Design the Best Pension Strategy for Your Cash Flow: I Think I Need a 401(k) Plan. Where Do I Start?

So, you are looking to increase your contributions to a pre-tax retirement account and are wondering if a 401(k) plan is right for you. It can be daunting to know where to even begin, for a dentist or for any other small business owner. Let’s explore a few steps you should think about taking to get started.

Step 1 – Is your current advisor equipped to support you in reviewing a customized 401(k) plan tailored for your needs and situation? Do you feel confident he or she can take you through the following steps? If not, you should consider working with a competent, fiduciary advisor before moving on.

Step 2 – Review a retirement projection with your advisor. What should you be saving each year to reach your long-term goals? Are you currently doing it? If not, is a 401(k) plan the appropriate vehicle to increase what you’re saving toward your long-term objectives, in retirement and otherwise?

Step 3 – Review a 401(k) plan illustration prepared by an independent Third Party Administrator (TPA). This illustration will be specific to you and your practice, and will be based upon your practice’s unique staff demographics. It will show you the contribution amounts that you can make for yourself under the plan. But it will also lay out the contributions the practice will be required to make for the staff. Why do we review an illustration in the very beginning? First, to confirm you have identified the right TPA. Not all TPAs are the same in terms of the services they provide. Second, to give you an idea of the cash flow that you will need to commit to fund a 401(k) plan. Third, to verify a 401(k) plan is the right vehicle for you and your practice. If you find you could fund $35,000 for yourself but it will cost you $25,000 in contributions on behalf of your staff, does that make sense?

Step 4 – Now that you’ve reviewed an illustration specific to you, do you have the cash flow to fund a 401(k) plan? This seems like a very simple question. But we have seen dentists implement a pension strategy without confirming whether the cash flow is actually there to fund it. You can imagine the stress when pension funding time is upon you and the dollars just aren’t there. If we review your cash flow and determine there currently isn’t quite enough to fund the 401(k) plan, there are strategies we generally can implement with you to help create it.

Step 5 – Now that you’ve reviewed your savings targets, reviewed a pension study specific to you, and reviewed your cash flow, are you able to confirm that a 401(k) plan is indeed the right pension strategy for you?

The first step I discuss might well be the most important because, as you can see, the question about starting a 401(k) isn’t simple. You should feel confident that your current advisor can provide the partnership you need as you navigate the remaining steps.

This commentary originally appeared May 9 on DentalTown.com

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The opinions expressed by featured authors are their own and may not accurately reflect those of Buckingham Strategic Wealth. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.

© 2018, Buckingham Strategic Wealth®

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Katie Collins, CFP®

As a practice integration advisor, Katie works directly with clients to develop a financial plan personalized for their specific situation and goals. She quarterbacks the entire financial picture, often for clients who have never put all the pieces together with one advisor. Katie joined Buckingham Strategic Wealth through the 2014 merger with Indiana-based Hufford Advisors, where she spent more than 10 years working in various financial planning roles, most recently as a senior planning consultant.

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