Many people are unaware of 401(h) plans, but these plans can provide great tax free benefits during retirement. If a retired employee will be spending a lot of money to cover medical expenses during retirement, this is the plan to look into.

What is a 401(h) plan?

There are thousands of people who have never even heard of a 401(h), so we will first explain what this is and how individuals can benefit from using this tool. The 401(h) plan is a retirement plan that was considered to be a medical expense account. The plan would reimburse for any expenses that were related to hospitalization, accidents or illness for retired employees (EEs). The plan would also pay for the medical expenses of dependents (as children) and spouses.

Since health care costs are always going up and are one of the greatest costs for any retired employee, people wonder how retired people can pay for medical expenses. In many cases, the costs will be covered by out of pocket payments made by the retiree.

If a 401(h) plan is being used, an employer will be able to deduct 100% of their 401(h) contributions to fund the plan that will allow retired EEs to take out the money from the plan when needed. This money would be used to cover medical costs and one of the primary tax benefits is that no income taxes would be owed as a result.

How good is the 401(h) plan in retirement planning?

These plans are in fact extremely practical and advisors should recommend them.

Example: We will assume that Dr. Vish has a practice with four employees that earn different incomes. The employees are also different ages. The dentist earns $350,000 annually and has been contributing to a defined benefit plan annually with $75,000. If the dentist continues with the defined benefit plan, he will have around $1.6M in the plan at the age of 63. We will presume that the dentist will incur $8,000 of medical costs annually after he retires. In addition, he will remain in the 35% tax bracket.

401(h) Plans Benefits

The dentist has the option of funding money that is tax deductible into a 401(h) plan as an employee benefit. This would apply to his employees as well as himself. Remember that discrimination testing for Employee Earnings consists of evaluating the years of labor, income and the ages of the employees.

The money that is placed into the 401(h) plan would accumulate tax free and can later be removed tax free from the plan if the money is to be used to cover medical fees. This can include costs of elective surgeries. The 401(h) plan benefits because instead of contributing $75,000 into a defined benefit plan, the dentist will instead contribute $8,000 of that amount to the 401(h) plan.

The Net Result of the 401(h) Plan at 65 Years Old

If the 401(h) has a 5% return and the pension plan also has the same rate of return, each plans would have the same balance when the dentist reaches 63. The amount would be $126,288, based on a $8,000 fund each year between the 53 years old and 63.

We will also presume that the dentist incurs $10,000 of annual medical costs when he retires. When this amount is used from the 401(h) retirement plan, the money will not be taxed when it is removed. However, if that same amount were to be removed from a defined benefit plan, it would be taxed around 35-40%.

401(h) Plan vs Defined Benefit Plan

It would be possible for the dentist to take $8,000 from the 401(h) plan each year until he is 90 years of age and not pay any taxes.

If the dentist needed the same amount from the pension plan, he would have to withdraw $13,121 to cover the taxes that he would incur. In this case, by the time he reached 76, he would likely be out of money.

The result is that the net benefit when contributing $8,000 to the 401(h) plan would be $103,876. $103,876 is the amount that could be removed tax free from the 401(h) plan over a period of time over and above what could be taken from a defined benefit plan in a comparison study.

When looking to save money in retirement and have a means to cover medical costs, a 401(h) plan is the best way to go. As people age, medical expenses will increase. Having this type of plan will provide many benefits and will help individuals pay their medical expenses without incurring taxes.

