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  • Please check my numbers - Group Annuity



    I am a partner with a subspecialty group of >30 physicians. The group is 100% physician owned. Our group has been approached with a "opportunity" an insurance company (Principal) is calling a business continuation plan, or at times a buy-sell plan. This is a combination whole life insurance policy and annuity. I would appreciate the WCI community input on my efforts to illustrate what this means for us and also for the company.

    The plan requires input of $38,000/year ($1,500/month from each partner and 20,000/year from our company on the partners behalf). It also requires a $2,750,000 but in from our company at the start. The partner would then receive an annuity payout (amount based on amount of time they pay in) and whole life insurance. Our company wants to make participating in the plan mandatory for all new partners. The payout is $100,000/year for as many years as you pay in from 4 to 10 years. After ten years, the annuity increases by $20,000/year for every additional two years, ex $120,000 at 12 years, $140,000 at 14 years and so on. The payments are cap at $250,000 which partners reach at 25 years, and paying into the program stops after 25 years. If you would like more information, please let me know and I will provide it if I can.

    Using Excel, I have attempted to put numbers to this plan. For the theoretical future value of the investment on the partners behalf I used

    =(FV(7%/12,"Years paying in"*12,-$1,500,0,1))+(FV(7%,"Years paying in",-$20,000,-($2750000*0.033),1))

    I assumed a 7% market return. the $2,750,000*0.033 is to represent the partners proportional share of the initial buy-in, each partner owns 3.3% of our company. This is supposed to represent the amount of money that would have accumulated at the time of retirement.

    To represent the total value of the payout I used

    =PV(2%, "years of payments", -(payment amount, range $100k to 250k),0,1)

    I assumed a 2% inflation rate for devaluation of the payments overtimes.

    Lastly, I tried to calculate what it would look like if you did it yourself, took the amount we would have left over at retirement and paid the partners the annuity we are promised.

    =FV(7%, "years of payments", (payment amount, range $100k to 250k), -(Principal = to (FV of theoretical amount of money leftover at time of retirement which was calculated above),0) + PV(calculated above)

    This produces the values in the table below. As I ran the numbers, the annuity pays more for partners who retire within the next 8 years, but after, the annuity payments lag. That lag becomes more than six figure in a few years, and ends up being several million dollars for those not retiring for 20 or more years.
    First column, is years until retirement.
    Second, is years paying IN, these two columns are the same expect for beyond 25 years.
    Third, is monthly payment from each partner.
    Fourth, is annual payment from our company for each partner
    Fifth, is time of payments out.
    Sixth, payment out amount.
    Seventh, assumed rate or return
    Eighth, assumed interest rate.
    Ninth, amount after paying in. (calculation above)
    Tenth, amount at time of retirement, should be the same as amount after paying in except for those beyond 25 years.
    Eleventh, inflation adjusted total value of the annuity payout (calculations above)
    Twelfth, total value you would achieve by doing it yourself (calculations above)
    4 4 $1,500.00 $19,425.00 4 $ 100,000.00 7% 2% $294,534.78 $294,534.78 $388,388.33 $330,469.04
    6 6 $1,500.00 $19,425.00 6 $ 100,000.00 7% 2% $419,392.21 $419,392.21 $571,345.95 $485,411.50
    8 8 $1,500.00 $19,425.00 8 $ 100,000.00 7% 2% $562,592.80 $562,592.80 $747,199.11 $687,858.02
    10 10 $1,500.00 $19,425.00 10 $ 100,000.00 7% 2% $726,832.11 $726,832.11 $916,223.67 $964,367.64
    12 12 $1,500.00 $19,425.00 10 $ 120,000.00 7% 2% $915,201.93 $915,201.93 $1,099,468.40 $1,241,835.37
    14 14 $1,500.00 $19,425.00 10 $ 140,000.00 7% 2% $1,131,248.56 $1,131,248.56 $1,282,713.14 $1,573,747.57
    16 16 $1,500.00 $19,425.00 10 $ 160,000.00 7% 2% $1,379,039.60 $1,379,039.60 $1,465,957.87 $1,968,105.81
    20 20 $1,500.00 $19,425.00 10 $ 200,000.00 7% 2% $1,989,203.02 $1,989,203.02 $1,832,447.34 $2,982,221.17
    25 25 $1,500.00 $19,425.00 10 $ 250,000.00 7% 2% $3,029,350.62 $3,029,350.62 $2,290,559.18 $4,795,638.36
    27 25 $1,500.00 $19,425.00 10 $ 250,000.00 7% 2% $3,029,350.62 $3,468,303.52 $2,290,559.18 $5,659,125.16
    29 25 $1,500.00 $19,425.00 10 $ 250,000.00 7% 2% $3,029,350.62 $3,970,860.70 $2,290,559.18 $6,647,731.20
    30 25 $1,500.00 $19,425.00 10 $ 250,000.00 7% 2% $3,029,350.62 $4,248,820.95 $2,290,559.18 $7,194,521.08


