The total amount that you can put annually into your plan is based on the four key elements: age, income, planned retirement age, and investment performance. The defined benefit plan contribution limits in 2011 go as high as $195,000.
To give you some general idea on how your annual contribution is calculated by an actuary, let’s take a look at these following variables involve:
1. The Factor of Age. Generally speaking, the older you are, the larger your yearly DBP contribution will be.
2. The Income Factor. The basis for mathematical calculation is on the average of your highest three years of income. That means you can expect a higher defined benefit plan contribution per year if you have a higher income but, of course, only up to a certain limit.
As mentioned earlier, the annual benefit payable can go as much as $195,000 per year in 2011, and projected to go as much as $200,000 in 2012.
3. Length of time prior to retirement. Typically, the minimum years are five years since the time the plan is established.
4. Rate of return of the retirement investment portfolio. The investment performance can significantly determine the total defined benefit plan contribution limits. In the following years since the plan is started a yearly actuary evaluation is made, which is based mainly on the actual performance of your investments in the plan.
This can impact the yearly contribution amount. That is why having a portfolio that decreases volatility is often the wiser way to go. Once the defined benefit plan is put in place, there will be a rate of return assumption. When the actual return of the portfolio is higher than the rate of return assumption, a smaller annual contribution will be required from the participant.
On the other hand, when the actual return of the portfolio is less than the return assumption, the annual defined benefit plan contribution limits will have to be boosted to make up the deficit.
To know exactly your defined benefit plan contribution limits, it is best to consult with an actuary or financial advisor located in your area. He or she will be able to provide you with the right figures, offer you with best advice and steps to do, and ensure that your personal goal or future target retirement income is reached.
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