Investing

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Company: Trimble (TRMB)

Trimble is a provider of technology solutions that enables professionals and field mobile workers to improve or transform their work processes. It operates through four segments: Buildings and Infrastructure, Geospatial, Resources and Utilities, and Transportation.
Stock Market Value: $12.88 billion ($51.77 a share)

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Trimble, 1-year

Activist: Jana Partners

Percentage Ownership: n/a
Average Cost: n/a
Activist Commentary: Jana is a very experienced activist investor founded in 2001 by Barry Rosenstein. They made their name taking deeply researched activist positions with well-conceived plans for long term value. Rosenstein called his activist strategy “V cubed”. The three “Vs” were” (i) Value: buying at the right price; (ii) Votes: knowing whether you have the votes before commencing a proxy fight; and (iii) Variety of ways to win: having more than one strategy to enhance value and exit an investment. Since 2008, they have gradually shifted that strategy to one which we characterize as the three “Ss” (i) Stock price – buying at the right price; (ii) Strategic activism – sale of company or spinoff of a business; and (iii) Star advisors/nominees – aligning with top industry executives to advise them and take board seats if necessary.

What’s happening:

On December 11, 2023, JANA Partners announced that they have taken a position in Trimble Inc and are calling on the Company to cease M&A activities and instead focus on organic growth in its existing businesses

Behind the scenes:

Trimble started in 1978 as a GPS technology company, primarily for agriculture. In the 2000s it entered the construction industry with its acquisition of Spectra Precision. It continued growing through acquisition and over the past 10 years has spent $5 billion on acquisitions, primarily buying software businesses with the goal of providing an interconnected hardware and software product. In 2012, they acquired the 3D modeling software package SketchUp from Google and continued to expand their Building Information Modeling portfolio with the acquisition of Tekla in 2014. In 2016, Trimble acquired Sefaira, a software for sustainability analysis including energy modeling and daylight visualization. More recently, in 2018, Trimble acquired Viewpoint (a leading provider of construction management software) from Bain Capital for $1.2 billion, and in 2019 launched Trimble MAPS, consolidating several of its previous acquisitions. They now offer hardware and software solutions in under-tech served industries such as construction, transportation, forestry and agriculture.

The company’s multiple software acquisitions have led to their mix changing in a very positive way. In 2011, 16% of their revenue came from software and services that are by their nature recurring and higher multiple revenue. In 2024, it will be more than half. However, while the business mix has transformed for the better, during this time the stock has significantly underperformed – over the past three years, the stock has underperformed the S&P 500 by nearly 50%.
A lot of this underperformance can be tied to their recent history of software M&A activity. They have been buying companies for 30 to 40 times EBITDA and the acquired companies are being valued at Trimble’s EBITDA multiple of 14 times EBITDA inside of Trimble. The market understands this and as a result, has reacted negatively to their acquisitions, as recently evidenced by their April 2023 acquisition of Transporeon (a cloud-based transportation management platform) for 30 times EBITDA. After the deal was announced, the company’s stock dropped 6.5%. Trimble is not getting credit for their new product mix with a re-rating to a higher software multiple. This does not mean 30 to 40 times EBITDA, but industrial technology peers trade in the mid-teens to mid-20s.  If they can get in line with peers, Jana sees a stock upside of over 40%.
The first thing Jana would like the company to do is cease M&A activity and focus on the core business. To do this, the board should tie executive compensation to return on invested capital, instead of the current compensation structure which incentivizes revenue growth targets. Second, Jana sees an opportunity for the company to focus on improving operations and profit margins. Over the past eight years of increasing software product mix the company has expanded its gross margins by approximately 800 basis points, yet they have expanded their EBITDA margins by only 500 basis points (1 basis point equals 0.01%). There is an opportunity to better integrate these acquisitions and improve operating margins. Lastly, this is a complicated business structure that could benefit from a simplification. This past September, Trimble announced that it entered a joint venture with AGCO Corporation (AGCO) (a worldwide manufacturer and distributor of agricultural machinery and Precision Ag technology), whereby AGCO will acquire an 85% interest in Trimble’s portfolio of Ag assets and technologies for $2.0 billion. This got the opposite market reaction than when Trimble acquires companies, sending Trimble’s stock price up 6.5%.
While their primary objective here is to have the company stick to the core business and cease their M&A activity, there is another ironic opportunity here, and that is the M&A opportunity created by the company’s history of value destroying M&A. Trimble could be an attractive acquisition target for a larger industrial company who also wants a product mix with more software but has the discipline not to pay 30 to 40 times EBITDA for software companies. With a greater than 50% software mix and a much lower EBITDA multiple, Trimble would be an attractive asset for many large industrial companies.
Jana often launches activist campaigns with a team of experienced industry executives ready to be board nominees if necessary. While we assume they have connections to such executives, there has been no announcement that they have recruited any, which means to us that it is too early to tell if this will be escalated. However, we will not have to wait that long. The director nomination window opens on February 2, 2024, at which time we will have more clarity on which road this campaign will take.
Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.  More

