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Don’t Play Pension Roulette - Alternative Retirement Strategies for Pilots

Updated: Sep 18, 2023

Part 2 - New Retirement Plan Options

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Pension plan options for pilots have dried up, and most airlines now offer a 401(k)-options. Gone are the days when our retirement could depend solely on a pension or 401(k) plan. To be financially secure and retire comfortably, you must supplement both during and after your career

I was asked to speak to a group of pilots about saving for retirement. This article is taken from that material and specifically references that industry and situation. However, there are other industries and job types that also offer pension plans. Those employees should be aware of how pensions work and how they can impact their retirement. Even if you aren't a pilot, I believe that the information in this article can help you. I share it in the hopes that you will become more aware of the details of your retirement and take control of your future.

New Retirement Plan Options for Pilots

Pension plan options for pilots have dried up, and most airlines now offer a 401(k)-option with higher-than-usual employer contribution levels.

These contribution levels are limited by IRS section 415(c), which caps the amount of “annual additions” (i.e., total contributions) a 401(k) plan can allocate to participants each year, and is subject to annual cost-of-living adjustments. In 2023, an employer and employee can contribute a maximum of $66,000 to a 401(k) plan.

Federal Aviation Regulations Part 121 (major airline regulations) currently requires all pilots to retire at the age of 65, which could be modified in the future.

Comparing a 401(k) vs Pension Fund

A 401(k) offers the benefit of allowing individual employees to control their own investments and protect the funds in their account from the company or its creditors. But it only provides half as much for retirement, compared to the pension:

  1. The standard 401(k) employer contribution for the airline industry is 16 percent of a pilot’s pay each year. At an annual salary of $200,000, the employer would contribute $32,000 per year.

  2. Over a period of 20 years, the total employer contribution would equal $640,000. ($200,000 x 16% x 20 years = $640,000)

  3. Employer contributions are pre-tax contributions. This is important because, at some point, you will be taxed on their contributions. Today, the tax rate for $120,000 in annual income (60% of the $200,000 salary) is 24%. This leaves you with $91,200.

The airline industry transitioned from a pension plan to a 401(k), which is still subject to market volatility. With good market conditions, you could stretch your retirement funds through the 11-year gap between retirement age and the average American life expectancy. Or, alarmingly, in bad market conditions, your funds may last as little as five years post-retirement.

Things to Consider for 401(k) Contributions

In 2023, the maximum an employer and employee can contribute to a 401k plan is $66,000.

  • Check with your employer about your contribution options for pre-taxed and after-tax options. Many 401k plans now have an after-tax or Roth 401k option available.

  • You can contribute up to $22,500 for 2023; when adding this to the employer contribution, you now have a $54,500 annual contribution to your 401k plan.

  • If you are over 50, you can increase your contribution to your 401k to $30,000 a year.

Supplement to Build A Sound Strategy

Gone are the days when our retirement could depend solely on a pension or 401(k) plan. To be financially secure and retire comfortably, you must supplement both during and after your 20-year flying career.

Alternative investments have become a significant part of Americans’ retirement strategies, as they offer a way to mitigate risk from publicly traded assets. Stock market volatility can affect both pension and 401(k) plans, but this can be offset with a balanced and diversified investment portfolio.

A self-directed IRA is a powerful diversification tool. You can start by opening and contributing to a self-directed IRA while you’re employed, then grow your SDIRA balance with a 401(k) rollover or transfer after retirement.

401(k) rollover or “Direct Rollover” - The 401(k) plan initiates a wire to directly transfer funds to your new retirement account. Most 401(k) plans will only allow rollovers or transfers after you have separated from the employer.

Transfer or Conversion - The movement of funds from a traditional institutional IRA to a self-directed Traditional IRA (no tax implications), or converting a Traditional institutional IRA to a self-directed Roth IRA (tax implications). This requires the receiving custodian to complete a Transfer or Conversion Form to request the movement of the funds.

Contribute to Both a 401(k) and Self-Directed IRA

To dispel the myth, you can contribute to a 401k plan and a self-directed IRA to maximize retirement savings.

IRA contribution limits for 2023 are:

  • Traditional = $6,500 or $7,500 50 or older

  • Roth = $6,500 or $7,500 50 or older

  • SEP (Simplified Employee Pension) = $66,000 or up to 25% of individual compensation.

In the next blog post we will share a strategy for high income earners.

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