As an accountant, you most likely have clients who are looking toward retirement soon. They are headed toward dynamic lifestyle changes after years of working. As their accountant, you can be of invaluable assistance by offering income tax planning, information on healthcare coverage, along with your experience with retired clients' record keeping and possibly even housing options. Your client will be very interested to learn how much retirement is going to cost and how you can help them minimize those costs. Here are strategies to consider with your pre-retiree clients:
Basic tips for clients thinking about retirement
Whether they’re months or decades from retirement, some clients are bound to seek your advice on getting prepared. Since you already know their retirement contributions, you have direct insight into their financial and retirement situation. While you may not want to take on a true financial planner role, you can always offer these basic tips:
Start early
Notice that your younger clients haven’t begun retirement contributions? Let them know about the benefits of compound interest over time and encourage them to start as soon as possible.
Consider paying off debts first
As beneficial as it is to start saving early, it might make more sense for your clients to pay off high-interest debts first. The earned interest from their retirement savings could be far less than the money they’d save by paying off debt early.
Contribute 10-15% or more
Most experts agree that contributing 10-15% of your monthly income is a great place to start if you hope to maintain your current lifestyle in retirement. However, clients who are older and haven’t contributed enough may need to play catch up and contribute more to meet their retirement goals. In this case, they may need to see a financial planner for more targeted advice.
Match employer contributions
Even if contributing 10% is out of reach right now, encourage your clients to at least contribute the amount their employer is willing to match. They’re missing out on free money if they don’t!
Learn the most common types of retirement accounts
Encourage your clients to stick to low-risk investments for retirements like 401ks and IRAs. Mutual funds can be another great addition to a savings portfolio since they are diversified and therefore less risky than investing in a single stock.
If your clients are after more specific investment advice, you may want to refer them to a certified financial planner (CFP) who can help them set up accounts and savings goals. (The CFP is likely to repay the referral when their clients need tax help!) Some tax preparers even add financial planning to their services to diversify their income and make money year-round.
Before collecting Social Security: Help your clients lessen their tax brackets in retirement by timing ROTH IRA conversions or traditional IRA withdrawals to fully use lower tax brackets each year from ages 60 to 71.
When transitioning from employer-sponsored health coverage to retirement health coverage: Your clients must consider COBRA along with Medicare and Medicare supplemental policies so they can avoid gaps in coverage. Help them do this by offering them education and guidance. Also, understand that Medicare supplemental policies do not consider COBRA as creditable coverage, so make sure you consult with a qualified professional that specializes in Medicare and Medicare supplemental policies whenever your clients have COBRA or are continuing work with an employer or union coverage after age 65.
When using inherited IRAs: Since inherited IRAs are no longer protected under federal bankruptcy rules, one alternative to providing cash flow before age 59 ½ is to use the “substantially equal payments exceptions" of IRC 72(t) for spousal rollovers. This takes careful planning on your part to ensure your client makes withdrawals for at least five years after the first payment and until after the employee attains age 59 ½.
Long-Term Recordkeeping
Long-term record keeping is a must if your client is going to avoid or reduce income tax and IRS nightmares. The key is transparency and accountability. No matter what it is – a legal document, birth or marriage certificates, passports, driver’s licenses, childhood health records of immunizations and illnesses, Social Security cards, voter registration cards, or credit cards – scan and back up all of them. Remember to rescan these items as documents change or are updated.
If the client owned real estate, make sure they retain the closing statements and records of all improvements made for at least five years after their property is disposed of; this enables them to have a record of the cost basis if the IRS or state authorities come calling.
Keep an Excel or spreadsheet file on home improvements in order to report property gains when a home is sold. Update it periodically so that recreating the cost of owning the property for 40 years is possible. Document property received in a divorce, making sure each asset or investment is assigned with the cost basis accounted for. Consider a one-page summary of all life insurance, disability, and long-term care policies still in force showing all contact information of agents, carriers, and the level of coverage provided.
Housing Considerations
Adding a second home or relocating to a different part of the country is very common in retirement. Since housing is generally the biggest cost for a retiree, look at the cost of your clients’ real estate taxes and utilities if they are relocating. Here are some factors to consider with regard to housing:
- Renting: In retirement, it’s not unusual for clients to make rash decisions without thinking things through. For example, some may buy a home, but may not be able to keep up with the emotional toll of living away from friends and family, not to mention the comfortable environment they once called home. As a result, renting may be the best move to see how your clients like the change of scenery and accommodations before advising them to fully commit to buying.
- Buying: On the other hand, buying a new home can decrease the size of your clients’ empty nest, and avoid the rising maintenance costs associated with an aging home.
- Income and estate taxes: In a move, check out all local and state taxes first, as income taxes can greatly lower cash flow during retirement, while legacies will be affected by the high estate or inheritance taxes at the local or state level.
Be an Advocate for Your Clients
The advice above will help you be an advocate for your clients. Keep clients informed, educated, and ready for all the ups and downs of pre-retirement so that they can best enjoy their lives after retirement.
Resources:
https://www.taxslayerpro.com/blog/post/helping-your-clients-prepare-for-retirement
https://www.journalofaccountancy.com/topics/personal-financial-planning/retirement-planning.html
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