ERISA regulations prohibit highly compensated employees (HCE) from fully benefiting from qualified retirement plans by way of contribution limitations and discrimination tests that ensure that similar participation benefit to nonhighly compensated employees. The effect is that HCE are left to figure out how to fill the savings gap as a % of their preretirement income in retirement. Nonqualified deferred compensation plans are a solution. 7 min video….(read more)

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How to Close Retirement Income Gaps for High Comp Employees

Retirement is a significant milestone in one’s life, and it is essential to ensure that you have enough income to live comfortably during your golden years. However, many high-compensation employees often face income gaps in their retirement plans due to various factors. These gaps can significantly affect their financial security and the lifestyle they desire during retirement. To close these gaps, it is crucial for high-comp employees to take proactive steps and make informed decisions about their retirement planning. In this article, we will discuss some effective strategies that can help close retirement income gaps for high-compensation employees.

1. Evaluate current retirement plans: The first step to closing retirement income gaps is to assess your existing retirement plans. Evaluate your current savings, investment portfolios, and expected retirement income streams, such as 401(k) plans, pension plans, and Social Security benefits. By understanding your current financial situation, you can identify any potential gaps and take necessary steps to address them.

2. Maximize contributions to retirement accounts: High-comp employees should aim to maximize contributions to their retirement accounts. If you have a 401(k) plan, contribute the maximum allowable amount, especially if your employer matches a portion of your contributions. Take advantage of catch-up contributions available for individuals aged 50 and above. Additionally, consider contributing to other retirement vehicles such as IRAs or Roth IRAs to diversify your retirement savings.

3. Diversify investments: Maintaining a well-diversified investment portfolio is crucial to minimize investment risk and maximize returns. Consult a financial advisor or investment professional who can help you develop an investment strategy that aligns with your retirement goals and risk tolerance. Diversifying your investments across different asset classes, such as stocks, bonds, and real estate, can help mitigate market volatility and boost long-term growth.

4. Consider additional retirement savings vehicles: High-comp employees may have access to additional retirement savings options, such as non-qualified deferred compensation plans (NQDC), stock options, or restricted stock units (RSUs). These vehicles provide an opportunity to save more towards retirement and potentially bridge any income gaps. Understand the tax implications and vesting schedules associated with these plans and make informed decisions based on your financial goals.

5. Explore annuities and guaranteed income streams: Annuities provide a guaranteed income stream during retirement, which can help bridge income gaps and provide financial security. Consider purchasing an annuity that offers a lifetime income stream or an annuity with a specific payout period based on your retirement income needs. Annuities can be complex, so consult with a financial advisor to ensure you choose the right type of annuity to suit your specific circumstances.

6. Continual evaluation and adjustment: retirement planning is an ongoing process, and it is essential to periodically review your retirement goals and adjust your saving strategy accordingly. As your income and life circumstances change, reassess your retirement income needs and revise your savings plan accordingly. Regularly monitor your investment performance and make necessary adjustments to stay on track towards your retirement goals.

Closing retirement income gaps requires careful planning, informed decision-making, and proactive steps. High-compensation employees should seek professional advice, conduct thorough evaluations of their retirement plans, and take advantage of available retirement savings options. By following these strategies, high-comp employees can ensure a more secure and financially stable retirement, free from income gaps that may have a negative impact on their quality of life.