Retirement Planning: Q&A

Retirement Planning Conversation with Smolin’s Ted Byer CPA,PFS,CFP*, and Joseph Pasquino, CPA

We sat down with Ted and Joseph to discuss some key points surrounding planning for retirement and what Smolin can do to help with that planning. Here is part of that conversation.

Ted Byer:  The most frequent question that I get from my clients is: Am I going to outlive my money? Everybody has that concern no matter how much money they have. Every discussion is led by that. The answer from the client’s perspective normally is: Yes, no, or I don’t know. That is where our expertise comes into play. There may be a range of $40,000 versus $400,000 a year in income. So there is no cookie cutter answer. People also have different levels of risk that they are willing to take in their lives and it is the same with investing for retirement. The client’s age when they come to us for help is also a significant factor in retirement planning. There are different things to do at age 30, versus age 60. For example, we focus on how to help the client as they approach retirement. Are they OK, or should they be doing something different.

Joseph Pasquino: I get a lot of questions about traditional IRAs versus Roth IRAs. There again, the answers seem to lie in the timing of these investments; whether the person is older or younger.

TB: Exactly. For a younger person, let’s say 45 or under, Roth IRAs make all the sense in the world. The client can pay tax now on the money (by not deducting the contribution), then let the funds grow tax free, knowing that no more taxes ever need be paid on these monies. If the client is 45-55 years old, generally speaking, then a comparison should be made of the present value of losing the deduction versus paying the tax in the future. This all depends on what the market is doing, as well. Mathematically, it commonly works out that below 45 years of age, a Roth is generally the way to go; 45-55 take a look at the cost/benefit; over 55, a Roth is usually not appropriate, but can be in the right circumstances.

TB: For those clients who are W-2 employees, they should be maxing out their 401(k) contribution in order to meet the highest limit, assuming they can afford to do so. This all depends on their cash flow situation. They may be buying a house or have other cash needs, which will bring down the amount of their contribution. At a minimum they should max out the employer matching amount. More employers are now doing the ‘safe harbor’ method for the 401(k). Top heavy IRS rules have predicted this change. I would encourage employees to put away the full $18,000 a year (plus $6,000 catch-up for age 50+), if they can.

JP: W-2 employees are limited. Self-employed individuals have a myriad of options other than 401(k)s, and IRAs. There are SEP, KEOGH, and profit sharing plans where someone can put away far more than 401(k)s and IRAs. There are also cash balance retirement plans (previously called defined benefit plans) where one can put away up to $300,000 or more.

JP: As an example, I had a self-employed client who moved his physical plant location in order to save money. While we were doing the yearend tax planning, I asked him if he had considered using some of those cash savings for retirement funding. In turn, we developed a new strategy using some of these retirement tools, and he was thrilled with this new investment opportunity.

TB: That is a really good point. Our clients look to us as both their CPAs and their wealth advisors. Our job is to have the big picture of your financial health. We get to see the big picture of you. We see how your business is operating, and can analyze all the situations that you are in. Not only can we give you the advice, but we can be part of the solution as well.

JP: As a young professional, I have to make sure that I make all the right decisions. I have to make sure I have all the right people involved. The right hand has to know what the left hand is doing. This is what I do for my clients. At least once a year, I like to get all members of the client’s team together in the same room. The team would include the insurance provider, the investment advisors, the estate planners, the client, and me, the CPA. Being in the same room, at the same time provides a tremendous opportunity for everyone to aim at the same retirement goals.

TB: Another consideration for retirement planning is the impact of Social Security. People born before 1953 can do what is called ‘file and suspend’. This allows a spouse to collect the spousal benefit between age 66 and 70, and then use their own retirement benefits from that time forward. Collection of Social Security benefits is actually quite complicated. We utilize experts to help our clients maximize their benefits. What is important to note, is that for someone who is marginally ready for retirement, it is a substantial benefit. Social Security planning should be part of retirement planning. For example, every year you wait to receive benefits, past full retirement age until age 70, your benefit amount increases 8%. That is huge. But there is a downside to this waiting business. You’ve got to live long enough for it to at least break even. So your decision to wait on benefits depends upon your health. If you are in relatively good health, then you should go for it. If you eat a lot of French fries, not so much.

