Retirement Rescue

Think about almost any kind of medical condition that you treat in your office today and about the various options available to treat it. Did those same options exist 30 or 40 years ago? In most cases, probably not. If you had been recommending treatment to your patients at that time, your choices would have been much more limited. 

The "prescriptions" available for retirement saving today are just as varied and numerous. The 412(i) is just one of many, many choices available for retirement savings. But before you and your financial planner decide whether to use it, you need to consider your situation carefully.

What's a 412(i)?

Many retirement savings plans, such as the 401(k), are based on projections of growth. You contribute a certain amount each year, and expect to achieve a particular amount by the time you're ready to retire. You also may change the amount you contribute periodically.

With the 412(i), however, benefits to you are guaranteed, and contributions by you are fixed.

Authorized by section 412(i) of the tax code, it uses insurance products to fund defined benefits; the payments are fixed and guaranteed by the insurance company. Moreover, with a 412(i), you enter a contractual obligation to set aside a fixed amount of money -- agreed upon in advance -- for a certain number of years. Your age, your income, and your retirement date are among the factors that determine the amount you contribute each year.

Suppose you are 55 years old, you have an income of $100,000 a year, and you decide that you want 60 percent of that income in retirement. You plan on retiring in 10 years, at age 65. With a 412(i) plan, an insurance company will take those figures and determine a payment that you will have to make every year for the next 10 years. Once you have made those payments and retire, you are guaranteed that $60,000 a year for as long as you live.

The 412(i) is ideal for older physicians who have less time to save, because it allows them to put in large contributions -- $100,000 or much more per year if they want to. They can accumulate a significant nest egg for retirement in a short time, and on a tax-favored basis. Contributions are deductible in the year in which you make them, and are not subject to income taxes during the accumulation period.

Is it right for you?

In general, people considering this type of retirement plan should be in the following circumstances:

• Age 50 or older, usually with little or no retirement savings.
• Self-employed, with few or no employees.
• A significant cash flow from practice that you are not spending. (Since you need to make larger contributions, you must be able to afford to fund -- or willing to sacrifice to afford to fund -- your retirement plan.)
• You're in one of the higher tax brackets, so you can benefit from the large deductions.
• Generally, you're a conservative investor. You won't have the potential for returns that you have when investing your retirement savings in the stock market, but neither will you have the losses. What you're buying is a guaranteed product.

Remember, these are general guidelines. Most people who will benefit from a 412(i) fit within these guidelines, but there may be exceptions.

Forgiveness for past neglect

I look at the 412(i) as a method that older physicians can use to make up for their past mistakes or inaction. Remember the three little pigs? The first pig built his house of straw and, for a time, did just fine. It was fast and easy. The people who invested aggressively in dot.com stocks were building houses of straw. They experienced phenomenal returns, and were confident that their retirement was not only well-secured but that they were going to live high.

The second little pig built a house of sticks -- comparable, perhaps, to investors who had a more balanced portfolio but weren't contributing enough or didn't get started investing early enough.

The blast from the Big Bad Wolf -- in the form of the stock market bust of the last several years -- blew down those houses of straw and sticks. People only 10 or 15 years from retirement discovered -- and are still discovering -- that they aren't going to have the money they thought they would.

I think of the 412(i) as a means of building a house of bricks. It's like a vault that will ensure that no matter what happens, you'll have the retirement savings you need, if you can put away a significant amount of your income now.

Finding the right alternatives

What if you don't fit the criteria for a 412(i) plan? Remember, there are hundreds of financial planning or retirement savings prescriptions out there, and one of them will undoubtedly help you enjoy a financially healthy retirement. The key is finding the right one, and for that you will need some help.

I have two strong recommendations as you look for someone to assist you: that your financial adviser be independent and certified, and that he have at his disposal other experts with whom to collaborate.

Independent, certified financial planners come to the table with less baggage than a non-certified advisor or one who is affiliated with a bank, insurance company, or mutual fund.

We are absolutely blessed today in having so many financial alternatives that fit so many different situations. That blessing has a flip side, however, and it is that people sometimes get used or abused because they don't fully understand their choices.
At the same time, no one person can do it all or know it all. That's why I'm such a believer in collaboration. If you don't have a team of advisers who work together -- who are able to share their knowledge for your benefit -- you're not going to be able to take advantage or to even know about all your choices. (And that's especially true if your adviser is not independent, because he is likely recommending only a very limited number of options.)

So before you consider a particular 412(i) plan, or any other type of retirement plan, do a little homework. Ask the person you're consulting whether he's certified and whether he's affiliated with any one company. Ask who else works with him, who else he can turn to for advice and consultation on your particular and specific situation.

Internists don't try to treat patients with complex heart conditions on their own. They refer the patient to a specialist -- someone backed by a hospital and a medical team that works day in and day out with that particular condition.

It's the same for financial planning. Why would you entrust something so important to your future -- your retirement savings -- to anything less than a financial specialist who is independent, knowledgeable, and backed by a team of experts?

Trevor 'Chip' Lewis Jr., CFP, is Managing Director of PSA Financial Center Inc. in Lutherville, Md. He was designated one of the Top 250 Financial Planners in Worth magazine in 2001, and the Top 150 Best Financial Advisers for Physicians in Medical Economics in 2002. Among other professional organizations, Mr. Lewis has been active in the leadership of the National Financial Planning Association and the National Association of Planned Giving. He can be reached at chip@psafinancial.com or via editor@physicianspractice.com.

This article originally appeared in the February 2004 issue of Physicians Practice.