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Why You Need To Know About A Cash Balance Plan

Posted by Josh Patrick

If you own a business there's a very good chance your business is not going to provide enough money for you to retire.  If you believe this (and if you don't watch the video) then you're going to need to save more outside your business in a tax advantaged manner.

Watch the video below and learn how a cash balance plan might be one of the tools that you'll use when it comes time to leave your business.  Watch the video below and learn how a cash balance plan might be right for you.  Then, download our special report on cash balance plans so you can learn more about how they work.

 

4 Boxes of financial independence

Transcript:

Hi, I'm Josh Patrick. I'm one of the founding principals here at Stage2Planning Partners. Today, I would like to talk with you about a thing called cash balance plans. A cash balance plan is a type of a retirement plan. But before we get into the specifics about a cash balance plan, you probably have a question. “Why do I need to know about a cash balance plan? What’s important about this? Why should I pay any attention at all?” Well, here’s the reason why, you probably own a successful business. In fact, I'm pretty sure you own a successful business and I'm going to give you some hypotheticals. It may be true for you or it may not be true for you. You might be doing better that this or you might not be doing as well. But let’s say that you have a bit of sense where you're trying to sell, you have $150,000 a year and your business is making a profit of $150,000 a year. You say, “Boy, I'm doing pretty well. You know, when it gets time for me to retire, I'm going to sell my business. I'll take the proceeds from the business and I'll be able to live off of it.” Well, I have some bad news for you. If that’s your case and that’s where you’re at, you're likely not going to be able to sell your business and ride off into the sunset.

Let me tell you why that doesn’t work. Let’s say you have a business that’s making $150,000 a year in profits, after your salary. And let’s say you're able to sell that business for 6.6 times your profit - that will give you about $1 million. Now, 6.6 times is a lot to sell your business for. Most businesses that size sell for around three times, sometimes four times. And if you're lucky, five times. But we’re going to say we're going to get 6.6. That will give us the $1 million. And after taxes and fees, we’ll be left with somewhere around $600,000, maybe a little bit more, maybe a little bit less. But let’s say $600,000.

Conventional wisdom in the financial planning world says you can spend 4% of that a year and be safe for inflation and investment returns, so that will give you about $24,000 a year that you can spend. That’s a far cry from the $150,000 you're living on right now. And even if we add social security into that, you're only about $50,000 or $60,000. Again, a far cry from the $150,000 that you're spending right now. So, if we take that as being true, and I hope you do, that means we have a problem. We have a gap that needs to be filled between what we're going to have for retirement and what we need for retirement.

This is where a qualified retirement plans come in and there’s lots of flavors that qualified retirement plans. And all qualify means is that qualify for the IRS for a tax deduction when you put the money away. Here are some of the qualified plans that you could use. You can have an IRA which will be able to save about $6000 a year. Or you can move up to a 401K where you might be able to save $20,000 to $25,000 a year. And if you want to get fancy, we could put a profit‑sharing plan on top of that 401K. And with that, you might be able to save between $50,000 and $60,000 a year.

Now, if you're watching this video, there’s a pretty good chance that you're 50 years or older. And if you're older than 50 years old, you don’t have that many years between the time you probably are going to want to retire and where you are today.

Let’s say you want to retire when you’re 60. If I can put away $50,000 a year, that’s going to have me save $500,000. Now, I have some sort of investment return but maybe that’ll get me to $600,000 or $700,000. Let’s say it’s $700,000 I got saved there. Well now I've got $28,000 a year I can spend. So I've got my $24,000 + $30,000, that’s $54,000. And then $28,000, it’s going to get me not to my $150,000 and that’s where a cash balance plan comes in.

A cash balance plan is a form of a defined-benefit plan. It allows you to save a lot more money than any of the other sort of qualified plans. In fact, if you're over 50 years old, a cash balance plan can let you save as much as $200,000 a year. Now, if you take that $200,000 times 10 years, that allows us to save $2 million. So now we’ve got our $600,000 and we’ve got $2 million. So the $600,000 will allow us to spend $24,000 a year. And the $2 million will let us spend about $80,000 a years, so $104,000. If we put social security on top of that, that’s about $135,000 to $140,000 – not the $150,000 we're spending right now but not far off either. So that will give us a long way towards getting towards retirement. That’s the good news. The bad news is you need the cashflow to do that with. That means you might have to find a way to make more money in your business and it might be you’re going to have to think about your business a little bit differently but it gives you a chance to get to where you want to go. So I think it’s important for you to learn about qualified plans.

One of the things I would like you to do is, after you watch this video, you're going to see a button below the video that says “Download our special report”. That special report is about cash balance plans. I'm going to encourage you to download the report. Read it. And then the next day, what I want you to do is give me a call and we can have a conversation about financial planning for your business and what it’s going to take for you to get to be able to sell your business, leave your business in style and not have to go to work for somebody else after you sell. So, after you download the report, set a time for me to talk with you, and then we can have a conversation about what’s it going to take for you to leave your business in style.

This is Josh Patrick. I'm one of the founding principals here at Stage2Planning Partners. Thanks a lot for watching this video and I hope you got some value from it.

Topics: qualified plans, cash balance plan, retirement plan, business owner video

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