TB: And then there are the older clients with the potential of diminishing mental capabilities. The key is to put in place the necessary provisions while you still have good mental capabilities. Two legal documents that need to be in place are a Medical Directive and a Durable Power of Attorney. The Medical Directive gives your designated person the authority to implement medical procedures as you have directed. The Durable POA handles the financial aspects of your affairs if you are incapacitated. Give copies of these documents to your attorney, accountant, and perhaps your children.

TB: Long term care insurance should also be part of retirement planning. There are a lot of new insurance vehicles out there. LTC insurance has gotten very expensive, however.

JP: I have a client that is a closely-held C Corp, and it has LTC insurance for its key employees. LTC insurance is one of a very few benefits where the company can still discriminate, in IRS terms. So this is a planning tool that can be used to obtain this insurance in an effective manner.

TB: LTC insurance also depends on your overall wealth picture. I have seen people who are really wealthy, then they self insure, and people who are poor, and they use Medicaid. It’s the people in the middle who need to buy LTC insurance. The rule of thumb seems to be: buy it as young as you can and your premiums will be less. There are other options, too. Ask me about the possibilities. I am a client advocate, with their best interest always in mind. I don’t sell any products, so I can look at everything in a subjective manner.

JP: There are also nonmonetary factors to consider, which tend to be very emotional for many people. I’ve been involved with some retirement conversations that have been uncomfortable. I’ve had some clients who don’t want to give up their business yet and don’t want to think about retirement at all. However unpleasant as the idea of retirement may be, it is important to talk to your CPAs about it. For example, a close family member in particular, when they left work, they left their relationships at work. It was very difficult for them to accept retirement, partially because they never really thought about it from that perspective.

TB: Clients don’t like to think about gray hairs, but I’ve got them too, it’s our job to make them think about it. We do help our clients understand the inevitable. For instance: “I am financially well-off enough, but what am I going to do with myself?” We help clients deal with this; that there is life after work. Life does not stop.  An entrepreneur identifies himself as a business owner. Take that away, it is tough to deal with.

TB: So start early. Life is short; in a blink of an eye, you’re old. Talk to more than one person, not just people selling products. Don’t be scared. When in doubt, call me. Our Wealth Management services are here to help.

A Special Note From Jim Cassa, CPA, Trusted Advisor, Cassa Wealth Management:

Cassa_James_-sized.jpgA client should consult with both their trusted advisors when planning for retirement, their CPA as well as their Financial Advisor.

While working in conjunction with the CPA, the Financial Advisor should develop a written financial plan that incorporates both financial planning concepts as well as income tax strategies that will make the plan more tax-efficient. Both professionals have in-depth knowledge of the client’s financial background but have different perspectives in which they view the client’s unique situation.

I often find it beneficial when working with my client’s CPA as they understand how the financial markets work and that their client must take a long-term approach to enable the strategies the Financial Advisor is recommending to take root.

As the client’s advocate, they can work together with the Financial Advisor so the client’s financial plan and investment recommendations are aligned with the client’s goals & objectives, risk tolerance and time horizon. Additionally, they often keep the client on an even keel when markets are extremely volatile and attempt to prevent the client from making rash decisions based upon fear and emotion.

Sound financial planning and good tax advice go hand-in-hand. Therefore, it is encouraged for clients to use a CPA and Financial Advisor who have a previous working relationship and are comfortable working together.

Securities and Advisory services offered through LPL Financial, a registered investment advisor Member FINRA & SIPC. Jim Cassa and LPL Financial are not affiliated with Ted Byer, Joseph Pasquino, and Smolin.