    I prefer the presentation in graphic form because, below, I think it better captures the magnitude of difference.
    Click image for larger version

Name:	Annuity01.png
Views:	764
Size:	22.4 KB
ID:	252489





    Thank you for taking the time to read this. Those of us that objected to this plan have been given a meeting with our groups executive committee in just over a week. The last thing I want to do as a young partner is present bad numbers. Please review my calculations and let me know if I made any errors.

    Thank you for creating a forum where I could post a question like this, and thank you for all that you do.

    #iknowwhathuntsyou


  • #2
    “Our company wants to make participating in the plan mandatory for all new partners.“

    someone much smarter than me can go through your numbers but if I saw this plan and saw that participating was mandatory, I would never take this job. If I had the job I would immediately begin looking elsewhere. This plan is that god awful

    Comment


    • #3
      The fact that your group is considering a whole life plan is telling enough. Run.

      Comment


      • #4
        Bring up the liability issue with choosing a sub-performing plan for the group. Probably even more liable if it is mandatory. Some insurance salesperson has got a hold of whoever is choosing the plan in your group. I don't know why people would want to risk making investment choices for their group if they know that they can be sued for under-performance and high fees. This sounds like a disaster to me. I didn't run your numbers, but just looking at your graph and imagining that amount X >30, someone is going to get very rich off your plan and it isn't going to be you.

        Comment


        • #5
          Originally posted by FloridamanMD View Post

          I am a partner with a subspecialty group of >30 physicians. The group is 100% physician owned. Our group has been approached with a "opportunity" an insurance company (Principal) is calling a business continuation plan, or at times a buy-sell plan. This is a combination whole life insurance policy and annuity. I would appreciate the WCI community input on my efforts to illustrate what this means for us and also for the company.

          The plan requires input of $38,000/year ($1,500/month from each partner and 20,000/year from our company on the partners behalf). It also requires a $2,750,000 but in from our company at the start. The partner would then receive an annuity payout (amount based on amount of time they pay in) and whole life insurance. Our company wants to make participating in the plan mandatory for all new partners. The payout is $100,000/year for as many years as you pay in from 4 to 10 years. After ten years, the annuity increases by $20,000/year for every additional two years, ex $120,000 at 12 years, $140,000 at 14 years and so on. The payments are cap at $250,000 which partners reach at 25 years, and paying into the program stops after 25 years. If you would like more information, please let me know and I will provide it if I can.

          Using Excel, I have attempted to put numbers to this plan. For the theoretical future value of the investment on the partners behalf I used

          =(FV(7%/12,"Years paying in"*12,-$1,500,0,1))+(FV(7%,"Years paying in",-$20,000,-($2750000*0.033),1))

          I assumed a 7% market return. the $2,750,000*0.033 is to represent the partners proportional share of the initial buy-in, each partner owns 3.3% of our company. This is supposed to represent the amount of money that would have accumulated at the time of retirement.

          To represent the total value of the payout I used

          =PV(2%, "years of payments", -(payment amount, range $100k to 250k),0,1)

          I assumed a 2% inflation rate for devaluation of the payments overtimes.

          Lastly, I tried to calculate what it would look like if you did it yourself, took the amount we would have left over at retirement and paid the partners the annuity we are promised.