Below is a sample list of post-retirement medical benefits that may be provided under a Benefits plan but are not limited to those contained in this list:

Acupuncture	Hospitalization Insurance
ADD Counseling and Assistance	Hospital Bills
Air Lift Transportation	Insulin
Alcoholism	Laboratory Fees
Alternative Healthcare	Laetrile by Prescription
Alternative Medicines	Lasik Eye Surgery
Ambulance	Hire Lead Base Paid Removal-Children
Artificial Limbs	with Lead Poisoning
Retirement Home for Medical Care	Assisted Living Facilities
Long Term Care, Nursing Homes	Asthma and Allergy Treatment
Medical Information Plan	Birth Control Pills
Medicines	Braces
Membership Fees for Medical Services,	Braille-Books and Magazines
Hospitalization, Clinical Care, Health	Chiropractors
Maintenance, Health club memberships	Christian Science Practioners’ Fees
Nurses Fees, Nurses Room and Board	Contact Lenses Including Exam Fee
S.S. Tax (Where Paid by Taxpayer)	Co-Pays
Obstetrical Expenses	Cosmetic Surgery (Even Though not by a Physician)
Operations (100% of All Costs)	Orthopedic Shoes
Cost for Care Outside the United States	Oxygen
Cost of Operations & Related Treatments	Personal Trainers
Counseling	Physical Therapy
Crutches	Physician Fees
Deductibles	Premiums for LTC
Dental Cosmetic Surgery	Preventive Care including but not limited to
Dental Fees	Spa Facilities, Usage Fees for Facilities
Dentures	Prosthetics
Dependent Care	Psychiatric Care
Dermatologist Care	Psychologist Fees
Diagnostic Fees	“Seeing-eye” Dog and its Upkeep
Drugs	Specialists and Specialized Treatments
Electrolysis	Specially Equipped Cars
Experimental Care	Special Care Costs for Disabled Dependents
Eyeglasses, Including Examination Fee,	Special Diets
Laser Surgery for Vision Correction	Sterilization Fees
Fees of Practical Nurse	Support Groups
Fees for Healing Services	Surgical Fees
Fees of Chiropractors	Therapy Treatments
Fees for Fitness Programs and Facilities	Transport Expenses for Medical Services
Fees of Licensed Osteopaths	including Preventative Care
Flu Shots	Tuition at Special School for Handicapped
Hair Transplants	Viagra
Health Insurance Premiums	Vitamins
Hearing Devices and Batteries	Wheelchair
Hospice	Weight Loss Programs
In Home Care	X-rays

Contact Estate Street Partners to discuss how we can help you plan for retirement using the 401(h) plan or any other retirement strategy.

Many people are unaware of 401(h) plans, but these plans can provide great tax free benefits during retirement. If a retired employee will be spending a lot of money to cover medical expenses during retirement, this is the plan to look into.

What is a 401(h) plan?

There are thousands of people who have never even heard of a 401(h), so we will first explain what this is and how individuals can benefit from using this tool. The 401(h) plan is a retirement plan that was considered to be a medical expense account. The plan would reimburse for any expenses that were related to hospitalization, accidents or illness for retired employees (EEs). The plan would also pay for the medical expenses of dependents (as children) and spouses.

Since health care costs are always going up and are one of the greatest costs for any retired employee, people wonder how retired people can pay for medical expenses. In many cases, the costs will be covered by out of pocket payments made by the retiree.

If a 401(h) plan is being used, an employer will be able to deduct 100% of their 401(h) contributions to fund the plan that will allow retired EEs to take out the money from the plan when needed. This money would be used to cover medical costs and one of the primary tax benefits is that no income taxes would be owed as a result.

How good is the 401(h) plan in retirement planning?

These plans are in fact extremely practical and advisors should recommend them.

Example: We will assume that Dr. Vish has a practice with four employees that earn different incomes. The employees are also different ages. The dentist earns $350,000 annually and has been contributing to a defined benefit plan annually with $75,000. If the dentist continues with the defined benefit plan, he will have around $1.6M in the plan at the age of 63. We will presume that the dentist will incur $8,000 of medical costs annually after he retires. In addition, he will remain in the 35% tax bracket.

401(h) Plans Benefits

The dentist has the option of funding money that is tax deductible into a 401(h) plan as an employee benefit. This would apply to his employees as well as himself. Remember that discrimination testing for Employee Earnings consists of evaluating the years of labor, income and the ages of the employees.