More people today may identify as HENRYs, or “high earners, not rich yet.”
That feeling of being wealthy is increasingly elusive, according to a new Edelman Financial Engines report. 
$1 million used to be the gold standard — now the bar is higher.

These days, fewer people feel financially comfortable, let alone rich.
The average household’s net worth has soared in recent years, rising 37% between 2019 and 2022, according to the survey of consumer finances from the Federal Reserve.

Yet, even as households became wealthier, inflation and instability have left more people in the bucket of so-called HENRYs — short for “high earners, not rich yet.”
Only 14% of Americans would consider themselves wealthy, a recent Edelman Financial Engines report found, and the bar is only getting increasingly out of reach. 
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Despite higher-than-average salaries, those HENRYs have struggled with a higher cost of living and a growing savings shortfall.
A prolonged period of high inflation and instability has chipped away at most consumers’ buying power and confidence. More than half of Americans earning more than $100,000 a year say they live paycheck to paycheck.

“Market volatility over the past two years has taken a financial and emotional toll on individuals and families regardless of wealth,” said Kelly O’Donnell, chief client officer at Edelman Financial Engines.

What would it take to feel rich?

In 2023, 67% of Americans said they would need at least $1 million to feel rich, up from 57% a year earlier, the Edelman Financial Engines report found. Roughly 20% said it would take $5 million or more.
“That million dollars is just not getting you as much,” O’Donnell said.
To bridge the gap, more people rely on credit cards to cover day-to-day expenses. In the past year, credit card debt spiked to an all-time high, while the personal savings rate fell.
When it comes to building wealth, most consumers say high-cost debt is now their biggest obstacle, according to the Edelman Financial Engines report.

However, feeling financially secure is often less about how much money you have and more about the ability to spend less than you make.
In part, the current economic conditions have fostered the feeling of being overextended, said certified financial planner Jason Friday, head of financial planning at Citizens Wealth Management.
“HENRYs are relative. There are a lot of people who live well below their means and people who spend too much,” Friday said.
“Social media is also to blame,” O’Donnell added. “There is a bit of keeping up with the Joneses and the pressure to continue to buy and consume even when people may not have the actual funds to do so.”
Understanding how much to save for retirement or other long-term goals can be key to finding a balance.
“If you are not grounded in long-term goals, short-term budgeting can get away from you,” O’Donnell said. Instead, “set up long-term goals and work backwards.”

The American dream ‘has created a lot of stress’

Historically, feeling wealthy has also had strong ties to homeownership.
In the aftermath of the Covid-19 pandemic, due to skyrocketing housing prices, many Americans became house-rich, at least on paper. When mortgage rates touched historic lows, those homeowners were also able to refinance, reducing the size of their monthly payments and creating more breathing room in their budgets.

Blueflames | Getty Images

However, that opportunity is now largely gone. For those in the market for a home, nearly half, or 45%, of potential buyers feel discouraged by the current high prices and higher mortgage rates, according to Edelman Financial Engines. Even among wealthy respondents, or those between the ages of 45 and 70 with household assets of up to $3 million, 37% said the same.
“That American dream, particularly around homeownership, has created a lot of stress for people,” O’Donnell said.

