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Preparing for the Future: Topics to Cover with Your Retirement Plan Consultant in Boston, MA
With its high-ranking medical care and low crime rate, it's no wonder that Boston is ranked as one of the best places in the United States to retire. While retirement may seem too far into the future to worry about now, it's never too early to start retirement planning. If you're a business owner, you may be interested in how retirement plan consulting can help you prepare for your golden years.
The first step in retirement planning is to understand who it is you need to talk to and how they can help.
What Is a Retirement Plan?
A retirement plan can mean two distinctly different things. It's important to understand the differences to ensure that you are seeking out the correct professional for your financial situation.
1. Retirement Plan
The technical and correct meaning of the term retirement plan refers to a company-sponsored managed plan consisting of pensions, which are usually 401(k)s. Depending on the size of the company, the plan may be managed by an individual at the company or by an entire team, usually headed by a plan sponsor. Companies bring in retirement plan advisors because of their expertise regarding the rules and regulations that govern retirement plans and to ensure compliance.
Although retirement plan advisors do participate in managing the investments, the advantage of working with retirement plan advisors lies in their ability to navigate the legal aspects of retirement plan management. Small business owners would seek the services of a retirement plan advisor when their company has grown large enough to need a 401(k) for both the owner and the employees.
2. Personal Retirement Plan
A personal retirement plan is a part of individual retirement planning, and it includes input from an advisor to help prepare you financially for when you retire. For those who own businesses, the personal retirement plan would include a strategy for the business as well, whether that means continuing to receive monthly income from the business or through its sale. Many financial advisors may refer to a personal retirement plan as simply a retirement plan, but this is not to be confused with a company-managed pension.
What Does a Retirement Plan Advisor Do?
Depending on which type of retirement plan you need, retirement plan consultants and advisors can have vastly different roles. Financial advisors whose knowledge and experience lie in retirement financial planning may use the term retirement plan, so clarifying the scope of their services is important. A large company looking for a professional to manage their pension would not want a financial advisor who normally handles retirement planning.
Retirement Plan Consultants
Besides working with companies to ensure adherence to rules and regulations governing company-sponsored retirement plans, retirement plan advisors also work to promote the plan within the company and encourage participation. This often involves education about the plan and the creation of incentives for employees to join. The more employees who participate in the plan, the more money can be invested and the bigger the possible growth. Retirement plan consultants also work to ensure that the plan benefits the owners and senior executives.
Some retirement plan consultants can take over the role of the fiduciary, which refers to the person with legal responsibility for assets owned by others. They also create profit-sharing strategies to balance costs and benefits and regular reports that demonstrate the plan's growth and disclose plan management fees.
Personal Retirement Plan Consultants
A personal retirement plan consultant is a financial advisor who advises business owners or individuals about their plans for retirement. Part of this process includes interviewing clients to determine their financial goals and their projected age of retirement. Planning also involves calculating the size of the nest egg needed to reach the monthly income goals after potential Social Security benefits are factored in.
The amount of time left before retirement plays an important role in shaping the plan because aggressive investment strategies typically involve greater risks, which would likely not be in the best interests of clients close to retirement. Beyond investments, retirement planning usually includes tax strategies and insurance planning in a holistic attempt to place the person in the best financial position as possible when they do enter retirement.
Reasons to Seek Retirement Plan Consulting
The primary reason a large company would seek a retirement plan advisor is to avoid legal fees, lawsuits, and fines resulting from regulation compliance issues. Another reason is to reduce the burden on the person who currently manages the plan, including the fiduciary role, so they are free to focus on the administration side of retirement plan management. Additionally, having a third party handle issues such as personal assets brings another level of accountability that can help employees feel more confident in participating in the plan.
For a small business owner, the time to seek a retirement plan advisor is when your business has grown to the size when it makes sense to add a 401(k) to your company's benefits package. A retirement plan advisor would ensure that the plan is set up correctly, according to applicable laws, and help decide if a profit-sharing model would make sense from a cost and benefit perspective. Because the company 401(k) plan would also be a part of your retirement plan, there is some overlap with a retirement plan consultant and a personal retirement plan advisor in this scenario.
