Confronting Retirement

Planning your nest egg shouldn’t be painful.


  • ALTHOUGH MOST CPAs HAVE their own personal retirement accounts, a surprising number of practitioners don’t have formal retirement plans for their businesses.
  • AS RETIREMENT PLANS ARE DEVELOPED, senior partners may have doubts about whether their successors can honor future obligations, intend to stay with the firm or have what it takes to keep the firm running. With such concerns, it’s no wonder many partners prefer to ignore the retirement issue altogether.
  • UNFUNDED PLANS ARE BASED ON trust and goodwill and are unique to professional firms. Each generation of partners pays for the retirement of the previous generation, according to a valuation formula included in a partnership agreement. These plans enable partners to maximize their current income and give partners control over their own investments.
  • A FUNDED RETIREMENT PLAN is the type that most CPAs prepare for their clients. You pay in over time and when you retire you take the money out, along with whatever earnings and appreciation your money has earned.
  • A FUNDED PLAN OFFERS partners real security.
  • BEFORE ADOPTING ANY PLAN, ask and answer a few tough questions:
    • Would you allow your liability to build for any business you consult without funding for the amount?
    • What kind of pressure will your retirement obligations put on the firm 5 or 10 years from now? How will it affect your take-home pay?
  • RETIREMENT PLANNING IS AN ISSUE that just won’t go away. If you haven’t dealt with it yet, call your partners and set up a meeting soon.
ELIZABETH DANZIGER is the president of WorkTalk, a West Los Angeles-based company offering writing training and consulting services to financial professionals. She is the author of three books and numerous magazine articles. She can be reached by e-mail at .

hy is it that “one father can support 10 sons but 10 sons cannot support one father”? This old proverb has returned to haunt senior partners who think their retirement may not be fully funded. Although most practitioners have personal retirement accounts, believe it or not, a surprisingly large number don’t have formal retirement plans for their businesses. “‘Do as I say, not as I do,’ is the credo,” says Neal J. Harte, a partner of Harte, Carucci & Driscoll in Woburn, Massachusetts. “Partnerships aren’t doing for their own businesses what they tell their clients to do.”

Retirement Is Everyone’s Issue

According to a survey of 1595 CPA firms, 719 (45%) have at least one partner who will retire within the next five years, and 1093 (69%)
have at least one partner who will retire within 6 to 10 years.

Source: PCPS, the AICPA alliance for CPA firms.

Not having a retirement plan may be downright foolish, nonetheless it is the plan at many accounting firms. Some simply expect partners to generate their own retirement income. Others procrastinate, only to find that putting off retirement planning has been like putting off getting your teeth cleaned. You avoid an unpleasant experience at the moment, but it may cost you dearly down the road.

“Emotions run high,” says Marc Rosenberg, a Chicago-based consultant to the accounting profession. “Partners get anxious when they discuss retirement, and the potential for acrimony is substantial. Of course, sooner or later, the issue must surface.”


“Will you still need me, will you still feed me, when I’m 64?” asked the Beatles. These kinds of questions are at the center of the table as partners hash out retirement issues. As plans are developed, senior partners may have doubts about whether their successors can honor future obligations or intend to stay with the firm for the rest of their careers. Some retirees ask themselves if the new generation of CPAs has what it takes to keep their firms going.

Given all this, it’s no wonder many partners have found it easier to ignore the retirement issue altogether. “Partners who believe retirement discussions provoke hard feelings prefer to keep tabling the issue indefinitely,” says Dick Kretz, partner of Kostin, Ruffkess & Co. in West Hartford, Connecticut.

Eventually, senior partners will reach retirement age and, at the very least, want to cash out their ownership in a firm. That’s the point at which firms without retirement plans sometimes are split up or sold to consolidators. Bill Balhoff, partner of Postlethwaite & Netterville in Baton Rouge, Louisiana, says, “The longer you spend not dealing with retirement, the more your unfunded debt builds up.” Clearly, denial is very costly.