But a deterioration of the American dream has been decades in the making, according to Mark Hamrick, Bankrate’s senior economic analyst.
“Structural or long-term changes have been injurious to Americans’ ability to manage their personal finances,” he said.
“Where there was a time in the U.S. when a married couple, with children, could get by with a single-wage earner in the house, those days are mostly vestiges of the past,” Hamrick added.
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The Powerball jackpot has grown to an estimated $535 million without a winning ticket on Wednesday.
With the year-end approaching, the winner may wonder whether it’s better to claim their prize in 2023 or 2024.
The next Powerball drawing is on Saturday at 10:59 p.m. ET.

The Powerball jackpot hit $1.2 billion on Oct. 3, 2023, the third-biggest prize in the game’s history.
Scott Olson | Getty

Whether you pick the lump sum or annuity payout, Loyd suggests a “cooling off period” after winning the lottery before making any big financial moves.

If you’re planning to donate money to charity, start a business or make any investments, it will be “really tricky” to line up the right team of experts before year-end. “You probably wouldn’t be getting the ‘A’ team,” Loyd said. “So, I would buy yourself some time.”

Prepare for higher taxes in 2026

The winner will also need to plan for looming tax law changes slated for 2026 when provisions sunset from former President Donald Trump’s signature tax overhaul.
For example, without changes from Congress, the top federal income tax bracket will revert to 39.6% from 37%. “That’s a lot of money,” Loyd said.
The winner will also need to plan for federal estate taxes. While the exemption rises to $13.61 million per individual or $27.22 million for married couples in 2024, those limits will drop by roughly one-half in 2026.
Robert Dietz, national director of tax research at Bernstein Private Wealth Management in Minneapolis, said it’s “the biggest issue” his firm is talking about with high-net-worth clients right now.

Saturday’s Powerball drawing comes roughly two months since a single ticket sold in California won the game’s $1.765 billion jackpot. Meanwhile, the Mega Millions jackpot is back down to $28 million and the odds of winning that prize are roughly 1 in 302 million. More

After a year full of record-high interest rates and home prices, experts say there are signs of improvement for the housing market in 2024.
In December, the average mortgage rates dropped below 7% for the first time since August and after an 8% peak in October, which pushed housing costs to the highest level since 2000.
“The decline poses good news for buyers,” said Jessica Lautz, deputy chief and vice president of research at the National Association of Realtors.

Noel Hendrickson/Getty Images

After a year full of record-high interest rates and home prices, experts say there are signs of improvement for the housing market in 2024.
In December, the average mortgage rates dropped below 7% for the first time since August and after an 8% peak in October, which pushed housing costs to the highest level since 2000.

The average rate on a 30-year fixed rate mortgage dropped to 6.95% from 7.03% last week, mortgage buyer Freddie Mac said Thursday. A year ago, the rate averaged 6.31%. Meanwhile, the 15-year fixed rate mortgage jumped to 6.38% from 6.29%.
“The decline poses good news for buyers,” said Jessica Lautz, deputy chief and vice president of research at the National Association of Realtors. 

Interest and mortgage rates will slowly decline, giving people a “little bit more room in their budgets” when it comes to mortgage payments, experts say. Additionally, inventory is growing as new listings creep back up, said Nicole Bachaud, a senior economist at housing site Zillow.
Lower interest rates should come as encouraging news for homebuilders.
“It should be easier for builders as rates go down, as they need to borrow to build,” said Lautz. Homebuyers should see a greater supply as more homes will be built, she said.

