Menu

Cash Balance Plan on the Cusp of FIRE

Home Retirement Accounts Cash Balance Plan on the Cusp of FIRE

  • Avatar G 
    Participant
    Status: Physician, Small Business Owner
    Posts: 1663
    Joined: 01/08/2016
    alpha investing

    I think I know the answer, but wanted to get an opinion from the forum.  My group is (finally) investigating a cash balance plan.  I wonder if it would be worthwhile for me to participate at this late stage in my career.

    I am 45, lean FI, working .6 FTE for next year then drop to .4 FTE for 1.5 years.  Then 0 FTE for 1-2 years (or longer–to be determined).  I will be in the 35% bracket at .4-.6 FTE.

    I have a large pre-tax account, a moderate taxable account, and a negligible Roth.  As of today, the non-retirement portion of my portfolio will (just) get me through to 59.5; my plan had been to increase that safety margin over the next 2-3 years.

    What do you think: a) big contribution to CBP for three years, b) maximize taxable during that time frame, or c) a little of both?

    If c), is there a quick rule of thumb for the break-even regarding fees vs tax savings?

     

    #189535 Reply
    Zaphod Zaphod 
    Participant
    Status: Physician, Small Business Owner
    Posts: 5943
    Joined: 01/12/2016

    Hard not to see it being pretty beneficial, especially depending on your allocation (if you are off on your bonds this would be a decent way to load) and maybe wanting to separate/retire early. You’d be able to over fund it likely really decreasing taxes and one way to utilize it is to turn it into basically an annuity which you can use to let your other funds compound til theyre able to be accessed without any issues as well. Lots of options but if you have the extra money to make it worthwhile it might make sense.

    Ofc you’d want to run the numbers specific to you.

    #189566 Reply
    Liked by G
    Avatar Steven Podnos MD CFP 
    Participant
    Status: Physician, Financial Advisor
    Posts: 150
    Joined: 09/21/2017

    I know this opinion is unpopular, but the idea that you will have enough money around age 50 to last another potential 50 years is terrifying.  There are so many variables in life and finance that can totally destroy your plans.  So much better that you plan on making income over a much longer period of time.  Anyway, it seems like a no brainer to use a DB plan to put away significant additional pretax funds for the future.

    #189624 Reply
    Molar Mechanic Molar Mechanic 
    Participant
    Status: Dentist, Small Business Owner
    Posts: 373
    Joined: 10/29/2017

    I’m not convinced it’d work, but conceivably between pass through deduction, profit sharing, 401k and whatever else you can creatively come up with, you might find a Roth conversion becomes reasonable.

    #189625 Reply
    Liked by G
    Avatar G 
    Participant
    Status: Physician, Small Business Owner
    Posts: 1663
    Joined: 01/08/2016

    I know this opinion is unpopular, but the idea that you will have enough money around age 50 to last another potential 50 years is terrifying.

    Click to expand…

    I tend to agree with you: I’m an ER guy and my world revolves around high consequence/low likelihood events.  On the other hand, math is math.

    #189660 Reply
    Avatar okayplayer 
    Participant
    Status: Physician
    Posts: 98
    Joined: 05/25/2016

    My group is about to start a cash balance plan. I am young (34) and my max per the actuary will be $75k/yr. I’m planning on maxing it every year going forward but the obvious consequence is the vast majority of our retirement savings will be in the form of pretax savings vehicles (profit sharing 401k for me, 401k for my wife, cash balance plan). After paying our student loans monthly and doing $500/kid in 529s, there isn’t much left for brokerage account contributions.

    I’m in one of the highest taxed states for income and part of a 2 physician household so I still think it is worth it, but I do have some reservations.

    Once student loans are gone in 2-4 years it will free up an extra 10k/mo or so of cash flow to deploy.

    #189664 Reply
    Avatar G 
    Participant
    Status: Physician, Small Business Owner
    Posts: 1663
    Joined: 01/08/2016

    My group is about to start a cash balance plan. I am young (34) and my max per the actuary will be $75k/yr. I’m planning on maxing it every year going forward but the obvious consequence is the vast majority of our retirement savings will be in the form of pretax savings vehicles (profit sharing 401k for me, 401k for my wife, cash balance plan). After paying our student loans monthly and doing $500/kid in 529s, there isn’t much left for brokerage account contributions.

