The retirement-savings strategy doctors and lawyers use to build wealth

[UNITED STATES] Retirement planning can be complex, especially for high-income professionals like doctors and lawyers. These individuals face unique financial challenges, such as limited time to save, high levels of debt, and a need for tax-efficient strategies to maximize their wealth in the long term. One of the most effective and underutilized retirement-saving strategies for high earners is the cash balance plan.

A cash balance plan is a type of defined benefit pension plan that combines elements of traditional pensions and defined contribution plans (like 401(k)s). Unlike a 401(k) where employees contribute a portion of their salary, a cash balance plan has a set contribution formula based on a percentage of income. Contributions grow at a guaranteed rate, providing the security of a predictable retirement income stream. This plan is especially attractive to high earners such as doctors, lawyers, and business owners, as it allows them to contribute significantly higher amounts to their retirement funds compared to other retirement savings options.

The cash balance plan is structured so that, at the end of each year, an employer (or the plan sponsor) contributes a fixed amount to the participant’s account, which grows over time. Contributions are typically a percentage of the employee's salary, but what makes these plans especially appealing for high earners is the ability to contribute much more than what is possible in a standard 401(k).

Why Cash Balance Plans Are Perfect for Doctors and Lawyers

1. High Contribution Limits

One of the main reasons doctors and lawyers turn to cash balance plans is the high contribution limit. For high-income earners, traditional retirement plans like 401(k)s may not provide enough room to maximize savings. For example, in a 401(k), the contribution limit for 2025 is $22,500 for individuals under 50 and $30,000 for those 50 or older (with catch-up contributions). However, with a cash balance plan, the contribution limit can be much higher, especially if you're in your 40s or 50s and nearing retirement.

In fact, cash balance plans allow for annual contributions that can reach up to $250,000 or more, depending on the individual's age and salary. This presents a huge advantage for professionals who want to significantly accelerate their retirement savings.

2. Tax Benefits

Cash balance plans provide substantial tax advantages, which are especially important for high earners like doctors and lawyers who often find themselves in higher tax brackets. Contributions to a cash balance plan are tax-deferred, meaning that the money grows without being taxed until it is withdrawn during retirement. This allows the funds to compound at a faster rate than in taxable accounts.

Additionally, high earners may be able to reduce their current taxable income by contributing large amounts to their cash balance plan. This can be a powerful tool in tax planning, as it helps lower taxable income while simultaneously building a larger retirement nest egg.

3. Security of Guaranteed Growth

Unlike 401(k) plans where the growth is based on market performance, cash balance plans offer a guaranteed rate of return. This is particularly appealing to doctors and lawyers who may not have the time or expertise to manage their own investments. In a cash balance plan, the funds are credited with a fixed interest rate, often between 3% and 5% annually, which provides stability and predictability.

Given that these professionals often work long hours and don’t have the luxury of dedicating significant time to managing investments, the guaranteed growth of a cash balance plan offers peace of mind. They know that their retirement savings will grow at a reliable, predictable rate.

How Cash Balance Plans Work

Cash balance plans are structured in a way that participants have an individual account, which grows as the employer makes contributions and the account earns interest. While cash balance plans are technically defined benefit plans, they function more like a defined contribution plan in that the participant can see their balance growing over time.

Here’s a simplified breakdown of how they work:

Employer Contributions: Each year, the employer (or business owner) deposits a set amount into the employee’s cash balance plan. This amount is often a percentage of the employee’s salary, and it’s based on a predetermined formula.

Guaranteed Interest Rate: The account balance grows at a guaranteed interest rate set by the plan. Unlike investment-driven plans like a 401(k), which rely on market performance, cash balance plans provide a predictable, stable growth rate, giving high earners more security.

Vesting and Payouts: As with other retirement plans, employees must typically work for a certain period before they are fully vested in their cash balance plan. Once vested, the individual is entitled to the full balance in their account, which can then be accessed during retirement, often in the form of a lump sum or annuity.

Flexibility in Withdrawal: At retirement age, participants can choose how they wish to access their accumulated savings, whether through an annuity or as a lump sum, giving them flexibility in how they manage their funds in retirement.

The Growing Popularity of Cash Balance Plans

High-income professionals like doctors and lawyers are increasingly using cash balance plans as part of their retirement strategy, especially as they near retirement age. Cash balance plans are becoming an essential tool for professionals who are looking to build wealth in a tax-efficient manner.

"For high earners like doctors and lawyers, cash balance plans offer an unmatched opportunity to stash away large sums of money for retirement. As these professionals often face the pressures of paying off medical school loans or dealing with the high costs of running a private practice, this type of plan helps them accelerate their savings and build wealth efficiently."

Additionally, as cash balance plans provide a guaranteed return and high contribution limits, they are particularly attractive to professionals who want to secure their financial future without relying on the ups and downs of the stock market.

The Advantages of Cash Balance Plans for High-Earning Professionals

Here are some of the key advantages of cash balance plans for doctors, lawyers, and other high earners:

Large Contribution Limits: With the ability to contribute up to $250,000 or more per year, cash balance plans enable high earners to save much more than they could in a traditional 401(k).

Predictable Growth: Unlike 401(k) accounts, which depend on market performance, cash balance plans provide guaranteed growth, which is a relief for professionals with busy schedules who prefer stability over risk.

Reduced Tax Burden: Contributions to a cash balance plan reduce taxable income for the year, allowing high earners to lower their current tax bill while simultaneously building their retirement savings.

Professional Flexibility: For doctors and lawyers, the ability to set up cash balance plans can help them adapt to the irregular nature of their income, providing a structured way to save during high-earning years.

Key Considerations Before Setting Up a Cash Balance Plan

While cash balance plans offer significant benefits, they are not without their complexities. Setting up and maintaining these plans can be costly and time-consuming. Professional advice from a retirement plan consultant or financial planner is highly recommended to ensure the plan is structured correctly. Additionally, cash balance plans often come with strict regulatory requirements and administrative costs, so it's important to weigh these factors before proceeding.

For high-income professionals like doctors and lawyers, cash balance plans are a powerful tool to build wealth and prepare for retirement. With their high contribution limits, tax advantages, and guaranteed growth, they provide an effective way to accelerate retirement savings and secure a comfortable financial future. However, it’s essential to carefully consider the administrative costs and work with a financial professional to ensure the plan is set up correctly. As more and more high earners embrace cash balance plans, they continue to be a go-to strategy for building wealth and planning for a financially secure retirement.