          =FV(7%, "years of payments", (payment amount, range $100k to 250k), -(Principal = to (FV of theoretical amount of money leftover at time of retirement which was calculated above),0) + PV(calculated above)

          This produces the values in the table below. As I ran the numbers, the annuity pays more for partners who retire within the next 8 years, but after, the annuity payments lag. That lag becomes more than six figure in a few years, and ends up being several million dollars for those not retiring for 20 or more years.
          First column, is years until retirement.
          Second, is years paying IN, these two columns are the same expect for beyond 25 years.
          Third, is monthly payment from each partner.
          Fourth, is annual payment from our company for each partner
          Fifth, is time of payments out.
          Sixth, payment out amount.
          Seventh, assumed rate or return
          Eighth, assumed interest rate.
          Ninth, amount after paying in. (calculation above)
          Tenth, amount at time of retirement, should be the same as amount after paying in except for those beyond 25 years.
          Eleventh, inflation adjusted total value of the annuity payout (calculations above)
          Twelfth, total value you would achieve by doing it yourself (calculations above)
          4 4 $1,500.00 $19,425.00 4 $ 100,000.00 7% 2% $294,534.78 $294,534.78 $388,388.33 $330,469.04
          6 6 $1,500.00 $19,425.00 6 $ 100,000.00 7% 2% $419,392.21 $419,392.21 $571,345.95 $485,411.50
          8 8 $1,500.00 $19,425.00 8 $ 100,000.00 7% 2% $562,592.80 $562,592.80 $747,199.11 $687,858.02
          10 10 $1,500.00 $19,425.00 10 $ 100,000.00 7% 2% $726,832.11 $726,832.11 $916,223.67 $964,367.64
          12 12 $1,500.00 $19,425.00 10 $ 120,000.00 7% 2% $915,201.93 $915,201.93 $1,099,468.40 $1,241,835.37
          14 14 $1,500.00 $19,425.00 10 $ 140,000.00 7% 2% $1,131,248.56 $1,131,248.56 $1,282,713.14 $1,573,747.57
          16 16 $1,500.00 $19,425.00 10 $ 160,000.00 7% 2% $1,379,039.60 $1,379,039.60 $1,465,957.87 $1,968,105.81
          20 20 $1,500.00 $19,425.00 10 $ 200,000.00 7% 2% $1,989,203.02 $1,989,203.02 $1,832,447.34 $2,982,221.17
          25 25 $1,500.00 $19,425.00 10 $ 250,000.00 7% 2% $3,029,350.62 $3,029,350.62 $2,290,559.18 $4,795,638.36
          27 25 $1,500.00 $19,425.00 10 $ 250,000.00 7% 2% $3,029,350.62 $3,468,303.52 $2,290,559.18 $5,659,125.16
          29 25 $1,500.00 $19,425.00 10 $ 250,000.00 7% 2% $3,029,350.62 $3,970,860.70 $2,290,559.18 $6,647,731.20
          30 25 $1,500.00 $19,425.00 10 $ 250,000.00 7% 2% $3,029,350.62 $4,248,820.95 $2,290,559.18 $7,194,521.08
          I prefer the presentation in graphic form because, below, I think it better captures the magnitude of difference.
          Click image for larger version  Name:	Annuity01.png Views:	60 Size:	22.4 KB ID:	252489








          Thank you for taking the time to read this. Those of us that objected to this plan have been given a meeting with our groups executive committee in just over a week. The last thing I want to do as a young partner is present bad numbers. Please review my calculations and let me know if I made any errors.

          Thank you for creating a forum where I could post a question like this, and thank you for all that you do.

          #iknowwhathuntsyou
          So being serious for a moment about the numbers, I have several points/questions:

          1. What amounts are pre-tax and what amounts are after-tax (for all dollars you mention)?
          2. Where are you going to get $2.75M? Cash call? Loan?
          3. Does the annuity pay out until death?
          4. You mentioned whole life. What’s the life insurance benefit?
          5. I think your model will need to be a bit more sophisticated.
          6. Realize the insurance company is likely selling this hard to your senior partners at the board level because this plan likely benefits them a of a lot more than younger members.
          7. Who gives two $hits if you are a “young” partner. You’re a partner. If you can make a logical argument against this then your words should be just as valuable as the most senior member.
          8. Small points on the Excel work so far:
          -you put a “1” in all of your equations I think, did you mean to do this (payments occur at beginning of period)
          -in your FV calculations you used 7% as an APY but then divided it by 12 in another formula to get a monthly rate. You can’t do this. Look up APY to APR formula.
          9. This point was brought up previously but hound be emphasized. This will deter young people from choosing your group.
          10. This point is also important to emphasize again, especially if the model shows this hurts most partners - this is a liability issue.

