As a financial advisor, you are likely very familiar with the costs of retirement these days. People used to aim to have $1,000,000 stashed away, thinking that that would guarantee a retirement of luxury. But $1,000,000 just isn’t what it used to be. Inflation means that your clients need to save more—and more than they might have in decades past.
The best example of that is healthcare costs. Healthcare has been outpacing overall inflation for a while now. It is estimated that a healthy 65-year-old couple retiring today will spend $285,000 on healthcare alone in retirement. (1) Do your clients have enough saved up to spend that much on healthcare?
You know firsthand how challenging it can be to help your clients get to a place where they are saving enough for a comfortable retirement. And almost nowhere is it more challenging than with business owners.
The Problem With Business Owners
The problem with business owners is that they want to reinvest everything they make back into their businesses. While that’s great for their businesses, it can wreak havoc on their retirement projections. When it comes to retirement savings, time is your most valuable asset, thanks to the power of compounding interest.
However, business owners often spend their early years investing in their business and by the time they begin saving for retirement, there isn’t enough time left for compounding interest to do them much good. They have to depend on their savings rate to get them to where they want to be.
Traditional Savings Vehicles Aren’t Enough
Unfortunately, many of the traditional savings vehicles simply have too low of contribution limits for clients in that situation. In 2019, the contribution limit for an IRA is $6,000 with a $1,000 catch-up contribution for those over 50. If your client begins to max out an IRA at age 50 earning a 6% rate of return, by age 67 they will only have about $209,000. That’s not even enough to cover their healthcare costs.
A 401(k) offers higher contribution limits. Between the employee deferrals and employer contributions, your clients could potentially save up to $56,000 a year with a 401(k). (2) The client from the above example would be able to amass just shy of $1,675,000. While that sounds like a lot, it would still mandate a reduction in lifestyle for most high-income earners.
How Business Owners Can Save Enough For Retirement
There is one savings vehicle that may be able to secure your clients’ retirement. It is a combination of a 401(k) profit-sharing plan with a cash balance plan. These two types of retirement plans are not mutually exclusive and it is perfectly legal for your client’s company to sponsor both.
Adding a cash balance plan to a 401(k) profit-sharing plan can multiply the amount that your clients are allowed to put away. The limit is not a straight dollar amount, like with the other retirement plans, but is calculated based on the client’s age and income. With both plans combined, your clients could save in excess of $317,000 for the year 2019. (3)
Other Benefits Of A Cash Balance Combination Plan
The ability to put so much away for retirement makes a cash balance combination plan well worth your clients’ consideration. However, there are also some present benefits to sponsoring one.
First of all, employer contributions to cash balance plans are tax-deductible. So your client will be saving for retirement and lowering their tax bill simultaneously. Those contributions also lower income, which can help with eligibility for the 20% pass-through business deduction. For service businesses, there are income limits for eligibility and contributing to a cash balance plan could lower your clients’ income enough for them to become eligible.
How I Can Help
As you can see, a combination cash balance and 401(k) profit-sharing plan might just be the secret to securing the retirement of a late-starting business owner. If you have questions about sponsoring such plans or you have clients that you think it could benefit, mail me today at info@ff401k.com. As an experienced pension consultant, I can answer all of your questions and help you determine if sponsoring one of these plans could be the answer to your clients’ retirement woes.
About Kenny Phan
Kenny Phan is a Managing Partner at FinancialFocus Retirement Plan Services. He works as a pension specialist who partners with financial professionals to design and implement pension plans. His area of expertise is customized defined benefit, defined contribution, and 401(k) plans. Serving financial advisors and businesses around the nation, he is supported by FinancialFocus Retirement Plan Services. Together, they provide comprehensive plan design consultation, administration, document installation, compliance testing, as well as IRS and DOL reporting for qualified retirement plans.
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(1) https://www.cnbc.com/2019/04/02/health-care-costs-for-retirees-climb-to-285000.html
(2) http://www.401khelpcenter.com/2019_401k_plan_limits.html#.XXAiS-hKiUk
(3) https://www.emparion.com/cash-balance-plan-lifetime-contribution-limits/