From Tax Preparer to Financial Planner: The Road Best Traveled

Transcription

1 From Tax Preparer to Financial Planner: The Road Best Traveled Step 2: Moving from Tax Planning to Integrated Financial Planning for Individuals, Families and Business Owners The Practical Side of Retirement Planning

2 Personal Financial Planning Section #AICPApfp 2 About the Series Build your financial planning knowledge with this learning series and discover the necessary steps to transition from tax preparer to personal financial planner. Step 1 Understanding the Value of Personal Financial Planning Step 2 Moving from Tax Planning to Integrated Financial Planning for Individuals, Families and Business Owners Step 3 Implementing PFP Services: A Plan for Success Learn more at aicpa.org/pfp/taxtopfp.

3 Personal Financial Planning Section #AICPApfp 3 About the PFP Section & PFS Credential The AICPA Personal Financial Planning (PFP) Section is the premier provider of information, tools, advocacy and guidance for CPAs who specialize in providing estate, tax, retirement, risk management and/or investment planning advice to individuals, families and business owners. (Learn more at aicpa.org/pfp.) The Personal Financial Specialist (PFS) program allows CPAs to gain and demonstrate competence and confidence in providing estate, tax, retirement, risk management and/or investment planning advice to individuals, families and business owners through experience, education, examination, and a resulting credential. (Learn more at aicpa.org/pfs.)

4 A CPA Financial Planner is a Trusted Advisor Who Operates at the highest professional level when delivering PFP services to clients, acting in the clients best interest. Adheres to high standards as required by the Code of Professional Conduct and the Statement on Standards in PFP Services through the application of objectivity, integrity, due care and competence required by CPAs. Is regulated by state boards of accountancy. Integrates advanced planning concepts, including tax and business considerations, with the entire financial plan. Personal Financial Planning Section #AICPApfp 4

5 Agenda Overview: Expand Your Financial Planning Practice through Your Client s Tax Return The Practical Side of Investment Planning The Practical Side of Estate Planning The Practical Side of Retirement Planning The Practical Side of Risk Management & Insurance Planning Comprehensive Personal Financial Planning Case Study Personal Financial Planning Section #AICPApfp 5

6 Earning CPE Disable all pop up blockers Any answer counts towards CPE credit Earn credit by responding to 75% of these the pop-ups Click the orange CPE button at the end of this webcast Disregard CPE information if you are viewing an archive without CPE. Personal Financial Planning Section #AICPApfp 6

7 Personal Financial Planning Section #AICPApfp 7 More Helpful Hints Adjust your volume Be sure your computer s sound is turned on as well. Click this blue button. Slide the control to the left or right to fit your needs. Ask your questions Feel free to submit content related questions to the speaker by clicking this red button. Someone is available to assist with your technology and CPE related questions as well. Download your materials Access today s slides and learning materials by clicking this green Resources button at any time during this presentation If you need help accessing these materials send a message through the Q&A application

8 Speakers Ted Sarenski, CPA/PFS, CFP, AEP Blue Ocean Strategic Capital, LLC Scott Sprinkle, CPA/PFS, CGMA, CFP Sprinkle & Associates LLC Sprinkle Financial Consultants LLC Steve G. Siegel, JD, LLM The Siegel Group Personal Financial Planning Section #AICPApfp 8

9 Learning Objectives What can one expect from Social Security What is a sustainable withdrawal rate in retirement What does the new retirement look like What health insurance options are available in retirement Personal Financial Planning Section #AICPApfp 9

10 How do you get them from this? Personal Financial Planning Section #AICPApfp 10

11 To this? Personal Financial Planning Section #AICPApfp 11

12 Personal Financial Planning Section #AICPApfp 12 Retirements Three Legged Stool Retirement After-tax Savings SS Retirement Plan Savings

13 Personal Financial Planning Section #AICPApfp 13 Social Security A type of annuity Current full retirement age (FRA) is 66. FRA will raise 2 months for every birth year from 1955 to 1960, ending at age 67 Anyone can start at age 62 with a reduced benefit Working and collecting benefits

14 Social Security Personal Financial Planning Section #AICPApfp 14

15 Personal Financial Planning Section #AICPApfp 15 Social Security Divorce issues Potential income tax on benefits Spousal benefits Disability benefits Survivor benefits

16 Social Security 50% 85% Single or Head-of-Household taxpayer $25,000 $34,000 Married Filing Joint taxpayer $32,000 $44,000 Married Filing Separate taxpayer has a zero threshold for Taxation of Social Security benefits Personal Financial Planning Section #AICPApfp 16

17 Personal Financial Planning Section #AICPApfp 17 Pension Plans Why have a pension plan today if there are going to potentially be higher income tax rates in the future? Save income tax today by reducing employment income 100% of funds will be invested and earning interest, dividends and appreciation as opposed to 55 to 75 percent of the funds if invested after-tax Similar to an annuity where the investment earnings are protected until withdrawn. The longer the time frame the funds enjoy the tax deferred environment the better the benefit will be

