ARI£ YOU A HISTORY buff? Here is one subject that I'll bet you have never read much about. This is a brief history of retirement plans. It may sound like a boring subject, but it is one that you should have a keen interest in, as it may affect your future retirement plans. In 1875, the American Express Company implemented the first private pension plan in the U.S. This was a big step forward for retirement plans in this country. Then, in 1882, Alfred Dolge Company withheld 1% of each worker's pay, putting it into a pension fund while adding 6% interest each year. That was the first time the 401-k concept was put into place. It was not called a 401 k plan at that time. Next, in 1935, the Social Security Act created a program to pay workers age 65 and older an income. Then, in 1974, the tax act referred to as "ERISA" set up the framework for benefit plans. It also permitted the tax-deductible Individual Retirement Account, the "IRA". In 1981, 40Ik's finally came into being after almost 100 years from the original. In 1997, just to confuse things even more, Roth IRA's were created. Now you had a choice. Things really begin to change at the beginning of the 21 st century. Most of those changes were not necessarily beneficial. In 2006, Verizon and IBM announced plans to freeze their pension plans. Other corporations are also considering such a move in the very near future. The Social Security Board of Trustees projects that tax revenues will fall below the program's costs by 2018. Now that is an exciting thought! Now the big question is, in what year will ALL pension plans disappear? Another question that you should be asking is what will happen to YOUR plans? These are two questions that will be presented with answers very soon. You may not like the answers but, believe me, they are coming. Based on what is coming, and coming soon, it may be a good idea to take a good long look at "alternative" ideas that could be used rather than the qualified retirement plan. These are sometimes referred to as "non-qualified" plans, because they do not fall under the rules and regulations of qualified plans. I recently ran some numbers for a doctor who called and asked me to compare a qualified and non-qualified plan for him. He was 35 years old and wanted to see what he would have at age 65. He wanted to deposit $30,000 per year and receive an average of an 8% return each year. He wanted the taxes calculated at a 30% tax bracket to keep things simple. In a qualified plan, such as a SEP, Pension, Profit-Sharing, or a 401k, the deposit into such a plan goes in BEFORE taxes. This means that, with a $30,000 deposit, he would save $9,000 per year. Total tax savings to age 65 is $270,000. Not bad. The plan would accumulate over $3,400,000, all sheltered during this accumulation period. At age 65 he would receive a "net" income from the plan of $290,000. This would be net since he would pay taxes on any money taken out of the plan. The young doctor was pleased with this until I informed him that he would run out of money in 14 years. By age 79, he would be totally broke. He would receive almost $4,000,000 in retirement income. He would also pay the IRS over SI,500,000 in income taxes on the distributions from his plan. This did not please him. We then took a look at the "non-qualified" plan. The deposits to this plan are AFTER taxes so there is no annual savings from taxes. This means that the qualified plan beats the non-qualified plan by $9,000 per year for a total of $270,000. $270,000 is a definite plus for the qualified plan. At age sixty-five, he would start taking a retirement income of $270,000 per year. This money comes to him "tax-free" so it is both the net and gross income. This means he has NO tax liability on this money, resulting in a savings of $1,500,000 on this plan versus the qualified plan. No tax liability is a plus for the non-qualified plan. Another plus is that he never runs out of money; the non-qualified plan will keep paying through age one hundred. Duration of payment is a plus for the non-qualified plan. His total retirement income from this plan is over $10,000,000 versus just $4,000,000 from the qualified plan. The total difference between the two is $6,000,000. Six million "pluses" for the non-qualified plan. There are other pluses for the non-qualified plan. You do not have to make any contributions for employees. You have no restrictions on the amount you can deposit into this plan. The money within this plan is sheltered from creditors in most states. You do not have to wait until you are age fifty-nine and one-half (59"J) to get to your money without a tax penalty. Plenty of advantages for the non-qualified plan over the qualified one. Do you have a current qualified retirement plan? IRA? Roth? SEP? Pension? Profit Sharing? 401k? Maybe it is time to take a good long look at these plans and not just the immediate tax savings you get on the deposits. What is your plan going to cost you in fees? How much will you give away to employees? What will your tax burden be at retirement? Do you really want to wait until age sixty to retire? Do you really understand how your current plan works? What will your retirement plan or plans look like in the future? All these are important questions for you to answer while setting up your retirement plan! Stanley B. Greenfield has been engaged in the fields of Financial Management and Insurance since 1962. He has been a guest speaker for Educare Financial on numerous occasions. He is a Registered Financial Consultant, and was awarded the designation ofRHU, Registered Profes- sional Disability and Health Insurance Underwriter, in 1979, as one of its Charter Members. Mr. Greenfield also serves as a member of the Board of Directors of the Florida Chiropractic Foundation for Education and Research. You may reach him at stan@stanleygreenfield.com. call 800-585-1555 or visit his w e bsite, www.stanlevgreenfield.com.\ Now the big question is, in what year will ALL pension plans disappear?