    I’m in one of the highest taxed states for income and part of a 2 physician household so I still think it is worth it, but I do have some reservations.

    Once student loans are gone in 2-4 years it will free up an extra 10k/mo or so of cash flow to deploy.

    Click to expand…

    I wish I had the option of a CBP at 34!  With two 401ks + PS, you’re going to be looking at a RMD “problem” regardless (I know I will be)–might as well go all-in, no reservations.

    #189675 Reply
    Liked by okayplayer
    Avatar ZZZ 
    Participant
    Status: Spouse
    Posts: 566
    Joined: 06/18/2018

    What sort of sweet setup do you have such that working 0.4 FTE as an ER doc gets your AGI over 408k?

    I’d max out the CBP.

    #189682 Reply
    Liked by G
    Avatar G 
    Participant
    Status: Physician, Small Business Owner
    Posts: 1663
    Joined: 01/08/2016

    What sort of sweet setup do you have such that working 0.4 FTE as an ER doc gets your AGI over 408k?

    I’d max out the CBP.

    Click to expand…

    Well, the setup isn’t that sweet: I file single and have other income.

    #189719 Reply
    Avatar Crazyroadtodublin 
    Participant
    Status: Physician
    Posts: 72
    Joined: 03/08/2016

    I would get the group to pass, these plans work great if your 60, 45 not so much. They are not cheap to implement.   I think it is fair to say that we have some pretty low tax rates right now and the rhetoric makes me think they are not going any lower.  Take the money and max taxable.  IF your group decides to implement it, then I would participate, but it’s not a slam dunk.

     

    #189727 Reply
    Liked by Tim, G
    Avatar okayplayer 
    Participant
    Status: Physician
    Posts: 98
    Joined: 05/25/2016

    Assuming I have 18 years of work left and stay at the same group and they keep the CBP that whole time (a LOT of what ifs), why isn’t this a good deal for a young physician? I see this stated frequently and can’t figure it out.

    I am limited to 2.xx million lifetime like everyone else participating. I understand that I am allowed to contribute significantly less than someone older than me, but it scales up annually (looks like starting at $75k/yr for someone 34 and increasing roughly $5k each year thereafter). If you assume that money would have been taxed and then gone to the taxable account instead of going to the CBP for me, for the next 18 years I get to contribute about 2x more than I would have to my taxable account when accounting for my federal and state bracket. I understand it only grows at 4-5% per year but it is a risk free 4-5%. I plan to be very aggressive with my other accounts since this one will be guaranteed and have near zero volatility.

    It seems like it makes sense for W2 employees with a household taxable income that puts that last 75-100k (that will now be going to the CBP) at a 35%+ federal and 10% state income tax?

    #189739 Reply
    Avatar okayplayer 
    Participant
    Status: Physician
    Posts: 98
    Joined: 05/25/2016

    Also our group was told the cost of the plan to us will be $70k/yr (setup cost will be covered under our overhead) split between all participants. It will be at least 50 participating partners, but more likely 100+.

    #189740 Reply
    Liked by RosieQ
    Kon Litovsky Kon Litovsky 
    Participant
    Status: Financial Advisor
    Posts: 888
    Joined: 01/09/2016
    medical school scholarship sponsor

    I think I know the answer, but wanted to get an opinion from the forum.  My group is (finally) investigating a cash balance plan.  I wonder if it would be worthwhile for me to participate at this late stage in my career.

    I am 45, lean FI, working .6 FTE for next year then drop to .4 FTE for 1.5 years.  Then 0 FTE for 1-2 years (or longer–to be determined).  I will be in the 35% bracket at .4-.6 FTE.

    I have a large pre-tax account, a moderate taxable account, and a negligible Roth.  As of today, the non-retirement portion of my portfolio will (just) get me through to 59.5; my plan had been to increase that safety margin over the next 2-3 years.

    What do you think: a) big contribution to CBP for three years, b) maximize taxable during that time frame, or c) a little of both?

