Prior to the last recession, one of our clients was succeeding in business, had a big investment portfolio and had leveraged this portfolio to invest in real estate development projects.
During this time we recommended he install a specific type of retirement plan, known as a defined benefit plan. There are four main advantages to this type of plan that we knew would benefit our client.
The benefits included:
- By contributing to it each year, he received a substantial tax deduction and saved 40% of whatever he put into the plan.
- These types of plans allow for very large contributions. Our client was putting in around $250,000 dollars every year whereas, by comparison, a 401K only allows you to put in $18,000 dollars. This saved our client over $100,000 in tax each year.
- This was a forced diversification strategy. We knew our client loved real estate, but this plan forced him to invest in something other than that, which turned out to be a very smart choice.
- These plans are asset protected. The money in a defined benefit plan can’t be lost to bankruptcy or judgments from creditors.
When the Great Recession occurred, our client’s portfolio was very leveraged so it had to be liquidated to pay off the portfolio loans and the real estate investments had lost tremendous value too, essentially evaporating all equity in the projects.
Our client went from a $20 million dollar net worth to a $2 million net worth in six months.
However, he didn’t lose the money in his defined benefit plan, which at this time was around $2 million dollars.
The defined benefit plan that our team had advised him to begin gave him the assets he needed in order to restart in 2009. He used that money to invest in real estate when it was really cheap and turned $2 million dollars into $6 million dollars in about four years.