However, consumers may still feel discouraged, added Lautz, as affordability may still be a challenge.
“We’re expecting home price appreciation to stay flat for the next year nationally, so prices aren’t really going to move much from where they’re at now,” Bachaud said.
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High costs kept would-be buyers as renters

Homes were 52% more expensive than rentals this year, the highest gap on record, according to the Zumper Annual Rent Report for 2023.
High costs in the buying market have delayed homeownership for many buyers and kept inflation-strapped consumers in the rental market, some explained.
The national rent price for a one-bedroom apartment is $1,496, down 10% from a year ago. The last time there was a decline was during the pandemic, from July to October 2020, Zumper found.
“Over the course of the last few years, there were actually a lot of buildings in the rental sector, so that may have helped to alleviate rental prices. But they’re still at a high price point,” Lautz said.
Lautz expects more movement in the rental market next year as many young adults look for a place to live.
While most young adults either stayed with parents or paired up with roommates during the pandemic to relieve costs, they might seek independence next year, whether because “a CEO [is] saying you have to come back into the office or they’re ready to move out,” said Lautz.
New York City is seeing a surging demand for rental housing in commutable areas with easy access to downtown and midtown Manhattan in 2024, according to data from StreetEasy, Zillow Group’s New York City real estate marketplace. 
“That’s an indication that people are looking to move back closer to the workplace or closer to more amenities,” Bachaud said. “We’re expecting the rest of the country to follow that trend throughout the next year.”

The American Dream is still owning a home.

Nicole Bachaud
Zillow senior economist

Record-high interest rates deterred more than 69% of renters from buying a home in 2023, a Zumper report found. These high costs are pushing the typical ages of renters and first-time homeowners upward.
To that point, the typical head of household in a rental is 41 years old, up from age 40 in 2019 and age 37 in 2000, according to Zillow economist Bachaud.
“Renters are getting older,” said Bachaud. “As long as affordability remains a big challenge, we will likely see renters getting older.”
Meanwhile, the age of a typical first-time homebuyer is 35 years. In the 1980s, people bought their first homes at the age of 28, Lautz said.
Market conditions and external factors, such as student loan repayments and child care costs, are delaying homebuying activity for many shoppers, Lautz said.
Since many people cannot afford to buy a home, they are likely to consider renting a single-family home instead to achieve a similar experience.

Renting over buying their first home

Prices for single-family rentals are increasing faster than rent prices for multifamily apartment buildings, showing signs of high demand, said Bachaud.
“That has a lot to do with affordability as people are priced out of being able to purchase a home. They’re still looking for that starter home experience,” she said.
As long as people continue to be priced out of the market, would-be homebuyers will remain as renters, and Bachaud expects “to see more of that this year.”
Even though affordability is expected to marginally improve over the next 12 months as rates continue to decline, the market is still far from where it was before the pandemic, she added.
“Affordability is still a big challenge for a lot of households,” she said.

‘The American Dream is still owning a home’

While homeownership is challenging for many would-be buyers, it doesn’t mean people no longer aspire to own a home, said Bachaud.
“The American Dream is still owning a home,” she said. “There’s a lot of pent-up demand for ownership; that isn’t going to go away. It might take longer for people to get and to be able to realize that dream.”
Indeed, “homeownership is the number one way to build wealth in America,” said Lautz.
Lautz explained that when you look at the typical homeowner, they have a net worth of just under $400,000 compared with the typical renter, who has just over $10,000, following the American dream of financial stability.

“Folks will have to look elsewhere if they’re not looking at homeownership to find that,” Lautz added.
Additionally, younger generations are still thinking about saving for down payments and planning for future housing, said Bachaud, meaning the demand for homeownership persists.
She predicts a change in what homeownership will look like in the coming decades: “We’re kind of on that journey now.”
For now, serious first-time homebuyers should consider jumping into the market as soon as February, while the market remains quiet, said Lautz. Lower rates may breed competitive bidding wars among strong buyers, so now may be the time.
The National Association of Realtors forecasts mortgage interest rates will average 6.3% and estimates 0.9% increase for home prices in 2024, added Lautz.
“First-time buyers stand a chance at this time period,” she said. “It’s a trade off: Do they want to run the risk of encountering higher competition when rates are lower or do they want to increase the probability of securing homeownership?”
“Refinancing is always an option,” she said. More

ETF Strategist

Since early 2021, there have been more than 70 mutual fund to exchange-traded fund conversions, including nearly three dozen in 2023, according to Morningstar Direct.
The primary benefit of the conversions is greater tax efficiency for investors since ETFs generally don’t have capital gains distributions, experts say.
But despite the uptick over the past couple of years, these conversions are still somewhat rare.

