Your clients may know less about retirement planning than you think

Assess their knowledge of Social Security and longevity before you begin planning.
By Eddie Huffman

A CPA sits down with a client to discuss retirement planning. The CPA thinks they’re on the same page. They’re not.

CPAs sometimes assume clients know more about retirement planning than they actually do. Even when they think they’re in sync with a client, CPAs’ in-depth understanding of complicated issues such as Social Security, tax liability, and living expenses can differ substantially from their clients’ surface-level knowledge. Problems can begin with terminology: Do all of your clients know exactly what you mean when you say “basis point,” “fixed income,” or “Roth IRA”? Are you sure? If they don’t understand financial planning jargon, they’re probably going to have a difficult time comprehending complex financial planning strategies.

To make sure you and your clients are on the same wavelength, start by getting a comprehensive look at their retirement goals and plans, suggested Jean-Luc Bourdon, CPA/PFS, wealth management practitioner and principal with BrightPath Wealth Planning. CPAs should ask clients plenty of questions to get a complete picture of their understanding of retirement issues, he said.

Going beyond terminology, here are additional false assumptions that CPAs often hold about their clients’ knowledge of retirement:

  • That they know when to start taking Social Security. “Social Security is a big area where clients need a lot of help,” said Gina Chironis, CPA/PFS, president and CEO of Clarity Wealth Management. “CPAs may assume people know that it’s a lot better and smarter to wait until age 70 to take Social Security than to take it at 62.” However, she said, “a lot of people will start collecting it right when they become eligible, without looking at the numbers.”

    In reality, “for each year someone waits past full retirement age to claim Social Security, their benefit increases by 8%,” Bourdon said—an excellent fact to share with your clients.

    Divorced clients may also not realize they can sometimes make claims on their ex-spouses’ Social Security, said Dirk Edwards, CPA/PFS, J.D., principal of Edwards Consulting.

  • That they have a good grasp of the amount of money needed for living expenses. Don’t assume your clients understand life expectancy projections and their impact on finances, Bourdon advised. Many people, he said, “think they’re going to live to be 84”—the life expectancy the Social Security Administration predicts for a 65-year-old man. But, as he points out, half the population will live less than the average lifespan, and half will live longer. “If people plan according to life expectancy,” Bourdon said, “it means that 50% of the time their plan will fail. They’ll fall short of expectations.”

    CPAs should also make sure clients look at the consequences of dying younger than expected, Bourdon said: “They also have to plan on having a very short life and see what it will look like for their surviving spouse.”

    Clients also may not be aware that expenses in the early years of retirement are often higher than anticipated. “Spending slightly increases at the beginning of retirement, because suddenly you’ve got time and you’re going out to eat, traveling, and doing all those things you’ve always wanted to do,” Chironis said. “Maybe you’re spending more time with the grandchildren, and of course, you’ve got to buy them goodies. It starts to add up.” CPAs should make sure their clients have taken these different needs into account, she said.

    Finally, make sure clients have adequately planned for end-of-life care. Long-term care, Bourdon said, is a topic that “seems to be tremendously overlooked.” He recommended the federal government’s website as a planning resource. “Most people assume that Medicare is going to cover long-term care, and it does not,” Bourdon said. People also may falsely assume that disease will end their lives relatively early.

    “What used to kill us, now we tend to survive more often: The fight against heart disease and cancer, for example, has made great progress,” Bourdon said. “Due to medical progress and longer life expectancy, right now, according to, 70% of people turning 65 can expect to use some form of long-term care during their lives. When I make the case to clients, I always tell them, ‘Imagine if you had a 70% chance at some point in your life of having some kind of house fire. Would you do without fire insurance?

    CPAs should talk to their clients about insurance that could help avoid devastating costs late in life, Chironis said. Don’t assume clients realize they’re liable for an unlimited 20% Medicare copay unless they buy supplemental health insurance. Long-term-care insurance may also be a good idea, with costs for such care currently averaging about $100,000 per year nationwide, she said. But the insurance itself doesn’t come cheap.

    “It has become very expensive, especially for women,” Chironis said. “The insurance companies figured out that women live a lot longer, so they’re more likely to collect on a long-term-care coverage policy.”

  • That they know how to minimize tax liability. CPAs should not assume clients understand the tax implications of retirement income, said James Shambo, CPA/PFS, who will retire from Lifetime Planning Concepts, his financial planning and investment advisory firm, at the end of 2015.

    “Most people go into retirement not thinking much about taxes, but taxes are a huge issue for various age groups,” Shambo said. “Retirees should look at a 10-year tax plan to encompass ages 60 to 71 and get a feel for what brackets they’re going to be in. Try to make sure your clients are staying in the lowest brackets they can for each year. This allows you to do creative things, like converting from a traditional IRA to a Roth IRA.”

    CPAs should also talk to their clients about their tax liabilities according to the state where they live, Edwards said.

    “We live in Portland,” he said. “Literally right across one of the rivers from us is the state of Washington, and Washington does not have an individual income tax. A lot of folks would say, ‘Well, maybe we should give some consideration to moving across the border.’”

    Residency isn’t the only consideration, however, particularly for retirees who continue doing some work. That can come as a nasty surprise to retirees.

    “The larger states have very aggressive tax policies that can follow your income into that other state,” Edwards said.

Eddie Huffman

Eddie Huffman is a Burlington, N.C.-based freelance writer.


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