Retirement Plans, Part II
By Carl Sanger
Do you feel locked out of the retirement plans offered by larger companies? Now, you can own or work for a small business and still retire in style!
Author and editor Robert Orben was once quoted as saying, "Every morning I get up and look through the Forbes list of the richest people in America. If I'm not there, I go to work." So it is our lot that we not only have to work to pay our expenses today but also have a vehicle at our disposal that allows us to plan to pay for our expenses of tomorrow.
In the first part of my series (May 2003), I let you in on the new, tax-favored ways you can save for your retirement goals, even if you own or work for a small business. I described vehicles ? such as Solo 401(k) Plans, SEPs and SIMPLE IRAs, to name just a few ? that are now available to give every worker an equal opportunity to build their retirement nest egg.
In part two of my series, I'll give you some more ways to fund your own prosperous retirement.
What Else is Available for Retirement Savings?
As I stated in my previous article, there are always the more commonly known types of retirement accounts such as traditional IRAs and Roth IRAs. But if you want to sock away some serious money, the $3,000 maximum annual contributions that go with these types of accounts just won't cut it. So, besides the plans I've already covered, you can consider starting either a profit-sharing plan, money purchase plan, or defined benefit plan as alternatives.
Profit Sharing Plans
Profit sharing plans can be a fine option for many small businesses primarily because a company needs to have only one employee to offer this kind of plan. Administrative maintenance is small and employers are permitted to make large contributions for employees. This plan also carries with it the advantage of flexibility when it comes to making annual contributions to employee accounts. The annual amount of the employer contribution is completely up to the employer from year to year. In fact, contributions can range from nothing at all to up to $40,000 per year and carry with them certain tax deductions for the employer, as well. Should the employer decide to permit it, employees are also allowed to contribute to their own account each year. Employers, when creating their company plan, also have the choice of determining when employer contributions become vested ? this option can be a good way of minimizing employee turnover. Employees are often happy with profit sharing plans because no matter when the employer-contributed amount vests, employees have the peace of mind of knowing that their own contributions become vested 100 percent immediately.
Money Purchase Plans
Money purchase plans offer many of the same benefits as profit sharing plans except that contributions made by employers must be a fixed amount based on a percentage of the employee's compensation. This is sometimes a blessing for those doing long-term financial planning for the company as far as expenses go, as well as for those doing the company accounting. Most surely, employees can take heart in knowing that a fixed amount will be contributed to their account as long as they work for the firm.
Defined Benefit Plans
This is a type of plan that is, for all intents and purposes, your traditional pension plan. In essence, this plan provides you with a fixed benefit upon retirement. Again, these plans now come in all sizes and are available to companies with one or more employees.
Due to the sophistication of planning for fixed future payments, however, you do require the services of an actuary to get this type of plan up and running. Establishing your plan and maintaining it is also more complex than the ease with which the other plans can be started and maintained. Also, the onus of building the capital base to support employees with a defined amount through retirement really falls on the employer primarily.
Employers must remember that once this type of plan is started, contributions are mandatory, regardless of how well or how poorly business is going. There have been publicly reported cases of some of the largest companies in the world being underfunded in their pension plans due to our recent economic times and poor planning. Large, established companies who are household words around the globe have had their pension funds adversely affected. With the likes of Exxon Mobil Corporation recently reporting that their defined benefit plan was underfunded by 34 percent, and The Coca-Cola Company being underfunded by 22 percent, you have to realize that, before starting this type of plan, you must run a very well-established company and be pretty sure that you can contribute each and every year. You also must have the cash or stock reserves to be able to inject more capital into your plan should you discover that your plan is underfunded.
While the majority of the responsibility for funding your defined benefit employee accounts falls on you, the employer, these plans can be set up to allow employee contributions, as well. However, even the amount an employee can contribute has to be calculated by an actuary. On a positive note, though, with less and less companies offering these plans nowadays, the retirement security that comes with this sort of plan can be a great lure to attract and retain top-notch workers. Employers also find the generous tax deductions that go with their contributions a great incentive for offering these plans.
The plans I mentioned above, along with the ones I described in Part I, are now available so you can create a retirement strategy that will make all your financial dreams a reality. Depending on the specific type and size of your business, there are even more alternatives you may want to explore (Employee Stock Option Plans, etc.). A good investment manager can help you sort through all your available options and select the plan that is right for your situation. It is essential to remember, however, that regardless of your type of retirement of plan, you must also have a properly constructed investment strategy that protects your capital through all market conditions. And, as with all investments, time is one of your greatest allies. We've waited a long time for these wealth-accumulation opportunities. Check out which one is best for your business today.
About the Author
Carl Sanger is the owner of Serenity Wealth Management, LLC in New York. Sanger is a Registered Investment Advisor and has been managing investment-capital for 10 years.