In summary, the point above that the after-tax 6.5 will definitely yield the same $52 mil of the after-tax, lump sum distributed annuity omits the following two points: (1) only an annuity will allow you to escape the double taxation (annual capital gains/dividend taxes, plus the ultimate taxation at the point of redemption) and (2) only an annuity guarantees that non-taxed ROI, whereas market uncertainty dictates that your return on a non-annuity vehicle may fluctuate. Thus, even if you put the post-tax 6.5 into an annuity, you’d pay taxes again on the date of withdrawal!

And while a guy with Tiger’s annual net income may find an annuity too conservative of a retirement vehicle, let’s remember that Tiger’s annual income eclipses that even of the #2 guy in the income rankings, Phil Mickelson’s. So the FedEx annuity is really geared towards the stuggling journeymen pros who are fighting just to keep their Tour cards and make six figures. You know, all of the guys who aren’t necessarily ringing the bell at the NYSE…

Good point about FexEx’s motivation and hedging.

Not sure what the restrictions on the FedEx plan are, but I believe any amount over $5 million may be used towards any kind of security.

Also, you’re assuming that the deferred payment is ultimately distributed as a lump-sum and not annuitized. If you annuitize, part of each payment is considered as a return of previously taxed principal (i.e., your investment) and part as earnings. You will owe income taxes on the part of the payment that’s considered earnings. The amount of each payment that won’t be taxed is computed by establishing an “exclusion ratio” that’s determined by dividing your investment in the contract by the total amount you expect to a receive during the payout period.

IRS Publication 939 (General Rule for Pensions and Annuities) highlights the details on how to calculate taxes due on annuity payments. Per their illustration, assume you have a fixed annuity in which you’ve invested $100,000 that will pay you a sum of $750 per month for life starting at age 62. According to IRS life expectancy tables, you will receive those payments for 22.5 years, so your contract’s value is $202,500 (12 X $750 X 22.5). Your exclusion ratio is 49.4% ($100,000/$202,500). Therefore, out of the $9,000 the annuity pays each year, you may exclude $4,446 from income. The remaining $4,554 of that payment will be subject to ordinary income taxes.

So in that case the math is NOT the same.

The main point is that guys not named Tiger have a much larger retirement pot now. Plus, if the FedEx money was paid out immediately, there’s no guarantee it would be used by the recipients towards their retirement. For some guys (here’s looking at you, John Daly), a mechanism to insure (and indeed require) their long-term financial well being may be welcome. For other financially astute investors, they may indeed be able to garner a better return by taking an immediate tax hit. But they’d also be welcoming market uncertainty (a primary knock against Bush’s private SS accounts) and inviting taxes on capital gains and reinvested dividends along the way. Thus, yes theoretically the immediate after-tax amount of 6.5 in the example could turn into 52 over time. But there is no guarantee, and more often than not, a risk averse investor may be better off taking the guaranteed non-taxed accumulation rather than trying to duplicate that return through an uncertain market.

To that extent, most golfers by all accounts are risk AVERSE personalities (they play the percentages on the course, so it’s not surprising they’d do so off the course), so I’m not surprised that the FedEx plan was eventually embraced by the Tour policy board (though as you point out, there are certainly valid strikes against it).

I agree – I can make that money work harder for me now (sorry, if I’m Tiger I can have my accountants make that money work harder) than it can sitting in a retirement plan.

Have to run, time to hit the putting green. After seeing this, I’ve got a Tour Card I need to win.

Your example about Tiger allowing his $10M to grow to $28M in 30 years tax deferred (at which point he must withdraw at age 60) is flawed. If Tiger allowed his money to double every 9 years for 27 years, that $10M would be $80M — minus 35% when he withdraws leaves $52M

If Tiger took his $10M and paid his $3.5M in taxes now, he’d have $6.5M to invest. Double every 9 years for 27 years = $52M. The math is the same. In fact, by cashing out now, Tiger will not be subject to restrictions on investments that are surely in place within the plan…and at capital gains rates (15%) going forward.

Such tax deferred plans were enacted to encourage workers to contribute and save for their retirement, to cut their dependence as retirees on Social Security. Surely, Tiger will not have to worry about funding his retirement.

This is a way for FedEx and the other sponsors to fund the payout using an annuity and hopefully out-perform the market in the interim, much the way life insurance and lottery payouts work. It is yet another hedge for these corporations.