There are two categories of retirement plans: unfunded plans, which have potentially enormous hidden costs, and funded retirement plans, which cost accounting firms money up front.

Unfunded plans are predicated on trust and goodwill among the partners and are unique to professional firms. Each generation of partners pays for the retirement of the previous generation, based on a valuation formula included in the partnership agreement. A partner’s ultimate payout depends on the value of the firm at the time he or she retires and generally is spread out over a period of 10 years.

“A reasonably profitable CPA firm can be sold fairly easily for one times the firm’s annual fees or slightly more,” says Rosenberg. “With unfunded plans, retiring partners cash in their share of this value by receiving payments after they retire.”

According to Jonathan A. Karp, CPA, JD, of Reish and Luftman, a law firm in Los Angeles, valuations also can be created using a formula based on a partner’s salary or profit-share distribution.

Good News. The three main advantages of unfunded plans are

  • They offer potentially high returns. If a partner’s firm has a high valuation when he or she retires, the retiree can reap the fruits of a lifetime of effort by cashing out and allowing younger partners to make payments. There is satisfaction in the passing-the-baton tradition, too.

  • They enable partners to maximize preretirement income. A partner can take home more pay if he or she doesn’t have to set aside funds for retirement. “Thirty-somethings may be in favor of unfunded plans because they aren’t thinking much about the future and they have high expenses now,” says Kate Nutter of Davis Kinard in Abilene, Texas.

  • They give partners maximum control over their own investments. Many accountants feel they will get a better return on their investments by managing their own funds.

Bad news. The key disadvantage of unfunded retirement plans is that, for one reason or another, the money may not be there when partners retire. Younger partners may balk at the prospect of having to pay for senior partners’ retirement, or they may leave the firm and take clients with them, putting the firm in a precarious financial situation.

Another problem may occur when retirement funds are calculated based on the firm’s gross proceeds rather than its profitability. The younger partners of a southeastern regional CPA firm found the painful error in their deal a few years ago. The value of the firm was keyed to a standard formula of one times gross billings. As some senior partners had approached retirement, they had focused less on profitability and more on building the firm’s value by merging with three smaller local firms. They retired based on the combined gross income, with the result that the retired partners were earning more than the partners who were working. The firm had to go through wrenching downsizing. The firm survived, but “it’s not what it used to be,” says a CPA familiar with the business. While this situation had its own peculiarities, it is a cautionary tale for all CPA firms with unfunded plans.

Critics of unfunded plans maintain that it is unwise to base one’s retirement on a plan that has no current assets. Some say that an unfunded plan has unsettling similarities to a classic pyramid scheme: As long as a firm keeps increasing in value, the stability of the unfunded plan increases. And as long as younger partners are willing and able to generate the funds to buy retirees out, a retiring partner is in good shape.

But what if the economy takes a dip in the few years before a senior partner retires? What if junior partners turn out to be less committed or less capable than founding partners have been? The unfunded plan maximizes strong economic potential but leaves the retiree unprotected on the downside. This is why some practitioners jokingly refer to such plans as “the unfunded chain letter.”

Perhaps the greatest drawback to the unfunded plan is that it can easily lead to the demise of an entire firm. Firms have been sold to consolidators to pay debts incurred by buying a retiring partner’s equity. As Balhoff says, “Go ahead and sell your practice if it makes business sense. But don’t do it because you were forced to sell to meet your debt.”

Jim Koepke, director at Doeren Mayhew in Troy, Michigan, says, “I would not advise a person in an unfunded plan to base his or her retirement on the proceeds from that plan. They should see it as an extra and realize that they’d better be making their own plans on the side.”


A funded retirement plan is the type that most CPAs prepare for their clients. The structure may vary, but the concept of these plans is the same: Participants pay in over time and when they retire they take the money out, along with whatever earnings and appreciation the money has earned.

