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February 12, 2006 at 02:00 PM
Saving for retirement cannot take place in a vacuum. Whether your clients just are starting out or nearing retirement, they need to be aware of the risks they face.
Risk is usually defined as the potential for loss. When most people think of financial risk, they focus on investment risk and the potential for loss due to downturns in the economy, changing interest rates, inflation or poor management of the companies in which they invest. One typically addresses these risks through diversification of assets: selecting different investments across industry sectors.
But risk of loss also arises from life events such as illness, disability or death. And if your clients are business owners, they have additional considerations to keep in mind. Between company retirement plans and other assets, they are likely to have an idea about what they need, and will have, when they reach retirement. But have they considered the impact of sudden medical expenses or a long-term disability on their retirement plans?
In addition to unexpected pre-retirement medical expenses, post-retirement medical and long term care expenses can decrease retirement income assets. According to a February 2003 study from the Employee Benefit Research Institute, for the average individual who has reached age 65 in 2003, the amount needed to pay future retirement medical expenses ranges from $50,000 to $1.5 million even after considering Medicare.
Expenses for LTC require additional savings. Consequently, business owners need to protect their retirement assets and those of their long-term employees against medical, drug and LTC expenses after retirement.
Fortunately, a business owner can help plan for disability, LTC and medical costs on a tax-favored basis. One method used by large corporations that is gaining acceptance in the medium to small business market is a funded single employer welfare benefit plan.
This generic name describes an arrangement established by an employer to provide miscellaneous welfare benefits to employees and beneficiaries. In my practice, I follow a simple checklist of questions to help an employer identify situations in which a single employer welfare benefit plan funded through a trust may be worth considering:
o Is the business structured other than as a sole proprietorship?
o Is the business profitable and seeking to provide tax-deductible fringe benefits to employees and dependents?