          Haply to look at this with an Excel spreadsheet if I have time. Anything to stick it to the likes of insurance salesmen who took their pound of flesh out of my hide..
          Last edited by ENT Doc; 01-23-2021, 03:12 PM.

          Comment


          • #6
            1. What amounts are pre-tax and what amounts are after-tax (for all dollars you mention)?
            The monthly partner payments ($1,500/month) are after tax dollars, as I believe the payments from the company are as well ($20,000/year). In the Informational session the sales person did say it would be after tax dollars, and the annuity payments would be taxed at the long term capital gains rate. This is not a good plan for tax purposes.
            2. Where are you going to get $2.75M? Cash call? Loan?
            I don't know where the $2,750,000 is planned to come from. This amount was not included until this most recent draft of the proposal. I also have that question. The partners would not support a cash-call and the executive committee is unable to make this mandatory for current partners.

            3. Does the annuity pay out until death?
            Annuity pays out $100,000/year for the number of years you pay in until reaching 10 years. For every two years the partner pays in beyond 10, the annuity increases by $20,000, until the partner pays in for 25 years, to a cap of $250,000/year.

            4. You mentioned whole life. What’s the life insurance benefit?
            Life insurance benefit varies by partner. The insurance company sell more life insurance to the younger partners. I did not include the value of the life insuance because I think it is a distraction. (Ex. Sure the plan costs you $500 dollars, but if you die next year the company get to pocket $750,000. this is good for the securit of everyone)
            5. I think your model will need to be a bit more sophisticated.
            I wish I could run a monte-carlo simulation or something, but I have excel and limited time to even teach myself more tricks. I am doing the best I can.

            6. Realize the insurance company is likely selling this hard to your senior partners at the board level because this plan likely benefits them a of a lot more than younger members.
            I agree.

            7. Who gives two $hits if you are a “young” partner. You’re a partner. If you can make a logical argument against this then your words should be just as valuable as the most senior member.
            I agree, but I don't have a board seat and we all have to work together. The case is clear, and I am trying to make it respectfully and in a fact based manner.

            8. Small points on the Excel work so far:
            -you put a “1” in all of your equations I think, did you mean to do this (payments occur at beginning of period)
            -in your FV calculations you used 7% as an APY but then divided it by 12 in another formula to get a monthly rate. You can’t do this. Look up APY to APR formula.
            I meant to include the 1 at the end. I believe assuming the payments occur at the beginning of the period is overall beneficial to my argument.
            -where I used the the APR/12 was for the monthly payments, in that equation I also multiplied the years by 12 with the goal it would produce an approximate monthly interest rate for monthly payments. I did try to look this up and found that dividing the APR by 12 was an acceptable way. However, intuitively I appreciate that probably isn't fully accurate, due to compounding interest, the monthly interest rate should be lower.

            9. This point was brought up previously but hound be emphasized. This will deter young people from choosing your group.
            I agree.

            10. This point is also important to emphasize again, especially if the model shows this hurts most partners - this is a liability issue.
            I am interested to know more. Can any one tell me more about the legal liability here, beyond the board has a fiduciary responsibility? Would we have to wait for damages to occur?

            I appreciate you taking time to review, thank you for your comments!

            Comment


            • #7
              Originally posted by FloridamanMD View Post
              The monthly partner payments ($1,500/month) are after tax dollars, as I believe the payments from the company are as well ($20,000/year). In the Informational session the sales person did say it would be after tax dollars, and the annuity payments would be taxed at the long term capital gains rate. This is not a good plan for tax purposes.

              I don't know where the $2,750,000 is planned to come from. This amount was not included until this most recent draft of the proposal. I also have that question. The partners would not support a cash-call and the executive committee is unable to make this mandatory for current partners.


              Annuity pays out $100,000/year for the number of years you pay in until reaching 10 years. For every two years the partner pays in beyond 10, the annuity increases by $20,000, until the partner pays in for 25 years, to a cap of $250,000/year.


