CPA/PFS Perspectives on … Retirement Planning: The Next Phase of Life

As part of the PFP Division’s “CPA/PFS Perspectives” webcast series, the panel discussion, “Retirement Planning: The Next Phase of Life,” was presented on September 20, 2013. Moderator Marc Minker, CPA/PFS, of CBIZ MHM, LLC, led the discussion with panelists Jerry Love, CPA/PFS (Jerry Love CPA, LLC); Ted Sarenski, CPA/PFS (Blue Ocean Strategic Capital, LLC); and Susan Tillery, CPA/PFS (Paraklete Financial, Inc.). Here are the highlights of the presentation; at the end of this article is information on how to obtain the audio recording and presentation materials.

Death, taxes and retirement planning: not always the most popular topics, yet planning for the next phase of life is essential for clients … and productive for CPAs and other practitioners.

Today, good retirement planning is about more than just tax and investment strategies, forecasts, and calculations. It is also about preparing clients for the personal and emotional aspects of “what comes next.” CPAs are well suited to initiate these discussions; if you are not talking to your clients about retirement, chances are they are talking to someone else.

Why the CPA?
There are some very good reasons CPAs should be involved in retirement planning, educating clients, and the decision making process.

In one practice, for example, as many as 75% of clients approach the firm with retirement-oriented questions. Retirees and those nearing retirement must make a number of tax-driven decisions. Some may have a pension; others do not. Some are entering a planned retirement; others have retirement forced upon them. The single most common question is whether the client will have enough money in retirement.

Yet, while most CPAs are comfortable with the numbers side of the conversation, forward-looking advisers are now taking a more holistic view of retirement. This perspective addresses more than the quantitative aspects of asset allocations, withdrawal rates, and estate tax calculations.

CPAs, and particularly those holding the personal financial specialist (PFS) credential, are in a unique position to engage clients in a far broader retirement-oriented conversation—one that can, and often should, address the more qualitative topics of post-retirement lifestyle hopes and expectations.

One firm uses the terms “go-go, go-slow, and no-go” to describe three common stages of retirement. Clients quite often enter the “go-go” phase of early retirement with plans to travel, try new things, or work on a part-time basis. The later “go-slow” and “no-go” phases may be modulated by less robust health and energy, but if planning is successful, not by financial limitations.

A Fundamental Shift
Retirement represents a fundamental shift away from a primary and decades-long focus on earnings and wealth accumulation to a posture of spending and stewardship. To best serve their clients, CPAs and financial professionals must make a similar shift—and prepare themselves to help clients address traditional planning questions and the more personal, quality of life issues of retirement.

That includes guidance on how to handle the emotional adjustments needed to shift from accumulating wealth to drawing down those investments. Many clients have particular difficulties when a portfolio declines below a certain level, or certainly, when market declines affect their net worth.

Advisers should start by asking the right questions. Today’s more advanced modeling systems can be used to project post-retirement income, spending, and balances under virtually any situation—projections that can greatly reduce stress and uncertainty.

Good planning should address the financial and emotional challenges of extreme or unexpected events, such as forced retirement or market downturns. A generally conservative approach to planning—considering worst-possible scenarios, being realistic about living expenses and reserve funds, and discussing potential fallback strategies—can reduce less rational fears and real world risks.

Retirement Risks
Retirement can be a wonderful part of life, but it does pose unique and specific risks. The panelists recognized both the art and science of retirement risk planning—and recommended a broad approach that considers the risk of market fluctuations, inflation, spending expectations, unexpected events on savings, cash flow, and a sustainable standard of living.

Longevity, itself, is a blessing and a challenge. Planners should consider actuarial tables and modeling, as well as a client’s current health and family history to reduce the risk of a financial shortfall. For these reasons, our panelists run their life-expectancy models to age 100 or even 110.

One all-too-common situation, driven by statistical realities, is that when a husband dies first, a widow may be approached for financial assistance by family and friends. Planners can help surviving spouses understand the need to manage their finances carefully, offering guidance when those personal relationships affect long-term financial well-being. If needed, advisers may function as the gatekeeper who provides a diplomatic response to those entreaties.

Not surprisingly, healthcare is seen as a major risk and is a key concern of retirees and those approaching retirement. Financial planners can help clients by talking to them about the implications of chronic or lengthy illnesses; the possibility of long-term care requirements; and the cost and benefits of medical and long-term care insurance, supplemental insurance, health savings accounts, and other strategies.

Investment and Pension Considerations
Our panelists agreed that investment allocations and pension considerations are “where the rubber meets the road” in retirement planning. As a result, they recommend a diverse approach to retirement investments. This includes mixing more conservative fixed investments with some equities to counteract inflation, and perhaps two or three years’ worth of cash reserves to more easily absorb market fluctuations. A well-formulated plan, using asset allocation and risk tolerance models and modern portfolio theory, should not require major adjustments just before or after retirement.