    If c), is there a quick rule of thumb for the break-even regarding fees vs tax savings?

     

    Click to expand…

    I wouldn’t take advice for such important decision from the internet (for one thing, there is not enough information to provide an accurate answer), but here are several observations:

    1) Lack of Roth is not a problem.  In retirement you can easily convert tax-deferred to Roth at a lower bracket.

    2) CB plan is precisely the type of plan you want late in your career so that you can maximize your tax deferred income.  Depending on your net income and whether you are a partner (or not), QBI also can play a role in deciding whether you contribute to a CB plan (and if so, how much).  I would also concentrate on after-tax portfolio (as that’s how you will be paying taxes on your Roth conversions later on).

    3) As far as CB plan, there should be zero AUM fees, and the group should be paying for all plan expenses directly.  Moreover, your plan should be invested rather conservatively and your investment expense ratio should be no higher than 0.1% (low cost Vanguard index bond funds).  However, if you don’t plan to stay with this group for long, fees and portfolio composition don’t matter very much.

    Kon Litovsky, Principal, Litovsky Asset Management | [email protected]
    -401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

    #189755 Reply
    Liked by G
    Kon Litovsky Kon Litovsky 
    Participant
    Status: Financial Advisor
    Posts: 888
    Joined: 01/09/2016

    Assuming I have 18 years of work left and stay at the same group and they keep the CBP that whole time (a LOT of what ifs), why isn’t this a good deal for a young physician? I see this stated frequently and can’t figure it out.

    I am limited to 2.xx million lifetime like everyone else participating. I understand that I am allowed to contribute significantly less than someone older than me, but it scales up annually (looks like starting at $75k/yr for someone 34 and increasing roughly $5k each year thereafter). If you assume that money would have been taxed and then gone to the taxable account instead of going to the CBP for me, for the next 18 years I get to contribute about 2x more than I would have to my taxable account when accounting for my federal and state bracket. I understand it only grows at 4-5% per year but it is a risk free 4-5%. I plan to be very aggressive with my other accounts since this one will be guaranteed and have near zero volatility.

    It seems like it makes sense for W2 employees with a household taxable income that puts that last 75-100k (that will now be going to the CBP) at a 35%+ federal and 10% state income tax?

    Click to expand…

    There are several considerations here:

    1) If you are a partner, is there any opportunity for QBI deduction planning (the 20% deduction on pass through income)?

    2) Do you have any debt that should be prepaid first?  That’s the first thing that should happen before you start contributing to a CB plan – get rid of most if not all debt that’s high interest.

    3) Are fees/expenses in the plan reasonable?  Is portfolio strategy clearly explained and documented?  I see all kinds of things, from high expense funds, to variable annuities inside DB plans, so this can’t be taken for granted.  I also see really aggressive investment approaches inside CB plans.  Remember that this type of plan can be terminated at a very short notice, and if it is underfunded (or overfunded) this could be an issue with an aggressive portfolio.

    Kon Litovsky, Principal, Litovsky Asset Management | [email protected]
    -401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

    #189756 Reply
    Avatar okayplayer 
    Participant
    Status: Physician
    Posts: 98
    Joined: 05/25/2016

    1. No. W2.

    2. 100k in wife’s student loans at 1.9%, 200k in my student loans at 2.6%, 600k mortgage at 3.5%. Prior to this CBP talk, we have been aggressively throwing all extra money at the loans. This will slow that down a little, but at least they are low interest rate loans (thanks First Republic).

    3. TBD. This hasn’t all been ironed out yet. All I’ve been told thus far is the group will cover the initial startup cost of the CBP out of overhead we’ve already paid and that all participants will split (in some way) the 70k/yr cost of the CBP. We will only start it if >50 partners commit to the CBP for the first 3 year run.

    I was also told that rather than giving us a guaranteed return we will get a real return, with a target of 4% (cannot exceed 5%).

    #189834 Reply

Reply To: Cash Balance Plan on the Cusp of FIRE

In case of a glitch or error, please save your text elsewhere, clear browser cache, close browser, open browser and refresh the page.

Notifications Mark all as read  |  Clear