              Life insurance benefit varies by partner. The insurance company sell more life insurance to the younger partners. I did not include the value of the life insuance because I think it is a distraction. (Ex. Sure the plan costs you $500 dollars, but if you die next year the company get to pocket $750,000. this is good for the securit of everyone)

              I wish I could run a monte-carlo simulation or something, but I have excel and limited time to even teach myself more tricks. I am doing the best I can.


              I agree.


              I agree, but I don't have a board seat and we all have to work together. The case is clear, and I am trying to make it respectfully and in a fact based manner.


              I meant to include the 1 at the end. I believe assuming the payments occur at the beginning of the period is overall beneficial to my argument.
              -where I used the the APR/12 was for the monthly payments, in that equation I also multiplied the years by 12 with the goal it would produce an approximate monthly interest rate for monthly payments. I did try to look this up and found that dividing the APR by 12 was an acceptable way. However, intuitively I appreciate that probably isn't fully accurate, due to compounding interest, the monthly interest rate should be lower.


              I agree.



              I am interested to know more. Can any one tell me more about the legal liability here, beyond the board has a fiduciary responsibility? Would we have to wait for damages to occur?

              I appreciate you taking time to review, thank you for your comments!
              Appreciate the info. So what happens to new partners? Do they pay in the same amounts of $1500 a month 10 years from now? Do the numbers change for them? I think I’d ask where the $2.75M is going to come from. I completely respect going about this diplomatically. But I think some junior partners sometimes think senior ones (or admin) know best and just shut up. This isn’t one of those times to not be pushy.

              Comment


              • #8
                Originally posted by FloridamanMD View Post
                The monthly partner payments ($1,500/month) are after tax dollars, as I believe the payments from the company are as well ($20,000/year). In the Informational session the sales person did say it would be after tax dollars, and the annuity payments would be taxed at the long term capital gains rate. This is not a good plan for tax purposes.

                I don't know where the $2,750,000 is planned to come from. This amount was not included until this most recent draft of the proposal. I also have that question. The partners would not support a cash-call and the executive committee is unable to make this mandatory for current partners.


                Annuity pays out $100,000/year for the number of years you pay in until reaching 10 years. For every two years the partner pays in beyond 10, the annuity increases by $20,000, until the partner pays in for 25 years, to a cap of $250,000/year.


                Life insurance benefit varies by partner. The insurance company sell more life insurance to the younger partners. I did not include the value of the life insuance because I think it is a distraction. (Ex. Sure the plan costs you $500 dollars, but if you die next year the company get to pocket $750,000. this is good for the securit of everyone)

                I wish I could run a monte-carlo simulation or something, but I have excel and limited time to even teach myself more tricks. I am doing the best I can.


                I agree.


                I agree, but I don't have a board seat and we all have to work together. The case is clear, and I am trying to make it respectfully and in a fact based manner.


                I meant to include the 1 at the end. I believe assuming the payments occur at the beginning of the period is overall beneficial to my argument.
                -where I used the the APR/12 was for the monthly payments, in that equation I also multiplied the years by 12 with the goal it would produce an approximate monthly interest rate for monthly payments. I did try to look this up and found that dividing the APR by 12 was an acceptable way. However, intuitively I appreciate that probably isn't fully accurate, due to compounding interest, the monthly interest rate should be lower.


                I agree.



                I am interested to know more. Can any one tell me more about the legal liability here, beyond the board has a fiduciary responsibility? Would we have to wait for damages to occur?

                I appreciate you taking time to review, thank you for your comments!
                Also, why did you make the yearly payment $19,425 in your table above when you said it was $20,000?

                Comment


                • #9
                  Originally posted by FloridamanMD View Post
                  The monthly partner payments ($1,500/month) are after tax dollars, as I believe the payments from the company are as well ($20,000/year). In the Informational session the sales person did say it would be after tax dollars, and the annuity payments would be taxed at the long term capital gains rate. This is not a good plan for tax purposes.

                  I don't know where the $2,750,000 is planned to come from. This amount was not included until this most recent draft of the proposal. I also have that question. The partners would not support a cash-call and the executive committee is unable to make this mandatory for current partners.


                  Annuity pays out $100,000/year for the number of years you pay in until reaching 10 years. For every two years the partner pays in beyond 10, the annuity increases by $20,000, until the partner pays in for 25 years, to a cap of $250,000/year.


