As your business grows, you'll naturally start thinking about differing forms of company retirement plans. Here’s our two cents on the subject.
(By the way, have you checked our quick roadmap for exiting your business? Remember, early planning = more money at sale, so start planning now, even if retirement is far off!)
OK, back to it. First, should you even have a retirement plan?
If it’s one of those expected benefits in your industry (e.g., accounting grads and people working at CPA firms would expect us to have a 401k plan as a benefit), then your decision is easy. You should have one.
But what if it’s not expected? In this case, if you want to do something extra for your employees because you know they aren’t saving, and you feel responsible for them, you should have one. That said, very rarely does an employee see the direct benefit you are providing them with no matter how often you explain it, so please don’t expect a parade here.
As for yourself, if you’ve saved less than $500k for your retirement liquid, you should have a retirement plan and use it as your primary savings platform to get to at least $1m.
Keep in mind that, once you have a retirement plan in place, it’s hard to take it away. Continuing to layer on bells and whistles (e.g., profit sharing match, cash balance plan) for a tax benefit starts to become debatable after you hit a baseline liquid retirement goal. Here’s why: Assume you have a 401k plan with a company match component of 3% (safe harbor). You must take a higher salary to increase your match as an owner. That salary increase comes at a cost (it’s at a higher tax rate -- potentially 37% -- versus a dividend rate of 28.5%, plus there’s the Medicare tax), so you are going backwards at this tax rate. If tax rates go back to equal, it’s neutral at worst, but at least you have a higher amount growing than if you invested post–tax instead of pre-tax. The same concept applies to a profit-sharing match or a cash balance plan.
All that said, here’s the right plan for you:
(By definition, ‘discretionary cash flow’ is cash flow after you’ve covered your home obligations, including the stuff that you should do for your mental health like taking vacations, and you’ve covered your debt in the business. ‘Predictable’ means you would bet your house that it will be there every year pending another Zombie apocalypse.)
Cash Flow < $100,000 – stick with the basics, a 401k w/a safe harbor (or SEP if you are the only employee)
Cash Flow > $100,000 – add a profit-sharing match to your 401k plan.
Cash Flow > $750,000 – add a cash balance plan to your overall plan.
Remember that these plans are meant to be your ‘safety net’ as your principal net worth is likely going to be your business and your real estate. So be caring for those assets.
Let us know where you need help here or any area you think might be killing your business value.