A growing number of mutual funds are converting to exchange-traded funds, which is a positive trend for investors, experts say.
Since early 2021, there have been more than 70 mutual fund to ETF conversions, including nearly three dozen in 2023, according to Morningstar Direct, and experts say more conversions are coming.

“It’s steadily increasing year-over-year,” said Daniel Sotiroff, senior manager research analyst for Morningstar Research Services.

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A 2019 change from the Securities and Exchange Commission provided fund managers with more flexibility, which has helped pave the way for mutual fund to ETF conversions, according to Sotiroff.
The conversion itself is tax-free to the investor and switches from actively managed mutual funds, which aim to outperform the market. The primary benefit of the new ETF is more tax efficiency.
“That’s a big selling point,” Sotiroff said.

Year-end mutual fund capital gains distributions can be a pain point for investors with actively managed mutual funds in brokerage accounts. Those payouts can trigger a sizable tax bill, even when the investor hasn’t sold shares.

In 2023, many fund managers realized gains to meet investor redemptions, resulting in double-digit projected payouts for some funds.

The most attractive feature of an ETF is that most don’t distribute capital gains at the end of the year.

Barry Glassman
Founder and president of Glassman Wealth Services

Conversions are still ‘kind of rare’

Despite the uptick in mutual fund to ETF conversions over the past couple of years, it’s still “kind of rare to see,” according to CFP Matt Knoll, senior financial planner at The Planning Center in Moline, Illinois.
Sotiroff said conversions have been “relatively smaller” actively managed mutual funds worth around $100 million or less that are more likely to be converted to ETFs.
“You’re not seeing a lot of big-name mutual funds turning into ETFs,” he said. The exceptions, of course, were Dimensional Funds and JPMorgan conversions.
Future conversions are likely to be smaller, actively managed mutual funds outside of 401(k) accounts, Sotiroff said. More

ETF Strategist

The S&P 500 has seen strong gains in 2023.
Here’s what experts say you should consider before doubling down on exposure to that index in 2024.

Thomas Barwick | Stone | Getty Images

The S&P 500 index has been a winner in 2023.
The index on Wednesday closed above 4,700 for the first time since January 2022.  Year to date, the index is up about 23%. Its average annual return is more than 10%.

That performance may now prompt some investors to question whether they should allocate more of their money to a fund that tracks the index.
Vanguard founder John Bogle famously argued long-term wealth may be built by owning a low-cost fund that tracks the stock market, such as the S&P 500.

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Per its name, the S&P 500 includes around 500 stocks (503, to be exact) that fall in the large-cap equity category. The index was established in 1957 and was the first market-cap weighted index. That means each company’s weighting in the index is according to its market capitalization, or the total value of all outstanding shares.
The companies included in the S&P 500 is subject to change. This month, ride-hailing company Uber is among several names joining the index, replacing packaging company Sealed Air Corp.

How an S&P 500 ETF can benefit investors

For investors, passive funds that track the index are widely accessible.

“The biggest ETFs in the world are S&P 500 ETFs,” said Bryan Armour, director of passive strategies research for North America at Morningstar, a provider of investment research.
Investors may also choose to add S&P 500-focused mutual funds to their portfolios.
Exchange-traded funds are priced and can be traded throughout the day. Mutual fund orders are typically executed once a day, with all investors receiving the same price.
Another key difference between ETFs and mutual funds is cost.
“Our research has shown over the years that cost is one of the best predictors of future success,” Armour said. “And ETFs are a lot cheaper than mutual funds.”
Passive funds that track an index have the advantage of providing much lower costs than active strategies that are professionally managed. Over time, passive strategies have shown better returns.
“Among the better decisions people can make is starting with an index-based fund tracking the S&P 500 because it works,” said Todd Rosenbluth, head of research at VettaFi.
To be sure, 2023’s strong performance may not be indicative what is to come in 2024.

Will the S&P 500 rally last?