Prudent withdrawal rates are another key concern. Panelists mentioned research and model-based analysis that indicated successful outcomes at withdrawals ranging from 2.5% to the traditional 4%. Market conditions and retirement timing can obviously affect portfolios and withdrawal requirements.

The other side of the coin, income-generating investments, can be a fruitful line of conversation. When clients ask for investment management input, advisers may consider dividend paying stocks, limited partnerships, and other alternatives. Retirees are often bombarded with investment pitches. A trusted CPA can help filter those offers.

For clients with pensions, it is important to understand the available distribution options, including joint and survivor rules that affect payments to retirees during retirement, to their surviving spouses, children, or other beneficiaries after the retirees die. Advisers should educate themselves on the details of single life annuities, joint and survivor rules, pension and Social Security options, cost of living adjustments, and other variables.

Careful planning for pre- and post-tax investments, and the use of multiple pools from which to draw during various stages of retirement, can help reduce tax liabilities during these crucial years. Of course, tax laws will no doubt continue to change, so a flexible and balanced approach with ongoing reviews and consultation is highly recommended.

As clients pass through the initial phase of retirement, and assuming the plan is working and their finances are stable, many gain comfort and are less stressed about money issues. As they reach more advanced ages, their focus may shift toward their beneficiaries and may prefer a more aggressive investment posture.

“Hard” Discussions
Retirement planning may require a number of challenging conversations around topics such as realistic expectations, potential market downturns, and unexpected events. Panelists again stressed the value of using advanced modeling to give clients a realistic view of savings and investments, appropriate levels of retirement spending, and long-term outcomes. Some clients will be afraid to spend money on things they can afford, while others must be educated on the limits of their post-retirement finances.

One dramatic suggestion, embraced by the entire panel, is to ask clients to conduct a “dress rehearsal” of their retirement spending. As they look ahead toward retirement, clients are encouraged to consider all retirement variables, from pensions, Social Security, withdrawals, and earnings, and agree on a monthly amount for post-retirement spending.

When challenged to live off that amount for six months, the reaction can be eye-opening and lead to additional conversations. For example, when many say the amount is simply too little to live on, the planner can use the response to spark a conversation about additional savings, current lifestyle, and long-term expectations.

Given future uncertainties and family dynamics, even the best plan is no guarantee of long-term success. For practitioners, it is advisable to carefully document all client meetings and recommendations. This is actually required in the new Statement on Standards for Personal Financial Planning Services that will be issued in the near future and will be effective July 1, 2014.

Final Thoughts
Most CPAs consider themselves proficient in the technical aspects of their profession, but given the realities of modern retirement, forward-looking practitioners are now embracing a far wider set of disciplines. As we learned during this panel discussion, clients can benefit greatly when advisers take the time to understand their entire financial picture as well as their personal needs and concerns.

CPA/PFS Perspectives Series
“Retirement Planning: The Next Phase of Life” is the latest presentation that is part of “CPA/PFS Perspectives,” a multi-part series of webcasts with previously archived topics on growing your practice, offering investment services, and much more. Watch for information on the January 9, 2014 webcast, “CPA/PFS Perspectives on the Use of Technology in a PFP Practice.”  Access the CPA/PFS Perspectives Web page for a complete listing of all sessions, including a link to the audio recording and presentation materials for the retirement planning panel discussion.

Other Resources on Retirement Planning
The 2014 Advanced PFP Conference has a Retirement/Elder Planning track that covers many retirement topics, such as Conversations on the Edge of Retirement with Jim Shambo and Bob Veres, Physical and Mental aspects of Aging: Impact on Retirement and Planning, and Guide to Retirement: Separating Fact from Myth. The conference will be held January 20-22, at the Aria Resort and Casino in Las Vegas, Nevada. PFP Section Members, inclusive of PFS Credential holders, and Tax Section members can save an additional $100 on the registration fee. An early bird discount of an additional $75 off the registration fee expires December 6, 2013. For registration information and to download a PDF brochure, visit the conference website. Don’t delay—register today.

PFP Section members, inclusive of CPA/PFS credential holders, have access to many retirement planning related resources.  The CPA’s Guide to Social Security Planning and The CPA’s Guide to Financing Retirement Healthcare give practical examples in these complex areas. The Retirement Planning Resource page includes these guides as well as information on Roth IRA conversions, safe withdrawal rates, long-term care planning, and more.  Forefield Advisor provides clear and concise consumer-oriented materials on many of these topics with special resource centers for Social Security and healthcare reform.