                  Life insurance benefit varies by partner. The insurance company sell more life insurance to the younger partners. I did not include the value of the life insuance because I think it is a distraction. (Ex. Sure the plan costs you $500 dollars, but if you die next year the company get to pocket $750,000. this is good for the securit of everyone)

                  I wish I could run a monte-carlo simulation or something, but I have excel and limited time to even teach myself more tricks. I am doing the best I can.


                  I agree.


                  I agree, but I don't have a board seat and we all have to work together. The case is clear, and I am trying to make it respectfully and in a fact based manner.


                  I meant to include the 1 at the end. I believe assuming the payments occur at the beginning of the period is overall beneficial to my argument.
                  -where I used the the APR/12 was for the monthly payments, in that equation I also multiplied the years by 12 with the goal it would produce an approximate monthly interest rate for monthly payments. I did try to look this up and found that dividing the APR by 12 was an acceptable way. However, intuitively I appreciate that probably isn't fully accurate, due to compounding interest, the monthly interest rate should be lower.


                  I agree.



                  I am interested to know more. Can any one tell me more about the legal liability here, beyond the board has a fiduciary responsibility? Would we have to wait for damages to occur?

                  I appreciate you taking time to review, thank you for your comments!
                  I also question the annuity being taxed at capital gains. This should be taxed at ordinary income to the extent it is beyond your principal payments. Anyone please correct me if I'm wrong on this.

                  Comment


                  • #10
                    “I agree, but I don't have a board seat and we all have to work together. The case is clear, and I am trying to make it respectfully and in a fact based manner.”

                    Do you think insurance is sold on numbers on a spreadsheet? It is sold on emotion, only.

                    Downpayment
                    Fixed payment stream going in.
                    Fixed payment stream going out.
                    Sweetener is some “free money” possible to the partnership.

                    This is not a battle of spreadsheets.

                    • It is a terrible investment
                    • It is product to be sold, not bought
                    • It would/should be a crime to make anyone but it, much less anyone you know
                    • Not only do you personally not want to participate, the partnership should completely disassociate from this program.

                    That message needs to come through loud and clear. Wrapping an annuity with a life insurance product is a bad investment.

                    Very few physicians have a need for an annuity.
                    Term life and an investment plan is much superior.

                    Fact: A group plan will add zero benefit for term life or a taxable account. This plan is a loser.
                    Leave your graph. Don’t say a frigging word.

                    Object strongly and emotionally. That is how to counter an emotional sales pitch. Win the emotional war.

                    If you fight an emotional battle on a point by point basis, each objection will be answered and the salesman will proceed to attempt to close the sale. That is a salesman’s job.

                    Comment


                    • #11
                      I don't like this idea.

                      Your rough excel sheet makes sense to me.

                      As mentioned the tax rates and tax implications are a bit beyond me to calculate with ease.

                      However, the fact that you are paying with after tax dollars (at high marginal rates) and getting a pay OUT with capital gains rates seems like an even bigger issue.

                      Aside from the elegant arguments against the plan as noted above I would lobby for another powerpoint deck showing that your money is getting locked up in the annuity and you don't have the options for direct charity contributions (for RMDs) or sell only the high cost (fund) shares and keep you the big gains for your heirs etc. etc.

                      Make the power point slide about losing options and limiting flexibility for everyone's family/heirs/charity of choice etc.

                      Comment


                      • #12
                        Also, why did you make the yearly payment $19,425 in your table above when you said it was $20,000?
                        the correct amount is $19,425, but it is an estimate of the partner's share of the total planned contribution from the business. Profit and expenses are shared among the partners, but the precise amount varies based on number of partners. The $19,425 is based on the current number of partners, best current data, but could change.

                        So what happens to new partners? Do they pay in the same amounts of $1500 a month 10 years from now? Do the numbers change for them?
                        New partner's would be required to sign in an we were told they would be at the same rate of $1500/month. However, when we asked what would happen if new partner's didn't join while old partners retired. We were told that the company portion/contribution *may* have to increase, the salesmen were vague/evasive about committing to the contributions not changing if the number of partners decreased. I assume the amount that the company would have to contribute would only go up, not down.
                        The company is 100% physician owned, so all the burden falls on the partners.
                        I will be sure to make them explain where the $2,750,000 will come from.

