During the downturn of the economy, we saw owners make personal sacrifices in order to keep their companies afloat. For instance, to reserve enough capital to maintain operations, owners were reducing or even delaying discretionary retirement contributions for both themselves and their employees.
These companies have now weathered that storm and are beginning to notice substantial increases in profits and operating cash flows. During these productive times, owners may want to refocus their attention back onto their own retirement goals and determine if they are taking the right steps to accomplish these goals. In addition to maximizing their own retirement needs, an employer contribution is a great way to reward those employees that have stuck by the company. In addition, it may improve employee retention and minimize turnover.
Some of the questions owners may want to think about when discussing their employee benefit options are:
What are my overall retirement goals? Some owners may not realize what their current spending habits are and what revenue streams they will need in the future to maintain their current lifestyle throughout retirement. Also, some owners may have a large, future philanthropic commitment or a future substantial asset purchase for which a steady stream of income will be required.
Are my current annual contributions enough to realistically fund my retirement goals? Having a clear understanding of your retirement goals will help put a realistic expectation on the amount of funds you will need to set aside today. Hopefully, your current contributions are putting you on track for whatever the future holds.
Do I have the right retirement plan in place to accomplish my own individual retirement goals? You may be able to have more set aside for retirement under a different plan with higher contribution limits. For example, owners that currently have a safe-harbor 401(k) plan and are not able to maximize their contributions due to the compensation limitation may consider adding a discretionary profit-sharing component to the plan. Additionally, the sole owner of an S Corporation that currently has a Simplified Employee Pension Plan in place may want to consider converting to an individual 401(k) plan to maximize their own retirement contributions.