The money that is placed into the 401(h) plan would accumulate tax free and can later be removed tax free from the plan if the money is to be used to cover medical fees. This can include costs of elective surgeries. The 401(h) plan benefits because instead of contributing $75,000 into a defined benefit plan, the dentist will instead contribute $8,000 of that amount to the 401(h) plan.

The Net Result of the 401(h) Plan at 65 Years Old

If the 401(h) has a 5% return and the pension plan also has the same rate of return, each plans would have the same balance when the dentist reaches 63. The amount would be $126,288, based on a $8,000 fund each year between the 53 years old and 63.

We will also presume that the dentist incurs $10,000 of annual medical costs when he retires. When this amount is used from the 401(h) retirement plan, the money will not be taxed when it is removed. However, if that same amount were to be removed from a defined benefit plan, it would be taxed around 35-40%.

401(h) Plan vs Defined Benefit Plan

It would be possible for the dentist to take $8,000 from the 401(h) plan each year until he is 90 years of age and not pay any taxes.

If the dentist needed the same amount from the pension plan, he would have to withdraw $13,121 to cover the taxes that he would incur. In this case, by the time he reached 76, he would likely be out of money.

The result is that the net benefit when contributing $8,000 to the 401(h) plan would be $103,876. $103,876 is the amount that could be removed tax free from the 401(h) plan over a period of time over and above what could be taken from a defined benefit plan in a comparison study.

When looking to save money in retirement and have a means to cover medical costs, a 401(h) plan is the best way to go. As people age, medical expenses will increase. Having this type of plan will provide many benefits and will help individuals pay their medical expenses without incurring taxes.

Below is a sample list of post-retirement medical benefits that may be provided under a Benefits plan but are not limited to those contained in this list:

Acupuncture	Hospitalization Insurance
ADD Counseling and Assistance	Hospital Bills
Air Lift Transportation	Insulin
Alcoholism	Laboratory Fees
Alternative Healthcare	Laetrile by Prescription
Alternative Medicines	Lasik Eye Surgery
Ambulance	Hire Lead Base Paid Removal-Children
Artificial Limbs	with Lead Poisoning
Retirement Home for Medical Care	Assisted Living Facilities
Long Term Care, Nursing Homes	Asthma and Allergy Treatment
Medical Information Plan	Birth Control Pills
Medicines	Braces
Membership Fees for Medical Services,	Braille-Books and Magazines
Hospitalization, Clinical Care, Health	Chiropractors
Maintenance, Health club memberships	Christian Science Practioners’ Fees
Nurses Fees, Nurses Room and Board	Contact Lenses Including Exam Fee
S.S. Tax (Where Paid by Taxpayer)	Co-Pays
Obstetrical Expenses	Cosmetic Surgery (Even Though not by a Physician)
Operations (100% of All Costs)	Orthopedic Shoes
Cost for Care Outside the United States	Oxygen
Cost of Operations & Related Treatments	Personal Trainers
Counseling	Physical Therapy
Crutches	Physician Fees
Deductibles	Premiums for LTC
Dental Cosmetic Surgery	Preventive Care including but not limited to
Dental Fees	Spa Facilities, Usage Fees for Facilities
Dentures	Prosthetics
Dependent Care	Psychiatric Care
Dermatologist Care	Psychologist Fees
Diagnostic Fees	“Seeing-eye” Dog and its Upkeep
Drugs	Specialists and Specialized Treatments
Electrolysis	Specially Equipped Cars
Experimental Care	Special Care Costs for Disabled Dependents
Eyeglasses, Including Examination Fee,	Special Diets
Laser Surgery for Vision Correction	Sterilization Fees
Fees of Practical Nurse	Support Groups
Fees for Healing Services	Surgical Fees
Fees of Chiropractors	Therapy Treatments
Fees for Fitness Programs and Facilities	Transport Expenses for Medical Services
Fees of Licensed Osteopaths	including Preventative Care
Flu Shots	Tuition at Special School for Handicapped
Hair Transplants	Viagra
Health Insurance Premiums	Vitamins
Hearing Devices and Batteries	Wheelchair
Hospice	Weight Loss Programs
In Home Care	X-rays

Contact Estate Street Partners to discuss how we can help you plan for retirement using the 401(h) plan or any other retirement strategy.

