracket of 37%. Here is where the Walmart DCMP can help.
As a Vice President at Walmart, Samantha could contribute up to $429,000 to the Walmart DCMP (100% MIP and 80% Salary) which would reduce taxable income to $295,800 - well below the $364,200 breakpoint when tax rates jump from 24% to 32% for Married Filing Jointly Taxpayers.
Samantha will contribute $360,00 to the Walmart DCMP to reduce taxable income to $365,000, very near the $364,200 breakpoint. In that case, she would reduce their tax liability in the current year from ~$203,000 to ~$77,000.
After contributing $360,000 AND paying taxes, the family would still have $288,000 to cover all expenses (living, mortgage and college tuition) and add $75,000 - $100,000 to the joint brokerage account.
Tax Expense is based on 2023 tax brackets for a Married Filing Jointly Taxpayer. The figure does not include State Tax.
2.) Bridging the Retirement Gap
Samantha is concerned about funding the first 10 years of retirement. She wants to feel confident that the family can financially bridge the gap between retirement and the start of traditional retirement benefits such as Medicare, Social Security, Madison's Pension and Retirement Account Distributions.
Samantha elects for her Walmart DCMP to distribute 10 annual installments starting at retirement.
If Samantha contributes $360,000 per year into the Plan for her remaining 5 working years and the funds grow at 5%, the DCMP account will have ~$2M at retirement. The $2M balance translates to 10 annual payments of ~$250K - which provides more than enough to fund retirement for the first 10 years.
The DCMP is subject to market fluctuations. Participants are allowed to invest in a range of funds including equity, bonds, money market and real estate. The above is for illustrative purposes and assumed 5% annual growth rate.
Tax Bonus: By electing a 10-year distribution schedule, Samantha may avoid paying State Income tax in Arkansas if she and Madison relocate to a no tax state such as Florida or Texas.
3.) Taxes in Retirement
While it is great to save taxes today, it is important to remember that you will pay taxes eventually. The key is to pay a lower tax rate.
By limiting gross income over the initial years of retirement to ~$250,000, Samantha and Madison's effective tax rate is ~16% - well below the 37% marginal tax rate during Samantha's final working years. Even with Madison's pension starting to payout in year 9, the couple will most likely be in a lower tax bracket compared to their working years.
The below chart shows the couple's fixed income sources for the first 25 years of retirement.
The initial 10 years - DCMP Payout Phase - is covered. There are not really any decisions to make. If needed, they can draw on the joint brokerage account for supplemental income.
The middle years - Low Income Phase - will need to be supplemented by savings. This is a fantastic opportunity for Samantha and Madison to access retirement funds (e.g. 401k, 403b) at a low-income tax rate before Social Security and Required Minimum Distributions start.
The final years - Social Security and RMD phase - may present tax challenges for the couple. As it stands, they are in a high-income tax bracket for retirement and paying extra Medicare Premiums (IRMAA.) In this case, Samantha and Madison should take distributions from retirement accounts during the Low-Income Phase to reduce the RMDs in later years.
The Recommendation and Risks
I'd recommend that Samantha contribute 100% MIP ($165,000) and $7,500 per paycheck from salary ($195,000) for the next 5 years.
Samantha is an ideal candidate for an aggressive Walmart DCMP strategy. She is in a high tax bracket, close to retirement and earns enough income to cover all expenses after accounting for the aggressive contribution.
While an aggressive strategy may be the right decision for Samantha, there are certainly some trade-offs that she must consider.
1.) Lower Take Home Pay - Samantha will need to plan for much lower bi-weekly take home pay. The equity compensation should cover all expenses, but Samantha must adjust to receiving one large annual payout compared to 26 bi-weekly paychecks. In the case of Samantha, take home pay from base salary would decrease from ~$8,500 to $1,000. That is a big adjustment!
2.) Lower 401(k) Match - The tax savings are likely significantly larger than the lost 401(k) match. In this case, Samantha will lose ~$11,700 of Walmart match in her 401(k). Assuming that Samantha's effective tax rate is 20% in retirement (vs 35% today), the expected tax savings on her Walmart DCMP contribution is ~$54,000/year ($360,000 X 15%.)
3.) Non-Qualified Plans are Not Guaranteed - As always, we must consider that non-qualified accounts are not protected. If Walmart declares bankruptcy you may not receive all the funds you previously contributed. Yes, it is Walmart, but strange things happen.
Wrap-Up
Samantha is an ideal candidate for an aggressive Walmart DCMP strategy. She is in a high tax bracket AND she is close to retirement. We have several other articles - see the three posts below - that discuss the nuances of the Walmart DCMP including a Case Study for a Sr. Director. Of course, if you have any questions, feel free to schedule a call with a Financial Planner below.
Mark Chisenhall, CFA is the founder of Taurus Financial Planning, a Bentonville, AR wealth management firm specializing in helping Walmart Sr. Directors and Officers build wealth with tax-efficient financial planning and investment management.
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.
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. Link to Plan Documents on SEC site.
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