Where Age Is an Advantage
In America’s “youth culture,” few ascribe any benefit to growing older. Turn on the TV or cruise the Internet, and most advertising spokespeople and newscasters look like they’ve barely graduated high school. Anyone middle-aged or older has been banished to radio.
An alternate universe can be found in the retirement plans marketplace, however, where tilting higher on the age meter can actually be an advantage. It’s especially so if someone owns a small business or professional practice.
That’s because retirement plans, particularly profit-sharing plans, can be designed to allow higher employer contributions on behalf of older employees. This “cross-testing” design technique, known as an age-weighted plan, allows contributions to be based on the age of each plan participant. The older an employee, the thinking goes, the less time he or she has to accumulate retirement savings.
Age-weighted plans are especially valuable for older employees who may be more highly compensated than younger workers. More highly compensated employees typically need to accumulate more savings to continue their lifestyles in retirement than their less-highly compensated colleagues. My experience is that owners of businesses and professional practices often need to start saving for retirement later in their careers as a large percentage of their profits are invested in their firm rather than a defined contribution plan. Any opportunity to play “catch-up” in the savings game is welcome.
Advisors who serve clients who own businesses should pay closer attention to their retirement plan preparations and determine if their company’s retirement plan design is serving them well. Of course, any consideration of different retirement plan designs should generally start with a careful review and include consultation with plan legal counsel and other experienced advisors, as appropriate.
Age is a relative concept but so is being financially prepared for retirement. If you have a middle-aged or older client who owns a business and is interested in accelerating his or her retirement savings, check with your plan provider to learn more about age-weighted plans and how they might help.
- Thomas Foster Jr. is Assistant Vice President, Strategy and Relationships, for MassMutual, a division of Massachusetts Mutual Life Insurance Co.
This article is for informational purposes only and should not be construed as legal, investment, and/or tax advice. Please consult your own legal counsel and other experts regarding the specific application of the information set forth herein to your own plan and/or circumstances.