For retiring partners the biggest advantage of a funded plan is that the money is there. It doesn’t have to be earned. It’s secure. As the accounting profession changes—and younger partners balk more at the prospect of paying for senior partners’ retirements—funded plans are becoming more common. In fact, most prudent larger firms now use some type of funded plan. Whether these plans are qualified or unqualified, they still provide a level of retirement security for everyone concerned. Contributions to qualified plans are made from pre-tax income; distributions from qualified plans are taxed at the prevailing income tax rate at the time of distribution.

A funded retirement plan has the additional advantage of being a powerful tool for recruiting and keeping staff. “We look at a pension plan the same way we look at medical or liability insurance,” says Harte. “We have relatively low turnover because of our benefits.” Nutter points out, “How can you hope to attract the best young talent without a funded plan using a 401(k) and matching employer contribution?” The idea of providing retirement benefits to staff members below partner level might be anathema to some partners; however, it’s what the most-talented CPAs expect from firms today.

According to Jeff P. McClanathan, partner of Gregory Sharer and Stuart, in St. Petersburg, Florida, CPAs tend to look at the funding for the rank and file as a cost rather than a stabilizing employee incentive. “They don’t understand that manpower is intellectual capital and must be courted with benefits such as flexible hours, vacations, health insurance and pensions.”

Although funded plans offer long-term security, they may do so at the cost of forgoing some of your current income. CPAs who opt for a company-funded plan in lieu of a buyout may miss out on the gains from a firm that increased in value over time. An ERISA requirement to offer a funded plan to all eligible employees also discourages some firms from establishing funded plans. However, according to Karp, “Beginning this year, there may be an opportunity to design a qualified plan under ERISA without having to include everyone in the firm.” CPAs should discuss this with their attorneys before they decide that regulatory hurdles to a funded plan are too high.

Firms that have one form of retirement plan but want the other may find the cost inordinately high. For example, a firm switching to a funded plan from an unfunded plan may have to grandfather in the predecessors’ unfunded retirement while contributing to a new, funded plan for its staff. The prospect of this double obligation often discourages CPAs from making the switch.


Still undecided about whether a funded or unfunded plan is right for your firm? Grapple with the issues now; don’t wait until you have no options.

Before adopting any plan get answers to a few tough questions:

  • Would you allow your liability to build for any business you consult without funding for the amount?

  • What pressure will retirement obligations put on the firm 5 or 10 years from now? How will it affect take-home pay?

  • What would the firm advise a client to do in the same situation?

  • If the firm instead were a larger company, what kind of pension plan would the employees expect?

  • Is the firm attracting the new talent it needs? Has it lost any strong applicants or promising staff people because there’s no retirement plan?

  • Setting aside personal desires, what is the right strategy for the long-term health of the business?


Now what do you do? Whom do you call? The first person you probably should contact is a CPA who specializes in retirement planning. Of course, you may not want to do that. “In almost any other area, we’re willing to pay someone to take care of tasks for us,” says Harte. “If you need a new roof, you call a roofer. But it feels strange to call a CPA and ask for help. The thing is, if we’re not going to do it ourselves we ought to get someone knowledgeable to do it for us.”

If you don’t want to start by talking with a fellow CPA, contact an attorney or a consultant who specializes in CPA-firm retirement planning. “Retaining an attorney who also has a background in accounting ensures that you get the benefits of both professions,” says Karp. “Also call friends at other firms in your city. Ask them how they have dealt with their own retirement issues.”

In the end, the unfunded-vs.-funded dichotomy may be a generational issue. Proponents of unfunded plans have been in the profession long enough to remember paying their obligations to the previous generation of CPAs. They paid their dues, and they’d like their successors to pay theirs, too.

Cheerleaders for funded plans focus on firmwide retirement plans as an important element of staff retention and employee benefits. They prefer a fully funded plan to the risk and uncertainties of an unfunded plan. Fortunately, it’s not an all-or-nothing choice. However—like death and taxes—retirement planning is one of those issues that just won’t go away no matter how much you want it to. If your firm hasn’t dealt with it yet, call your partners and set up a meeting soon. Retirement is the pot of gold at the end of your rainbow. Do what you can to ensure it is full to the brim when you reach it.


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