Cash Balance Slides

Cash Balance Pension Plans Defined Benefit Defined Contribution Cash Balance New Cash Balance Plans 4797 3893 3174 2669 2188 1742 1337 0 1000 2000 3000 4000 5000 6000 2001 2002 2003 2004 2005 2006 2007 359% Increas e 80% of Cash Balance plans have less than 100 employees 63% have fewer than 36 participants 34% are sponsored by medical and dental groups 79% are combined with a Defined Contribution plan. Cash Balance Market Analysis Today’s Topics Important component of Financial Planning Why use Qualified Plan / Cash Balance? How does a Cash Balance plan work? Real Life… Real Solutions Questions The Retirement Equation Retirement Plan = Savings Plan Retirement Plan: Retirement Date Income Target Probability of

Success Savings Plan: Current Savings Future Savings Investment Strategy Why use a Tax-qualified Plan? • Tax-Deferred Savings Short-term – Reduce Current Taxes Long-term – Increase Accumulations • Creditor Protection • PBGC Guarantee (unique to Cash Balance) • Contribution Requirement = Savings Discipline Value of Tax-deferred Savings $100,000 – 1 year later (5% return) “After-tax” “Pre-tax” Income $100,000 $100,000 Pay tax (40%) $(40,000) Amount Invested $ 60,000 Investment Income (5%) $ 3,000 Pay tax (40%) $ (1,200) Amount Invested $ 61,800 Pay tax (40%) n/a Distribution $ 61,800 Value of Tax-deferred Savings $100,000 – 1 year later (5% return) “After-tax” “Pre-tax” Income $100,000 $100,000 Pay tax (40%) $(40,000) n/a Amount Invested $ 60,000 $100,000 Investment Income (5%) $ 3,000 $ 5,000 Pay tax (40%) $ (1,200) n/a Amount Invested $ 61,800 $105,000 Pay tax (40%) n/a $(42,000) Distribution $ 61,800 $ 63,000 Tax-deferred Advantage Compounds Accumulation after 1 year: • After-tax: $61,800 • Tax-deferred: $63,000 Accumulation after 30 years: • After-tax: $146,000 • Tax-deferred: $259,000 Advantage “Tax-deferred” $1,200 or 2% increase Advantage “Tax-deferred” $113,000 or 77% increase What if Tax Rates Change? Tax Rates DECREASE from 40% to 35%: • After-tax : $146,000 • Pre-tax: $281,000 Tax Rates INCREASE from 40% to 45%: • After-tax : $146,000 • Pre-tax: $238,000 Advantage “Tax-deferred” $92,000 or 63% increase Advantage “Tax-deferred” $135,000 or 92% increase What if After-tax is at Capital Gains Rates? Capital Gains Treatment for After-tax investment: • After-tax: $200,000 • Pre-tax: $259,000 Advantage “Tax-deferred” $59,000 or 30% increase Why adopt a Cash Balance Plan? Age DefinedContribution Cash Balance 45 $49,000 50 $54,500 55 $54,500 60 $54,500 65 $54,500 Qualified Retirement Plan with higher annual Deductible Limits! Why adopt a Cash Balance Plan? Age DefinedContribution Cash Balance 45 $49,000 $86,000 50 $54,500 $112,000 55 $54,500 $147,000 60 $54,500 $192,000 65 $54,500 $200,000 Qualified Retirement Plan with higher annual Deductible Limits! Is your Defined Contribution Plan running out of time? Projected Accumulation of Maximum Contributions Years to Retirement 5% Return 10% Return 15 $1,320,000 10 $750,000 5 $320,000 Assumes 1.5% annual inflation for limits. Is your Defined Contribution Plan running out of time? Projected Accumulation of Maximum Contributions Years to Retirement 5% Return 10% Return 15 $1,320,000 $1,970,000 10 $750,000 $970,000 5 $320,000 $360,000 Assumes 1.5% annual inflation for limits. Comparison of Projected Accumulation Years to Retirement Defined Contribution Cash Balance 15 $1,320,000 $3,000,000 10 $750,000 $2,800,000 5 $320,000 $1,300,000 1....

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