Reasons to Hire a Retirement Planning Consultant
One of the biggest reasons for a business owner to hire a retirement planning consultant is to have a plan in place for your business when you retire. Keeping the business would provide monthly income that would be reduced by paying a full-time manager, while selling the business would mean projecting the future value of the business and incorporating that into your financial plan. In addition, many financial areas affect retirement, such as taxes and insurance, and they need to be taken into consideration. Here are three of the top reasons to hire a retirement planning consultant.
1. Expertise
Retirement is much more complicated than simply setting aside a certain amount each month and depositing it into a mutual fund. In other areas of your life, you would seek the expertise of a professional rather than attempt to do it yourself. The difference between these situations and retirement is that by the time you realize you made mistakes in planning for your retirement, it's already too late to take steps to change the situation. Effective retirement planning requires growth over time, not quick solutions.
2. Experience
As a layperson, you may have heard some personal anecdotes about family members or acquaintances who have retired, whereas a seasoned professional might have hundreds of their own and other colleagues' experiences upon which to draw insight. For example, you may currently have no plan to mitigate against a financial crisis or personal tragedy that could wipe out all of your savings in a matter of months, but a financial advisor would have the foreknowledge and understanding of why it's important to prepare for the unthinkable.
3. Expedience
It's human nature to put off things that are time-consuming, painful, and difficult. This is especially true when it comes to retirement planning. It's difficult for young people to think about a future time when they might be older and more frail. But the longer you wait to begin planning for retirement, the more monthly income you need to save in order to reach comfortable retirement goals. Turning to an expert means you can start planning right away.
Areas of Retirement Planning
Retirement planning involves more than simply investing a portion of your monthly income. Because different financial areas, such as tax shelters and Social Security benefits, affect one another, the advice of an expert is consequential. Financial planning for retirement entails a number of areas.
Social Security Benefits Planning
Social Security taxes are assessed on a limited amount of your annual income. Any amount above that is not subject to Social Security taxes. The income from your highest-earning 35 years is used to calculate the monthly amount you will receive when you are eligible. Taking into account these two factors, a financial advisor can help you develop a strategic plan to maximize your future Social Security benefits while also lowering your current tax burden.
Pension Planning
There are two types of pensions: defined contribution and defined benefit. Defined benefit pensions guarantee a specific monthly amount when the person leaves their place of employment and becomes eligible for pension payments. Defined benefit pensions are costly for companies, so they are becoming less common. Most people don't realize that the more well-known 401(k) type of retirement plan is actually a defined contribution pension plan. A financial advisor can help you determine how much of your investable income to contribute to your 401(k) plan and how much to invest in other opportunities.
Investment Planning
Investment planning usually involves diversifying investments in order to mitigate against sudden losses in one area of the financial sector, such as the stock market, while also taking advantage of rapid growth in another, such as getting into the ground floor of a rapidly growing industry. An experienced and knowledgeable financial advisor may include investments in any of the following in your retirement plan:
- Bonds
- Businesses
- Interest-bearing accounts
- Precious metals
- Real estate
- Stock funds
- Stocks
Retirement Income Planning
Retirement income planning involves determining how much money in investments a person needs in order to produce the monthly income they desire, while factoring in potential Social Security benefits. One significant factor in this calculation is the combined percentage of the annual return expected from the pool of investments. For example, to generate $100,000 annually on top of expected Social Security benefits, $2 million would need to be invested at a 5% annual return. The larger the annual return, the smaller the nest egg needs to be in order to produce the same amount of future monthly income.
Your financial advisor will also take inflation into account when calculating your retirement income. Although $100,000 per year may seem to be a generous amount now, it's unlikely to have the same significant spending power 30 years from now. Retirement income planning should take into account inflation when determining an annual income amount that will be comfortable in the future.
Another aspect of your plan should include whether you intend to make your nest egg last the length of your retirement alone, or whether you want to leave the principal intact as an inheritable asset. A qualified financial advisor will consider many factors such as this when determining the appropriate target monthly retirement income.
Retirement Insurance Planning
Some types of retirement insurance to take into consideration include supplemental health insurance and pre-Medicare health options. Other insurance products, such as annuities and health savings plans, are actually investment opportunities in themselves. The most important aspect of retirement insurance planning involves protecting assets from global or personal disasters so that sudden or unforeseen turns of events don't have a significant impact on your retirement investments.