Personal Wealth Game-Changer

[Blog] Personal Wealth Game-Changer

Mar 25, 2024

A high-income earner’s shift to a Defined Benefit Plan.

If you're earning in the seven-figure (or high six-figure) range, you likely have a diversified investment portfolio. However, have you considered adding a Defined Benefit Plan (DB Plan) to your savings strategy?

You might have only heard about a DB Plan in passing, especially if your advisors haven't brought it up. That was the case for Gary Peck, owner and principal of GWP Consulting, a leadership advisory and executive coaching practice. For years, he and his wife followed the traditional investment strategies. However, a DB Plan proved to be a personal wealth game-changer for Gary.

When Gary moved to a new advisor who recommended a DB plan, he wondered why his previous advisors had kept it a secret. A DB Plan is attractive for many reasons, but significant tax savings topped the list for Gary.

For those curious about the buzz around Defined Benefit Plans and wondering about their benefits, here's a look at Gary’s experience. He shares his initial reservations, the plan’s selling points, and what you should be aware of as you consider embracing a DB Plan as an investment strategy.

Q: What initially made you hesitant about investing in a Defined Benefit Plan?

GP: Initially, my hesitancy wasn't about the safety of the funds but rather how a Defined Benefit Plan fit into a long-term investment strategy. I was concerned about potentially missing out on higher returns from more traditional investments. The question for me was about balancing the investments. Would the returns from a Defined Benefit Plan be competitive with what I could achieve in the regular market? I learned that even within a Defined Benefit Plan you have the power to tailor your investment choices based on preferences and risk tolerance.

Q: How did your perspective change regarding Defined Benefit Plans?

The turning point for me came when I started to consider the tax implications of my investments more closely. It wasn't just about the raw returns but the net benefit after taxes. Once I factored in the significant tax savings that a Defined Benefit Plan could offer, the overall value of the plan became much clearer. These savings were not just marginal; they were substantial enough to reconsider my initial reservations fully.

Q: Can you elaborate on the significance of the tax savings you experienced?

The tax savings were a personal wealth game-changer for me. They were material, making a noticeable difference in my financial planning. We're talking about a potential 25% savings in taxes, which, depending on the amount you're able to contribute, can translate into a six-figure difference annually. This kind of saving isn't just a number; it's a strategic advantage that allows for reinvestment or reallocation of resources that would otherwise go to taxes.

Q: What emotional or psychological benefits did you find from adopting a Defined Benefit Plan?

There's considerable peace of mind that comes from knowing you're optimizing your financial strategy, not just for growth but for tax efficiency. It’s incredibly satisfying to maximize your savings and reduce unnecessary tax. But, just as important, there’s also a peace of mind that comes from having a secure, lower-risk investment as part of your retirement plan. It's not just about the numbers; it's about the sense of security and foresight in planning for the future.

Q: How do you approach the annual contribution decision for your Defined Benefit Plan?

Each year, the decision on how much to contribute involves a careful evaluation of our available cash and where it might be best deployed. It's a balance between the immediate tax benefits and the potential long-term gains of other investments. The conversation with my advisor is crucial here, as we discuss market conditions, my company's performance, and our financial goals for the year. It's a dynamic process, reflecting the changes to both the market and my personal financial situation.

Q: In retrospect, what do you see as the primary benefits of a Defined Benefit Plan?

Beyond the tax savings, the primary benefit is the sense of security it offers. For my wife and me, knowing that we have a stable, reliable income stream for retirement, which is less exposed to market volatility, provides tremendous peace of mind. It's a foundational piece of our retirement strategy that complements the higher-risk, higher-reward aspects of our portfolio.

Q: What advice would you offer to someone on the fence about Defined Benefit Plans?

Before embracing the DB Plan, I was with two other financial services firms. Throughout our time together, neither of them suggested a DB Plan as a viable strategy for my retirement savings. The option either wasn't on their radar, or they lacked the expertise to implement it. This realization underscored for me the importance of working with advisors who are thoroughly knowledgeable and proactive in exploring all avenues for financial planning, especially ones as impactful as a Defined Benefit Plan. 

Q: It sounds like it goes back to finding the right partner to trust.

Trust is paramount. You need to have absolute trust in the advisors who recommend a Defined Benefit Plan. It's crucial to understand why it's being recommended and how it fits into your overall financial picture. If there's trust and clear communication, the decision becomes much easier. It's also important to consider your risk tolerance and how a Defined Benefit Plan aligns with your financial goals and values.