                        Thanks again for your comments!

                        Comment


                        • #13
                          Originally posted by FloridamanMD View Post

                          the correct amount is $19,425, but it is an estimate of the partner's share of the total planned contribution from the business. Profit and expenses are shared among the partners, but the precise amount varies based on number of partners. The $19,425 is based on the current number of partners, best current data, but could change.



                          New partner's would be required to sign in an we were told they would be at the same rate of $1500/month. However, when we asked what would happen if new partner's didn't join while old partners retired. We were told that the company portion/contribution *may* have to increase, the salesmen were vague/evasive about committing to the contributions not changing if the number of partners decreased. I assume the amount that the company would have to contribute would only go up, not down.
                          The company is 100% physician owned, so all the burden falls on the partners.
                          I will be sure to make them explain where the $2,750,000 will come from.

                          Thanks again for your comments!
                          So take a look at the attached spreadsheet. The graphical analysis shows the annualized after tax return based on your years until retirement (at the 25% tax rate). You'd have to create a separate table with another tax rate if you wanted to show something else. Again, I think you get taxed at your marginal ORDINARY tax rate, not capital gains rate. And you shouldn't be taxed on the basis (your after-tax contribution).

                          You can vary the years until retirement based on the colored drop down box and also the tax rate - these are really the only two choices/assumptions that should be changed based on what you've said. This doesn't model out a potential loan for the 2.75M paid out over X years.

                          My take-away: It's not the worst deal in the world, but it's also not the best. It strips away decision rights and alternative uses of the money (and perhaps better uses). It will also have negative effects on hiring. And I would explicitly point out to the group that those closer to retirement are inherently biased to vote "yes" based on their rosy returns while the majority of people will get worse after-tax returns. (If I were a older partner with 4 years to go, I don't think I'd be able to find an investment that beats this on an after-tax basis.)

                          Hope this helps. Let me know if you see any errors or have any questions.
                          Attached Files

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                          • #14
                            I am curious how this would affect buy-in and buy-out values as this is a big liability the group is assuming. Does the group have a CPA or accounting firm that calculates buy-in and buy-out values? If so have them crunch the numbers.

                            Assuming this product is a turkey (insurance company + whole life + annuity= ) maybe the senior partners won't be so eager once they see their buy-out values are markedly reduced.

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                            • #15
                              Originally posted by FloridamanMD View Post

                              the correct amount is $19,425, but it is an estimate of the partner's share of the total planned contribution from the business. Profit and expenses are shared among the partners, but the precise amount varies based on number of partners. The $19,425 is based on the current number of partners, best current data, but could change.



                              New partner's would be required to sign in an we were told they would be at the same rate of $1500/month. However, when we asked what would happen if new partner's didn't join while old partners retired. We were told that the company portion/contribution *may* have to increase, the salesmen were vague/evasive about committing to the contributions not changing if the number of partners decreased. I assume the amount that the company would have to contribute would only go up, not down.
                              The company is 100% physician owned, so all the burden falls on the partners.
                              I will be sure to make them explain where the $2,750,000 will come from.

                              Thanks again for your comments!
                              Does the practice already have a 401k with profit sharing and a Cash Balance plan? Instead of doing this I would consider a Cash Balance plan, as it is a lot better however you look at it, not to mention you don't have to force anyone to participate (you do need 40% coverage, which is easy in a partner-only group). And when doing an illustration, it is possible to ask the actuary to compare this to a CB plan and see what they say. I can't imagine CB plan losing to an annuity, and partners who do want to contribute more will have the ability to do so on their terms (especially the older partners). One big reason CB plans are popular is because they have a lump sum payout and hardly anybody would pick an annuity payout (unless you want to go ahead and buy an annuity on your own, which very few people do, but you can if it is something like SPIA and it is part of your overall strategy).

                              By the way, I've never seen this type of group annuity offered by a practice before, but there are plenty of CB plans, which just means it is a much better choice given the alternatives. It takes a sales job to sell this annuity, but CB plans sell themselves because they work, especially for partner-only practices.

                              This would be a good starting point:

                              https://www.whitecoatinvestor.com/ca...oup-practices/
                              Kon Litovsky, Principal, Litovsky Asset Management | [email protected] | 401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

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