Inflation may not play a large role in retirement planning for many people, however, after the options are explained, many retirees will wish they had guaranteed income for life regardless of their inflation expectations. This is possible by using Fixed Indexed Annuities with a guaranteed income rider. The following article discusses retirement financial planning options.

Retirement Planning: Fixed Indexed Annuities w/ Guaranteed Income Rider

Read Part 1: Inflation Retirement Planning

When an investor’s risk tolerance for investing has finally been determined for their retirement planning, inflation should not be a factor when you choose devices to use to grow money. Even though you may not have enough cash to retire on and keep pace with inflation at the same time, this does not mean that you who may have a low risk tolerance should change your way of investing and all of a sudden be more aggressive.

Inflation should be talked about in retirement planning and your financial advisor should be able to deduce if you need to save more money or simply alter your retirement lifestyle or both.

Financial Planners do not advise Fixed Indexed Annuities

Many financial advisors state that Fixed Indexed Annuities are not good retirement planning strategies to use for building assets in retirement. They will claim that Fixed Indexed Annuities are not a good choice because they have limits on the growth of your money, which means that the product cannot keep pace with inflation and thus should not be used. The reality is that they are a great way to protect assets from the volatility in the stock market because the Fixed Indexed Annuities protect principle, so when the market goes down 40% – they don’t lose anything!

When your financial advisor determines you are more conservative or moderate in your investment thinking, Fixed Indexed Annuites should be used to help you grow your money in a positive manner.

Why Some Financial Advisors Don’t Like the Fixed Indexed Annuity

Basically, most financial planners do not really comprehend the full benefits of Fixed Indexed Annuities because many of the Broker Dealers they work for disallow or restrain their use because the Fixed Indexed Annuities do not have recurring cross-selling fees that can generate their business long term.

Asset Protection of Your Principle: Guaranteeing Money Every Month in Retirement

No, this is not irrevocable trust asset protection. While there are no guarantees that a portfolio containing bonds, mutual funds, and stocks will give you any return at all, you will be guaranteed not to lose principle due to market volatility with a Fixed Indexed Annuity. For example, let’s say there is a 63 year old who has $390,000 in a 401(k) plan as his sole retirement nest egg. He would like to retire in five years and take out $48,000 each year from the 401(k) account until the time of his death. He believes he will pass away around 93.

In order to take $48,000 from the 401(k) and not exhaust his nest egg, he would have to earn 7% each and every year until he turned 93! If even one year was negative it would completely disrupt his retirement plans which is likely considering the stock market’s volatility. He is conservative in his investment approach and does not want to place his money in the volatile stock market.

How can his financial advisor guarantee a return of 7%? If the advisor is using the typical mutual funds, bonds and stocks, the answer is that it is impossible to make these types of guarantees and the client would not be able to use risk adverse investments to achieve that goal. On the other hand, if the advisor suggests a money market/CD account, it is impossible for the money to increase and sustain a requisite 7.5% per year to achieve his goal.

What Will the Advisor Likely Tell the Investor?

Most people will say to their client that their retirement planning goals are not achievable with risk-adverse investments (i.e. with a conservative investment approach). The financial planner becomes the bearer of bad news. However, they would be wrong – you CAN protect assets from the volatility in the market AND still get enough for retirement.

