Practice Management

Integrating Retirement Plans With Social Security

By Tom Foster

The retirement income from Social Security is an important but relatively small benefit for most Americans, meant to be a supplement rather than a replacement. It’s especially so for highly compensated people such as business owners and professionals.

The Social Security Administration (SSA) reports that the average monthly Social Security benefit, based on the national average wage index of $46,481, would be $1,287 a month or $15,444 a year at age 66.* That’s a pre-retirement income replacement ratio of 33.3 percent, which should underscore the need to save for retirement.

The ratio plummets for higher income earners. For someone who makes $200,000 a year and who would qualify for the maximum benefit, he or she would receive $2,663 a month or $31,956 a year, according to the SSA.*  It’s only 16 percent of his or her pre-retirement income – less than half of the replacement ratio of the average worker.

The net effect is that owners of businesses and professional practices need to save considerable sums for retirement or face the prospect of drastically changing their lifestyle once they stop working. It’s no one’s idea of sound planning.

Savvy financial advisors who serve retirement plans know that owners and other key employees can offset the income replacement shortfall by actually integrating retirement plan contributions with Social Security. It’s an advanced plan design known as “cross-testing.”

Integrating contributions with Social Security is accomplished in part by making larger contributions to the firm’s retirement plan on behalf of employees who earn above the $118,500 Social Security wage base for 2016.  Contributions are based on the principle of “Permitted Disparity,” which accounts for the fact that Social Security will replace a lower percentage of income for higher-compensated employees than it will for lesser-compensated employees.

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. Engaging a local third party administrator can also be helpful.

To learn more about the concept of cross-testing, including integrating retirement plan contributions with Social Security, contact your retirement plan provider. Doing so just may help your clients preserve their hard-earned lifestyles when they retire.

  1. Thomas Foster Jr. is Assistant Vice President, Strategy and Relationships, for Massachusetts Mutual Life Insurance Company (MassMutual).


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. MassMutual Financial Group is a marketing name for Massachusetts Mutual Life Insurance Company (MassMutual) and its affiliated companies and sales representatives.