As a Financial Advisor, sometimes we see people whose behavior mimics the stock market – we encounter bears and bulls. Bears are too busy to focus on their family planning, they prefer to put their heads in the sand and hope the big wave never comes. Bulls are too busy to focus on their planning needs because they already know what they need and don’t need a trusted advisor.
There are so many important considerations that come into sound financial planning, your goals, your finances, your family, your lifestyle, income taxes, social security, wills and trusts, life insurance, 401(k) contributions, regular vs. Roth, college savings plans, deferred compensation, disability and long term care, and investing efficiently. Each area carries with it unique opportunities, but there are rules that need to be followed and tax consequences that need to be understood and planned for. If your planning isn’t designed thoughtfully, the result can be a plan with coordination gaps and missed opportunities.
For example, let us focus on retirement plan choices. This can be a very complex analysis for some professionals because in addition to the traditional defined contribution plan, firms may offer defined benefit and non-qualified deferred compensation plans. Which plan(s) to participate in must be carefully coordinated with other aspects of your planning including income taxes, cash flow, and liquidity needs. Furthermore, the popularity of mandatory retirement provisions is on the rise so you may not have as long as you think to save.
A defined contribution plan is a type of retirement vehicle where the firm and employee both make contributions on a regular basis. Many plans offer pre-tax and post-tax (commonly referred to as “Roth”) contributions where employees can defer their salary and the firm may match up to a certain percentage of the employee’s contribution. Some firms may add a profit sharing contribution where the firm gets certain income tax benefits by sharing profits with employees. It is important to understand that the pre-tax and post-tax contribution options carry with them different rules that should be coordinated with your overall retirement planning.
A defined benefit program is similar to your traditional pension plan where the firm promises the employee a certain income stream in retirement that is determined by a formula. The formula is based on several criteria including earnings, tenure and age. This is a common plan for firms looking to avoid payroll increases by promising to pay for something later. Some plans also allow for the employee to contribute. The one concern for defined benefit plans is a potential deficit between the money in the plan and the pension obligations.
A non-qualified deferred compensation plan involves an employee voluntarily deferring income to be held by the firm and paid out later after the income is earned. The goal is the deferral of taxes. The difference between this plan and a defined contribution plan is that the firm can be selective as to who the plan is offered to and the amount that can be deferred is greater.
The important thing to remember is that each plan offers specific and unique benefits. As a trusted advisor, it is my fiduciary duty and responsibility to educate my clients about their options and advise them on what is in their best interest. For the big financial decisions that come up, it is prudent to review them with a qualified professional so you can evaluate where you are in life and what you have, combine that with your goals, and make educated decisions for your future.
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As a Family Wealth Advisor, Chris assists business owners, executives, and affluent families in helping them achieve financial independence. Chris specializes in providing advanced estate planning strategies, business succession plans, and independent wealth management and retirement advice. Chris joined PSG after a legal career specializing in estate planning and corporate law. Chris is an Instructor with the National Automobile Dealers Association (NADA) Academy and teaches the “Family Succession Planning” session focusing on the dynamics of a family business and the importance of implementing sound estate and business succession planning. Chris has been a guest speaker at the annual NADA Convention, as well as a featured speaker at a Minority Dealer Development 20 Group Member meeting.
Chris earned his Bachelor’s Degree from Boston College with a double major in Political Science and Philosophy. Chris received his Juris Doctorate* from the University of Baltimore School of Law and is a member of the Maryland Bar*. Chris holds his FINRA Series 7 and 66 registrations as well as his Life, Accident and Health Insurance license. Chris has been recognized as a 2015 Five Star Wealth Manager, as featured in Baltimore Magazine. He can be reached at firstname.lastname@example.org.