Fixed Indexed Annuities with Guaranteed Income Riders

The question is whether financial advisors should introduce a Fixed Indexed Annuity with a guaranteed income benefit to you with conservative investment approaches who is looking for assurances in retirement. The answer is yes. Regardless of whether you buy or not is not the issue. Frustration arises when financial advisors have little knowledge on Fixed Indexed Annuities and the guaranteed income riders. Many will actually be disallowed by their employer from offering them, so you will never be introduced to these products that could provide you with a guaranteed income during retirement.

8% Guaranteed Return with a Guaranteed 6% Income Benefit

Most advisors don’t even know that there is an annuity that has a 10% bonus, would roll up at 8% guaranteed and will pay a guaranteed income benefit for the rest of your retirement life that is founded upon on a 6% payment rate at 70 years old. Let’s say you paid into a Fixed Indexed Annuity with $390,000, the income that is guaranteed for the rest of your life beginning when you are 70 would be about $39,142 every year, regardless of how long you live. The balance in the account would also transfer to your beneficiaries upon your passing away.

Good financial advisors should educate you on these products. While the Fixed Indexed Annuity doesn’t quite generate $48,000 each year for you, it does come close and with a little tweaking, you could get there. Also it does not fully account for inflation because this income most likely will never rise above this amount.

Fixed Indexed Annuity with a Growing Income Option

For those who are close to retirement or already in retirement years, the Fixed Indexed Annuity attached to a guaranteed income rider and with this growing income option is one of the most effective strategies for retirement planning. The income with this particular product will begin a tad lower than Fixed Index Annuities without the growing income option; however, the income will increase every year that the stock market increases. On average the stock market increases 4-6% so this is the expected growth. This is one of the retirement strategies to combat the inflation problem.

In regards to how the rider will work, let’s examine the numbers. For the case study above, the income will begin at $31,337 at age 70. If the rate of return averages 5%, the income amount at age 80 would be about $54,175. At 85, it would increase to $73,215 and by age 95, the amount would be about $125,362 each year.

This is a conservative retirement plan that will have no market risks and will allow the retiree to keep pace with inflation.

Though inflation is not entirely impertinent in retirement planning, it can be used as a factor to get you to save more money. Inflation can also be used to help you better understand your financial dreams for retirement which may not be sensible based on your investment tolerance and financial situation.

However, inflation does become impertinent when your investment tolerance has been decided. If you are conservative, this does not mean that you should change your investment style to attain higher returns. If you are not using Fixed Indexed Annuities with a guaranteed income rider as part of a conservative growth portfolio, you will have no way to have income that is guaranteed for the rest of your life upon retirement.

For more information on how Estate Street Partners can help you grow your retirment fund with Fixed Indexed Annuities please call us toll-free at (888) 938-5872. If you are calling within the Boston region please call (508) 429-0011.

Inflation asset protection is discussed in the following article. It goes on to explain when inflation is irrelevant and when it could affect an investing pre-retiree. When retirement planning, many individuals will choose a conservative stance in regards to their investments and this will drive the funds available to them during retirement.

Inflation becomes irrelevant once an individual has decided on their tolerance of risk. If the individual were to choose to invest in bonds, mutual funds and stocks, inflation generally is not a cause for concern – let us explain why.

Definition of Inflation

Inflation will occur when there is an increase in the cost of goods or services due to the creation of money by the Federal Reserve. Inflation is often measured by the Consumer Price Index (CPI). In 1998, milk cost about $1 per gallon. Inflation is evident since we are now paying more than $3 a gallon. There are many financial planners who will take the time to ask some important questions of clients. Let’s suppose that we are dealing with a 63 year old 7 years before retirement and they answer the questions as follows::

• When do you want to retire and what is the number of remaining years until you retire or desire to retire? 7 years – the number of remaining years until retirement
• Based on the current dollar value, how much money is required after taxes to sustain yourself or to live the lifestyle you desire when you do retire? I am not sure, but I would say $4K per month ($48K per year) – the money that is required before taxes to live the lifestyle desired at retirement – who knows what the income tax will be in 5-10 years.
• At what age do you think you will live to? I would guess 93 – expected to live to age 93.
• What do you anticipate to be an average rate of return over the coming 30 years? 7% – the expected rate of return for the investments
• How much do you currently have to invest in (stocks, bonds, mutual funds, etc) for retirement? $390,000 (in a 401(k) plan) – the amount of current money that is available for investment purposes
• What is your level of risk tolerance for investing? Conservative – the level of risk tolerance for investing

