A senior executive or physician earning $250,000 or more at retirement is likely to receive less than 30% of her final pay as a retirement benefit from her employer’s retirement plan and Social Security. It is not unusual for us to find retirement benefits from employer dollars in the 20 to 25% range of final salary. At the same time, the average employee’s retirement benefit is likely to be at 50% or more of final salary.
Did you know that while you are paying taxes for Social Security benefits on $110,100 of salary this year (the 2012 wage base), the actual benefit is based on the average of your highest 35 years of wage bases, assuming earnings are more than the wage base? Thirty-five years ago (1977), the wage base was $16,500. The average since then is $61,891. No wonder the benefit seems so small. For the $250,000 earner, the average is less than 25% of final pay. The half of the Social Security benefit paid for by employers is approximately $18,000 a year or about 7% of final pay. Think about the $400,000 earner. Hmmmm.
So, to get a reasonable supplemental retirement benefit, especially in a situation where there is:
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short service,
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only a 401(k) or 403(b) plan,
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no stock benefits such as in a not for profit charity, hospital or trade association, a mutual bank, or a closely held business,
you need to ask for the benefit.
It is reasonable to ask for an improved and reasonable level of retirement income that can be provided by a supplemental retirement plan, sometimes called a SERP or deferred compensation. Two basic rules:
- don’t be greedy,
- know your facts.
Avoiding greed is relatively easy. Asking for and receiving a total employer paid benefit of 50% to 65% of final pay is not unusual. However, if you are going to have only five years of service before retiring, it is a lot to ask. A usable rule of thumb to get a supplemental retirement plan benefit is to multiply your years of service by as much as two percent. With this said, it is not unusual to see an executive with 15 years of senior executive service receive a 50% benefit, occasionally, even more.
Gather your data. Go on line and get a Social Security benefit projection. There is a link to an easy Social Security Benefit Calculator in the Useful Resources section of this website. Review your qualified retirement plan. Do your best to project the benefits. You should be maxing your personal contribution, but do not include it in the projection to determine employer paid benefits. Show it to your boss and politely discuss the need for boosting your retirement income through a supplemental executive retirement plan.
For further information or assistance contact Barry N. Koslow, JD, at bkoslow@mkaplanners.com.
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