Tax Tip of the Week: 5 Years Before and 5 Years After Retirement

As a CPA nearing the end of his time helping with the transition following the sale of his firm, Ted Sarenski finds himself at a crossroads.

"I can't play golf five, six days a week. I've got to have something else to do," he said. "But what's that something else going to be?

"I'm still struggling with that, and I'm sure your clients will be struggling with that as well."

While some may see Sarenski's situation as a good problem to have, it is a problem that can be addressed by a personal financial planner. At AICPA & CIMA ENGAGE 2023 last month, Sarenski and fellow financial advisers Oscar Vives, CPA/PFS, and David Stolz, CPA/PFS, presented "5 Years Before and 5 Years After Retirement."

"In this five-year-before and five-year-after, you should be having a lot more meetings with these clients than you've had maybe for the last 10 or 15 years," Sarenski said.

What should you be accomplishing at those meetings?

Here are five vital topics from the presenters' perspective.

Define what '5 years before' means to your client

Oftentimes when Stolz thought it might be time to begin a client's five-year countdown to retirement, he got a surprise – time after time.

"It used to always puzzle me when you'd say, 'How long do you think you're going to work?'

"'Five more years.'

"Then next year, 'How long do you think you're going to work?'

"Five more years.'"

Sometimes, the client was kicking the can down the road for financial reasons. But often, it was something else.

Often, clients couldn't imagine what they were going to do with themselves once they retired.

Helping clients identify their post-career purpose, be it by referring them to literature, a qualified professional, or simply by having an in-depth conversation, is important for establishing a retirement timeline and also for further establishing the client-adviser relationship.

"We feel more comfortable naturally with a calculator in our hands than we do talking about softy/touchy/feely types of topics," Vives said. "I know this is not a numbers thing, but if we can help our clients find a path in their purpose, then, number one, I think you're going to have a client for life. And, number two, it's just going to be better for everybody."

Work through cash-flow considerations

When deciding when to retire, clients are focused on when they can afford to retire.

That's where a CPA financial planner can make all the difference.

"We've all had conversations with people. 'What do you think you'll spend? How much do you think you'll need?'" Stolz said. "Those numbers tend to be pretty soft.

"I think the trick there is getting to that number and not just taking the number."

Rather than accepting a monthly expenditures number that a client throws out, Stolz said he likes to delve deep into a client's bank account for more accurate answers. During that process, it's important to also allow for "one-time-only expenses," taking note of whether they truly are "one time only" or if they need to be baked into the cash flow equation – things like taking a big trip or buying a new car.

Vives does much the same, with a helping hand from a client's tax return.

"Zeroing in on what this number is, it's critical," he said, "because the No. 1 question we get is, 'Am I going to be OK?'"

Whatever the preferred calculation method, Sarenski said it's also a good time to look for ways to consolidate a client's finances.

"They've got 15 different bank accounts," Sarenski said. "They've got 15 different life insurance policies. They've got investment accounts all over the place."

Consolidation helps arrive at a better estimate of resources for retirement. It also simplifies the picture for the client during a stressful time of transition.

"Once they've retired, we've got the five years beyond retirement that are rather critical because this is the first time they don't have money coming in," Sarenski said. "They now have to see their savings go down. They see their investment account money being withdrawn every month to pay the bills that are going out. It's getting them comfortable with that idea that I'm no longer a saver.

"It's important to be meeting with them regularly to make them comfortable with what's going on."

Have a healthy discussion about insurance

Determining monthly need for retirement isn't as simple as accurately determining monthly need before retirement.

One potential game-changer? Changes to health insurance.

Sarenski laid out a hypothetical example where a couple upon retirement could easily go from having $2,000 to $3,000 in health insurance costs automatically drafted from their paychecks each year to outright sticker shock with Medicare.

"You don't want to have people surprised after the fact," he said. "We've got all of this budget together and suddenly we've got a potential $12,000 to $22,000 cost item that we didn't discuss with them ahead of time?"

The complexity of the health insurance industry, however, also presents opportunities for an adviser to make a sizable difference.

Once a client is eligible for Medicare, strategies that reduce taxable income can help the client avoid Medicare's dreaded income-related monthly adjustment amount – IRMAA for short.

"There's something about those IRMAA adjustments that irritate people, more than other things," Stolz said.

Further, for clients considering retirement before they become eligible for Medicare, reducing taxable income could set them up for greatly reduced insurance premiums from the Affordable Care Act Marketplace until they qualify for Medicare (usually at age 65).

"We can provide a lot of value to our clients in helping them with this transition," Vives said.

Shore up a Social Security plan

An adviser is well-positioned to help a client determine the best age to begin drawing on their Social Security benefits. But Sarenski suggested that the Social Security decision shouldn't always be entirely about the bottom line.

"Is it about winning the Social Security game or is it about enjoying life a little more today?" he asked. "I don't suggest that anyone start earlier than full retirement age (66), but do you start at full retirement age or do you wait until age 70? The software is going to say you are going to be better off financially if you wait until age 70."

But what if, come age 66, you decide to start Social Security in six months?

"You're going to get three-and-a-half years of payments in a time period when you're able to do things," Sarenski said. "You're in good health, you just retired. Maybe you want to travel, maybe you want to go visit the grandkids. You want to do things."

Ask questions to arrive at agreed-upon answers

The Social Security example reflects what the best personal financial planners do for their clients: They take into consideration the raw numbers but also the less black-and-white realties related to retirement, then they discuss the entire picture with their clients.

"It's not about us telling them how to do stuff, but rather having them accept our suggestions and mirroring back their questions in a way that makes them make the decision," Sarenski said. "If they won't own the plan you've put together for them, if they won't believe in it themselves and follow it, then what good was the plan?"

Credit goes to Bryan Strickland with AICPA=CIMA. Published July 17, 2023 in the Journal of Accountancy.
 
Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.
 
This Week’s Author, Ana

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