As the calendar turns to the new year, experts are placing bets on where the markets, including the S&P 500, will land.
A recent CNBC Fed Survey found money managers, strategists and economists surveyed expect a modest gain for the S&P 500 in 2024 of less than 2% to reach 4,696. Those experts on average also see the S&P rising above 5,000 for the first time, but not until 2025.
HSBC is expecting the index to reach 5,000 in 2024, with a chance it may go higher if there is no recession.
Raymond James’ S&P 500 target for 2024 is 4,850, due to a more conservative outlook than other firms when it comes to earnings, according to Chief Investment Officer Larry Adam.
That news is based on this year’s good news being already priced into the index, he said.
“Everybody’s feeling better that the Fed is no longer raising rates, they’re going to eventually be cutting rates, inflation is coming down,” Adam said.

In 2024, however, the firm’s forecast includes a mild recession or slower growth.
Much of the S&P 500’s strong turnout this year is due to the so-called “Magnificent Seven,” that includes Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla.
Raymond James expects those technology names (excluding Tesla, which it considers a consumer company) to continue to be a driver of the market in 2024, though not as strong as they were this year, Adam said.
“Technology, by far and away, is the one sector that consistently beats its earnings by a fairly substantial amount,” Adam said.

‘Set a strategy and stay invested’

Financial experts generally say investing in an S&P 500 index fund is a sound strategy — though it does leave room for diversification.
“It could prove an effective strategy if you hang on,” said Douglas Boneparth, a certified financial planner and president of Bone Fide Wealth in New York. Boneparth is also a member of the CNBC FA Council.

While the S&P 500 index offers exposure to the largest companies, it excludes small- or mid-size companies, as well as international companies, Boneparth noted.
While buying and holding exposure to the S&P 500 may prove wise over the long term, investors should resist reacting to market moves.
“The main thing would be to set a strategy and stay invested,” David Rea, president of Salem Investment Counselors, which is No. 27 on the 2023 CNBC Financial Advisor 100 list, said via email. “The market is up this year, but down last year. You cannot time the market, so pick funds or ETFs that suit or risk/return profile and stay invested!”
Ted Jenkin, a certified financial planner and CEO and founder of oXYGen Financial, a financial advisory and wealth management firm based in Atlanta, said sticking to low-cost investing and not timing the market may pay off. He is also a member of the CNBC FA Council.
“I don’t think individual investors or money managers can generally outperform the S&P 500,” Jenkin said. More

Over the last year, the S&P 500 is up by more than 19%, and the Dow Jones Industrial Average has risen 11%.
The last few days have seen some of the steepest rises, with the Dow closing on Wednesday above 37,000 for the first time ever.
What should you do amid the rally? Financial advisors weigh in.

Traders work on the floor of the New York Stock Exchange during morning trading on December 13, 2023 in New York City.
Michael M. Santiago | Getty Images

The stock market is having a holiday party. But financial advisors urge investors to use caution for before joining in.
“Don’t fall prey to irrational exuberance,” said Ted Jenkin, a certified financial planner and the founder and CEO of oXYGen Financial in Atlanta. He’s also a member of CNBC’s Advisor Council. “Things are never as bad nor as good as they seem.”

Over the last year, the S&P 500 is up by more than 19%, and the Dow Jones Industrial Average has risen 11%, as of the market’s close Wednesday. A $1 million investment in the S&P 500 on Dec. 12, 2022, would be worth nearly $1.2 million today, according to Morningstar Direct.

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‘Stick to your goals’

Investors shouldn’t make any big changes to their investment strategy based on one short period in the market, Jenkin said. Instead, “stick to your goals and your time frames,” he said.
Marguerita Cheng, a CFP and the CEO of Blue Ocean Global Wealth in Maryland, said it was exciting to see positive returns. But investors who pull out now in an effort to lock in gains or access cash will likely regret it.

“The most challenging aspect of investing can be staying invested,” Cheng said. “I advise clients to remember that the time they are in the market is more important than trying to time the market.”
Indeed, over the last 20 or so years, the S&P 500 produced an average annual return of around 6%. But if you missed the 20 best days in the market over that time span, your return would shrivel to 0.1%, according to an analysis by Charles Schwab.

