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Preparing for the Future: Topics to Cover with Your Retirement Plan Consultant in Los Angeles, CA
Who doesn't dream of saying goodbye to congested commutes and bumper to bumper traffic or wish for day after lazy day spent basking in the California sunshine while enjoying the ocean breeze on the beach? If you own a business, you may wonder what role retirement plan consulting in Los Angeles can play in making these retirement dreams into reality.
Before hiring a retirement plan consultant or advisor, you have to understand what it is that they do and know the terms associated with the services they provide.
What Is Retirement Planning?
Retirement planning, in its essence, is about preparing financially for the period of your life when you're no longer working. Most people think of 65 as the age to begin the golden years, but retirement can start at any age. While the average age for saying goodbye to employment is 63, many people stop working even earlier. The FIRE (Financial Independence, Retire Early) movement has inspired zealous participants to retire as young as in their late 20s. Retirement planning is not to be confused with a retirement plan.
What Is a Retirement Plan?
A retirement plan is a company-sponsored managed plan that often includes profit-sharing and provides retirement benefits for the owners, executives, and employees. The verbiage is often confused with the idea of an individual having a plan for retirement. The word "plan" in "retirement plan" describes it as a legal entity, not as a simple noun. This distinction is similar to how the word "plan" in the term "health plan" doesn't refer to an individual making a plan for better health. When seeking out retirement plan advisors, you have to clearly understand their area and scope of expertise.
What Do Retirement Plan Consultants Do?
Retirement plan consultants are often confused with retirement planning consultants. These are two very different roles. Some consultants add to the confusion by using the title interchangeably.
Retirement planning consultants help individuals create a financial plan for retirement by looking at their personal investments, income, and estimated Social Security benefits. Retirement plan consultants, on the other hand, help businesses manage their company-sponsored retirement plan, which is often a 401(k) or pension. The management of the employer-sponsored plan includes ensuring legal compliance with rules and regulations governing aspects of the plan as well as managing investments and growth through the retirement plan marketplace.
Depending on the size of your company, you may benefit more from the services of a retirement planning consultant than a retirement plan consultant. For example, if you own a small company without an employee 401(k) plan, a retirement planning consultant can include a provision to sell the business or seek a manager to oversee operations after you retire. With this in place, your retirement income would include either the profits of the sale of the business or the regular income from its continued operation after paying someone else to run it. In this case, your plan for the future of your business would be a part of your individual plan for retirement.
If you run a larger company with a 401(k) plan or pension, or your business has grown to the point of needing to start one, you should consider a retirement plan consultant who can help manage it. Some of the responsibilities of the retirement plan consultant include:
- Maximizing plan benefits for the owner and top executives
- Employee education on retirement investing
- Creating a profit-sharing model for employer contributions
- Incentivizing employee participation
- Transparency in reporting fees associated with the management of the plan
Some retirement plan consultants function as fiduciaries, and some serve only as advisors.
What Is a Fiduciary?
When employers withhold taxes, they do so on behalf of the government entities that claim the withholdings. The employer then pays the taxes on behalf of the employee. With retirement investments such as 401(k) accounts, the funds withheld by the employer still belong to the employee.
This sense of being a caretaker or guardian of another person's assets is referred to as being a fiduciary. A bank, for example, is a fiduciary because it's responsible for the funds in its customers' accounts. A fiduciary role comes with certain legal responsibilities, rules, and regulations.
Some retirement plan advisors act as fiduciaries, and some do not. When a retirement plan advisor doesn't act as a fiduciary, the employer or company continues to have the fiduciary role. An advisor who acts as a fiduciary is subject to a much higher standard of ethics and regulation than one who does not.
Reasons to Seek Retirement Plan Consulting
The person who benefits the most from retirement plan consulting is the person who currently has the most responsibility for managing the retirement plan. For a very large company, this may be the plan sponsor. For a medium-sized company, this may be an accounting person in HR who handles payroll and other employee benefit responsibilities. It's rare for a company to be large enough to offer a retirement plan but not have someone other than the owner managing payroll and other administrative duties. However, the owner may have this role as well.
In all of these cases, the main benefit of hiring a retirement plan advisor is to take advantage of their ability to remove some of the regulatory responsibilities from your company's shoulders. They can also help you avoid penalties resulting from issues with compliance, prevent lawsuits, and ensure that the company's and employees' assets are handled in their respective best interests at all times.
