FINANCIALLY $PEAKING: Have You Thought About the Future?
Have You Thought About the Future?
We recently compiled a survey of clients
who began using our services over the last three years. Although the majority of
these firms had been in business for over three years, about one-third had not
yet set up a retirement plan.
For some who did not, they simply could not
afford to do so. For the others however, they later determined they could afford
to do so but had not been informed about costs or how to go about establishing a
We live in one of the most productive and
richest economies in the world yet most Americans are concerned as never before
about being able to afford retirement. The Social Security Administration states
that, if you have average earnings, your social Security benefits will replace
only about 40% of your preretirement expenses. Most financial advisors say
you'll need about 70% of pre-retirement earnings to maintain your standard of
living after retirement. Add to that the fact that were living longer and
healthier lives and there is a greater need for more savings.
A small business owner has several means
available to save for retirement and can do so with pre-tax dollars. Consider
the following three types of retirement plans:
(Simplified Employee Pension). Beneficial for self-employed persons or small
business owners with variable earnings and providing minimal governmental
reporting. The owner is not committed to contribute anything. All employees must
be included who are at least age 21, and have earned at least $400 in three of
the preceding five years. Contributions are limited to the lesser of 15% or
The contribution limits applies to wages
or, if a sole proprietorship, to earnings of the business. Employees cannot make
2. 401-(k) Plan.
This is a plan which accepts employee voluntary contributions. Employer
contributions can be discretionary. In other words, an employer is not required
to make a contribution and employees can make before-tax contributions. As a
minimum, all employees age 21 and older with at least one year of service are
eligible to participate. Employee contributions for 1999 were limited to 25% of
compensation or $10,000. Total contributions cannot exceed the lesser of 15% of
earnings up to $30,000 per participant.
While the employer is not required to make
any contribution, the plan is subject to administration costs of government and
participant reporting, discrimination testing and other requirements.
3. SIMPLE IRA or SIMPLE 401-(k) Plans.
Accepts pre-tax, employee voluntary contributions but does require employer
contributions which are tax deductible. Employees earning at least $5,000 in the
prior two years and expected for the current year must be eligible. The SIMPLE
401-(k) allows for participant loans and has other features in addition to the
Annual government reporting and
discrimination testing is not required. However, the employer is required to
make a contribution by matching 100% of the employees contributions up to 3% of
compensation or contributing a straight 2% of all employee compensation up to
$3,200 per eligible employee whether or not employees contribute to the
In general, monies contributed to any of
these plans can be invested in various ways. Most mutual funds accept retirement
plan contributions, provide a wide variety of investment selections and allow
for Internet access of account balances. If you do not have a retirement plan
for your business or are considering a change to your current plan, be sure to
learn all the features about these plans and consider the options. As you can
see, each type of plan has features which may or may not be right for you. Above all, be sure you are planning for your
For more information, clicak on the Authors Biography at the top of this page.