From the time they first had regular jobs, Jason and Allison Stack contributed as much as they could to their retirement accounts. Their inspiration was Allison's dad, who retired early. "I thought I was going to spend about half as much in retirement as I did while I was working," says Bill Schulze, 72. "I couldn't have been more wrong. I spend every bit as much. I just spend it on different things, like travel."
In 2006, the Stacks bought a South Carolina dental practice that already had a 401(k) plan. Jason, a dentist, and Allison, who manages the office, immediately started contributing the maximum allowable to that, too. Because they began saving so early and so diligently, they are likely to be able to retire comfortably in about 20 years, in their early 60s.
That's an all-too-rare opportunity for many business owners: Launching and running a business sometimes requires every dime you can scrape together, so retirement planning has to wait. And when such planning is put off until midcareer, there are both mathematical and practical challenges to getting on track. Fortunately, there are some ways to get a late jump on retirement savings.
Size up future hurdles
Practically speaking, if you're a big earner who's put off retirement planning until relatively late, your biggest challenge is likely to be the tax code. The federal government limits tax-deductible contributions to retirement plans; for most plans, such as 401(k) programs, the maximum amount you can receive in contributions in 2016 is $53,000 if you're under the age of 50, and $59,000 if you're eligible to make "catch-up" contributions. But, if you're a 50-year-old earning $450,000 and have only $1 million saved, you should sock away more than twice that much to maintain your lifestyle. That can be tough to do when federal and state taxes are taking roughly 45 percent of every dollar.
If that situation sounds familiar, consider an increasingly popular way to maximize your retirement savings: stacking what's called a cash-balance pension on top of your company's profit-sharing 401(k) plan. These combo plans, while complex, allow a 50-year-old to set aside up to about $150,000 more each year on a tax-deductible basis, says Joe Gordon, managing partner of Gordon Asset Management in Durham, North Carolina. That additional contribution saves a business owner paying 45 percent of her income in taxes a whopping $63,000, or more.
Some 15,178 U.S. cash-balance plans were operating at the end of 2014, boasting a record $1 trillion in assets. That's a 19 percent hike from a year ago, and the vast majority of growth comes from businesses with fewer than 100 employees, according to Kravitz Inc., a consulting firm.
Pay a little, get a lot
Cash-balance plans allow high-income business owners to put aside vastly more money on a tax-deferred basis than other programs. And the current-year tax savings that the business owner can reap often surpass the cost of the plan. What's the downside? If you have employees, you will probably have to contribute more money to their retirement plans to comply with so-called non-discrimination rules. If you have a lot of employees, that cost can be prohibitive (which has temporarily ruled out the plan for the Stacks, Allison says). But many professional businesses can add a tax-qualified cash-balance plan affordably, says Gordon. In many cases, employee pension costs go from just about 4.5 percent of payroll to 7.5 percent, he adds. The precise figures could be higher depending on the age of your work force--but it's worth doing the math to see if you can catch up on your retirement goals, while helping your employees reach theirs as well.