Tailor Your Pension for Bigger Benefits Washington DC

Does having enough for retirement concern you? If it does not, it should. Everyone is living longer, and if you are retiring at age 65, or 62, the average person can expect to live to 80, which means half of us are living beyond that. If you are planning for yourself and your spouse, the odds are that one of you will live into your 90s—that is 25-plus years and you need enough assets to keep an income stream coming to combat inflation, economic downturns, and health issues.

For those of you in your mid-40s, now is when a legitimate discriminatory plan can be implemented. Because of the shorter length of time to retirement, the Internal Revenue Code allows for larger sums to be put away for short timers.

A Plan for Everyone

There are two main types of pension plans: Defined Benefit and Defined Contribution. Defined Benefit plans fell out of favor, particularly for larger public companies, due to actuarial costs, monetary commitments, pension benefit guarantee premiums, and so on. However, because Baby Boomers are in this age bracket—and are in ownership and/or decision making positions—this type of plan is making a strong comeback with private companies.

A Defined Benefit plan defines the level of benefit to be received in retirement. For example, it may state you are to receive 2 percent of the average of your three highest consecutive annual incomes for each year of service to the firm. An actuary calculates how much a firm has to put away to meet that commitment. Because of the short time period to retirement for an older person, more dollars may be put away for him or her.

A Defined Contribution plan defines the level of contribution to be made by the organization. For instance, 10 percent of salary will be put into the plan each year, and however well or poorly the investment does, is how adequate or inadequate your retirement savings will be. Because of the longer time period for money to compound, and the chance to rebound from losses, these plans tend to favor younger workers. An example of these is a profit sharing plan.

Defined Contribution plans are the most common type of plan—401(k)s are a subset of these—and many will arrive at middle age not having contributed sufficiently, or not having many contributions made in their behalf, or not having had great investment results. Contributing even the maximum to a 401(k) will often not cut it in terms of providing the standard of living to which you have been accustomed.

A Defined Solution

With the Defined Benefit plan, or some variation thereof, such as a 412(i), you may be able to contribute an annually deductible $100K, $200K, or more. These can be particularly effective with private companies, where owners and key employees are older and more highly compensated than the rest of the workforce. A 412(i) plan is an even more extreme version that allows for even higher deductible contributions because it is funded by fully guaranteed vehicles.

On the Defined Contribution side, an approach to substantially increase retirement funding for more senior crowd might be to add a profit sharing component to a 401(k). If, for example, a match is already made on behalf of employees, it may be that a slightly higher match—known as a safe harbor—would allow for significant contributions to be made to the accounts of the key personnel.

If, due to the particular demographics of your organization, there is no qualified retirement plan that is palatable, then non-qualified plans—those that may be selectively given solely to highly compensated employees—may fit the bill. Because the IRS does not impose the strict rules that it does in the qualified retirement plan area, more flexibility may be built into this type of plan. All of these plans may also help, particularly with family owned businesses involving different generations, and in the structuring of business continuation plans from one generation to the next.

There are options available to help owners and other highly compensated workers who sense that time is somewhat short in developing a level of retirement assets that will provide golden retirement years, rather than merely an adequate, or less than adequate, level of existence, much more vulnerable to economic downturns, ill health, and inflation. The tax implications of any plan depends on the specific structure and design of the program, and should be reviewed with your tax advisor.

Alan M. Kahn is a vice president and Jeffrey R. Brown, JD, MBA, CLU, CFP is a managing director of advanced planning for the Cowan Financial Group. You can contact them at (212) 642-4811 or (212) 536-6117.