“The market keeps going up so even though it’s at a high, it might be even higher in the future,” said CFP Sophia Bera Daigle, founder of Gen Y Planning in Austin, Texas.
Dramatic ups and downs aside, history reveals the market reliably gives more than it takes over long periods.
Between 1900 and 2017, the average annual return on stocks has been around 11%, according to calculations by Steve Hanke, a professor of applied economics at Johns Hopkins University in Baltimore. After adjusting for inflation, that average annual return is still 8%.

Market rally, market slump: Do the same thing

It might sound counterintuitive, but investors should probably not do anything different whether the market is green or red, said Ivory Johnson, a CFP and founder of Delancey Wealth Management in Washington, D.C.
“Review your risk tolerance, time horizon and ask if anything has changed,” Johnson said.

Big drops and rises in the market can also be a good time to rebalance your portfolio, said CFP Cathy Curtis, founder and CEO of Curtis Financial Planning in Oakland, California.
“It’s quite possible that the rally of the last few months has created an overweight to stocks versus bonds in a person’s portfolio,” Curtis said.
For example, if you want your money allocated 70% to stocks, and 30% to bonds, you may now or at least soon need to sell some stocks and add to your bonds, she added. More

Shohei Ohtani made history this week with a 10-year, $700 million contract to play for the Los Angeles Dodgers.
The Japanese superstar will only receive $2 million per year over the agreement and will defer $680 million.
Some of the risks of deferred compensation include higher federal taxes, inflation and company solvency, experts say.

Shohei Ohtani, formerly of the Los Angeles Angels, pitches during a game in Anaheim, California, on July 6, 2021.
Daniel Shirey | Major League Baseball | Getty Images

Shohei Ohtani made history this week with a 10-year, $700 million contract to play for Major League Baseball’s Los Angeles Dodgers. The deal’s unique payout structure, however, could carry some risks, financial experts say.
The Japanese superstar will receive $2 million per year over the 10-year agreement, which defers $68 million annually.

Ohtani isn’t the first MLB player to defer income. Players such as Bobby Bonilla and Ken Griffey Jr. also chose yearly payments. In Bonilla’s case, those came with a guaranteed 8% interest rate. But Ohtani will receive the bulk of his contract, $680 million in payments, between 2034 and 2043, without interest.
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The deal could provide tax benefits for Ohtani if he leaves California before receiving his deferred income, according to certified financial planner Eric Bronnenkant, head of tax at Betterment.  
For 2024, California’s top tax rate climbs to 14.4%, which includes a 1.1% payroll tax on all income. Bronnenkant said federal law protects nonresidents from taxes on “retirement income,” including payments structured for at least 10 years.
But California might disagree, he added.

Ohtani could face higher federal tax rates on the deferred payments, said CFP and enrolled agent Louis Barajas, who is also CEO of International Private Wealth Advisors in Irvine, California. He is a member of CNBC’s Financial Advisor Council.
Without changes from Congress, the highest federal income tax rate will revert to 39.6% in 2026 from the current top rate of 37%. By accepting payments later, “he’s taking a risk,” Barajas said.    

The opportunity costs of deferred income

Another downside of deferring income is Ohtani cannot spend or invest $68 million per year over the next decade.
“A dollar today is worth more than a dollar tomorrow,” Barajas said.
By deferring payments without interest, Ohtani also faces reduced purchasing power. While inflation has dropped significantly since June 2022, it’s difficult to predict rates over the next decade.
But if higher inflation returns, “the net value of his contract isn’t worth as much as he thought,” Barajas said.

The top risk of deferred compensation

While higher taxes and inflation could be issues for deferred income, the No. 1 concern is the company’s ability to pay, experts say.
That’s important for Ohtani’s potential tax benefits. To delay taxes on $680 million of deferred compensation, his future income must be “at risk,” per IRS guidelines, Bronnenkant said.
However, since he’s working for the Los Angeles Dodgers, “the odds of that happening are slim to none,” Barajas said.Don’t miss these stories from CNBC PRO: More