Reasons to Hire a Retirement Planning Consultant
If you own a smaller company that doesn't have a company-sponsored retirement plan and want to put a plan into place for your business in the event of your retirement, you would benefit the most from a retirement planning consultant. Here are three reasons why having the expertise of a retirement planning consultant is invaluable.
1. You need an expert
Although many people may feel knowledgeable about investing, retirement planning is not the same thing. A layperson's understanding of how inflation affects future income, especially in the distant future, or how to calculate expected Social Security benefits isn't sufficient to help you navigate the ins and outs of retirement planning on your own. The big danger of making a mistake in your DIY personal retirement plan is that by the time you realize it, perhaps once your retirement has begun, it will be far too late to rectify.
2. You can't predict the future
An expert retirement planning consultant can assess your risks and vulnerability to unforeseen financial issues such as economic downturns in your industry or personal health problems that could affect your ability to set aside income for the future. Early proper planning can mitigate that risk and give you protection from the impact of global and personal disasters while you're attempting to accumulate capital earmarked for your golden years.
3. You can start today
Rather than put off the trek up the learning curve to properly understand the complexities of retirement planning until you have time, you can leave that to the experts and start now. The earlier you begin retirement planning, the more control you will have over when and how well you can retire. Retirement planning starting at 30 will take much less monthly income compared to starting at 40 or later.
Retirement Planning Areas
Although most people think of investing as the main area where people need help when it comes to retirement planning, there's much more to it than that. You want to find a retirement planning consultant who is knowledgeable about many areas of retirement planning, not just investing. Here are some of the main areas of expertise to look for when seeking a retirement planning consultant.
Social Security Benefits Planning
Some may wonder what there is to plan when it comes to Social Security benefits. An expert in this area will understand that there are steps you can take now to maximize your benefits later. Because the SSA uses your 35 highest-earning years to calculate monthly Social Security payouts in retirement, there may be some strategic trade-offs between income tax shelters and future Social Security benefits. An expert in Social Security benefits planning can help you weigh the pros and cons of lowering your taxable income compared to maximizing your future benefits.
Pension Planning
Although traditionally defined pension plans are becoming increasingly rare, many people don't understand that a 401(k) is also technically a pension plan, although of the defined contribution variety. If you work for another company that offers a 401(k), you can benefit from expert advice on whether and how much you should invest in your 401(k) rather than investing profits into your own business. As mentioned previously, a retirement plan consultant would be the expert to consult about adding a 401(k) benefit to your company.
Investment Planning
When most people hear the word "investment," they typically think of the stock market. There are actually many types of investments, some rather unconventional and risky, like investing in the career of a music artist or band. Here are some of the most common types of investments:
- Stocks
- Stock funds
- Interest-bearing accounts
- Bonds
- Precious metals
- Real estate
- Businesses
An expert investment planning consultant can help you make decisions about diversifying your investment portfolio to protect you from sudden losses in one or more industries. Depending on your current financial situation and your financial goals, owning another business, while risky, may help accelerate your personal retirement plan, whereas investing in bonds could protect an existing nest egg from market volatility during a period of economic contraction.
Retirement Income Planning
While it can be difficult to plan for an uncertain future, most retirement planning includes a financial goal to reach through a combination of savings, investments, and income-producing assets. One approach is to plan to live on the income produced by the nest egg in order to maintain the current or a diminished lifestyle. For example, if a person's current annual pay is $100,000 and the retirement plan is to live off of 75% of the current income, $75,000 per year is the goal.
An important part of this calculation is the annual return on investment. To produce $75,000 per year at a 20% annual return, a retiree would need $375,000 invested. Unfortunately, a 20% return is unrealistic. A person would need $1.5 million to live off of just the income of a 5% return. The lower the return on investment, the larger the savings required to reach the annual income goal.
Another factor that retirement income planning addresses is whether the retired person would dip into the principal investment itself or only withdraw the income generated. Living off of only the produced income leaves the nest egg intact as an inheritable asset to benefit future generations. People with no children or heirs may only want to ensure their retirement cache lasts the entire length of their retirement, even to the ripe age of 100.
When it comes to retirement income planning, there's a delicate balance between planned investment returns, retirement income goals, and the expected length of time investment funds need to last, which is why the opinion of an expert retirement planning consultant is important.
Retirement Insurance Planning
Some retirement-related insurance programs may also be useful in your personal retirement plan. Insurance is often an afterthought, but annuities and health savings accounts started now can reap big tax savings over their lifetime. Insurance products could include:
- Annuities
- Health savings accounts
- Supplemental health insurance
- Pre-Medicare health insurance options