When forecasting, financial planners typically will use various rates of return: aggressive 8-9%, moderate 6-7% and conservative 3-4%. Typical fees for 401(k) plans that are managed by a financial planner should be between 1 to 2.5% annually.

How would a financial planner assist a clientsomeone in reaching their retirement goal if the goal isthey need $3036,000 pre-tax annually when only using money from a 401(k) account?

In order to withdraw this amount from the 401(k) account and avoid running out of money later in life, the current balance of the account, which is $390,000, must grow annually by 7% for 30 years. This means that there would be a net rate of return of 5.5% after annual expenses if we suppose the annual administrative fee is 1.5% per year. How is it possible for any financial planner to guarantee these returns? While it is technically possible with a properly balances mix of stocks, bonds and money market accounts, it is not likely – when was the last time you had of more than 7% rate of return on your portfolio for 3 or 4 years in a row, never mind 25 to 30 years? In the stock market, there are no guarantees of returns.

If we take into account this client’s conservative level of risk tolerance for investing we know that he will have no desire to be involved with mutual funds or stocks. Instead, this client will invest in Cash Deposits (CDs)/money markets or even bonds which are conservative investment strategies. Some financial planners will try to persuade the client to make investments in mutual funds and stocks, but again, there is no guarantee that these will return 7% over the period of the next 25-30 years. The chance of a 7% return over 30 years in CD and bonds is nil.

How Inflation Affects the Yearly Withdrawn Amount

For the past 30 years, inflation has been around 3% every year. Looking at these numbers, in five years, a client would have to take out $55,000 from their 401(k) account when they are 70 to account for inflation. By the time the client was 85, they would have to take out $79,260 a year and $106,600 at the age of 90.

Three Ways to Protect from Inflation:

There are generally three ways for a client to retire with the desirable lifestyle (or, numerically speaking, be able to withdraw $48k in current dollar value when he/she is age 70). These include:

1. Increase the rate of return on his/her investment portfolio over and above what the conservative investments can return
2. Increase the amount save before he/she retires
3. He will need to reduce expenses during retirement

Let’s suppose that the client has no way to increase his/her savings in the five years preceding retirement. In this case, how could a financial planner increase the wealth of the client so they can have $48,000 a year in retirement (pre-tax)? How is it possible to assist the client to combat inflation?

In reality, there is nothing the advisor or planner can do because of the conservative risk tolerance of the individual. In order to generate the rates of return that are needed, the client would have to buy stocks and bonds, which is something they do not wish to do because of his risk tolerance.

Discussing Inflation

Once a client has made up in his mind on their level of risk tolerance, there are only two rationalizations to talk about inflation asset protection. These include:

• If he can allocate more money for investments and/or save more money
• Whether he should manage to reduce expenses during retirement

In short, inflation is only relevant when it is being used as a motivational tool that will urge clients to save more money or spend less when they enter retirement.

How Financial Planners Deal with Inflation

Many financial planners will use inflation as an excuse to persuade clients to change their investment philosophy. Financial planners want the client to forget the conservative philosophy and adopt an aggressive one so they can achieve their goals. Many financial planners will not even suggest the use of Fixed Indexed Annuities because they claim that the caps will place a limit on the ability to keep up with inflation. Financial planners who believe this are wrong and they should disclose this option to clients.

Contact Estate Street Partners to discuss how we can help protect your assets for retirement and how to transfer your assets to your beneficiaries.

Read Part 2: Fixed Indexed Annuity: Guaranteed Income Rider

Read more on Captive Insurance Company Plans