18 Retirement Plans Types of plans you might suggest to your clients Defined benefit plan yes, they are not extinct! Defined contribution plans / cash balance plans 401(k) Money purchase Target benefit SEP (Simplified Employee Pension) SIMPLE IRA (Savings Incentive Match Plan for Employees) IRA Roth IRA Key question: How much can your client reasonably expect to contribute to their retirement over the next 5-10 years? Personal Financial Planning Section #AICPApfp 18

19 Personal Financial Planning Section #AICPApfp 19 After-Tax Savings Why should someone have after-tax savings? Emergency fund Avoid short-term borrowing Validates that you are living within your means Capital gains tax rate rather than ordinary income tax rate Flexibility in retirement

20 After-Tax Savings How much after-tax savings should someone have? Emergency fund should equal 6 to 9 months of current, regular expenses cash and cash equivalents Enough other cash to cover anticipated regular and larger expenses Monthly credit card balances Automobile purchases Home repairs Remaining after-tax savings can be invested more long-term to take advantage of capital gain tax rates Compute the amount you will need in retirement to supplement Social Security and pre-tax savings Personal Financial Planning Section #AICPApfp 20

21 Personal Financial Planning Section #AICPApfp 21 After-Tax Savings Computation of after-tax savings needed to supplement Social Security and pre-tax pension contributions You can use retirement planning software, and, if you are going to be a planner, you should. For a quick calculation, you can use the following rule of thumb calculation. We will be discussing safe withdraw rates immediately following this section

22 After-tax Savings Let s assume the following facts: The retirement budget needed is $80,000 per year (we will ignore inflation for now) Social Security will provide $2,250 per month at age 66 The client will live to be 95 (30 years of retirement) The client is currently 55 The client currently has $340,000 saved in a 401(k) plan and is adding $17,500 per year plus the $5,500 catch up provision and his cheap employer is not matching at all Personal Financial Planning Section #AICPApfp 22

23 After-tax Savings Calculation Amount needed $80,000 $2,250 X 12 months = ($27,000) $23,000 X 11 years = $253,000 plus current balance $340,000 equals $593,000 times.04 (4 percent) = ($23,720) Still needed to meet cash flow $29,280 $29,280 X 20 (inverse of 4%) = $585,600 The client will need $585,600 of after-tax savings to enjoy 30 years of retirement spending $80,000 per year Beware assumes no inflation and no earnings on moneys invested over initial 11 years (age 55-66) Personal Financial Planning Section #AICPApfp 23

24 Personal Financial Planning Section #AICPApfp 24 Sustainable Withdrawal Rates As you near retirement, what can you safely withdraw from your savings and 401(k) plan to assure that it will last the rest of your life; a minimum of 30 years Or put another way if I want to spend $XXX, how much money do I need in my accounts to safely retire?

25 Sustainable Withdrawal Rates Challenges of safe withdraw rates: Stock and Bond Market volatility What is the Optimal Portfolio Allocation to survive Volatility? How high of a withdraw rate would have survived any historical market scenario? Sensitivity to the date of retirement (timing) Portfolio changes to manage risk Fees and taxes Personal Financial Planning Section #AICPApfp 25

26 Sustainable Withdrawal Rates According to a study performed by Michael Kitces, Director of Research at Pinnacle Advisory Group, the following facts are presented: Using rolling 30 year periods from 1868 to 1980, the safe withdraw rate ranges from a low of 4.3% to a high of 10.7% with the 112 year average of 6.6% The safe withdraw rate is heavily influenced by early returns Valuation environments are predictive of safe withdraw rates Volatility necessitates a 2% reduction from historical averages Taxes and fees necessitates an additional.5% reduction Personal Financial Planning Section #AICPApfp 26

27 Sustainable Withdrawal Rates In summary: The optimal portfolio mix is 60% equity/40% fixed The base safe withdraw rate is 4 4 1/2 % Adjust the safe withdraw rate on current P/E ratios P/E above 20.0 use base rate P/E between 12.0 and 20.0 increase the base by.5% P/E below 12.0 increase the base by 1% Personal Financial Planning Section #AICPApfp 27

28 Tax Planning The new Medicare taxes that are part of the Health Care Reform law are in effect 3.8% Medicare surtax on net investment income of high income individuals (MAGI > $200K single, $250K MFJ, $125K MFS) 0.9% increase in Medicare payroll tax for high earners What planning can you do to preserve more assets for the individual for their retirement needs? Personal Financial Planning Section #AICPApfp 28

29 Tax Planning Harvest gains Last quarter of the year Not affected by the 30-day wash sale rule Compensation and benefit issues Exercise stock options Pay bonuses before year end Deferred comp elections Roth conversions Income acceleration Cash basis taxpayers accelerate billings and revenues Accrue bond interest Accelerate installment payments Personal Financial Planning Section #AICPApfp 29

30 Tax Planning Other planning ideas Re-allocation of investment portfolio based on tax changes (qualified money versus non-qualified money) AGI planning to effectively manage the 3.8% net investment income tax Accelerate itemized deductions (limitation on itemized deductions is back in effect for high income taxpayers) Evaluate debt of clients (possible refinance) Alternative Minimum Tax (AMT) Personal Financial Planning Section #AICPApfp 30

31 Health Insurance Options How to insure if you are retiring before age 65 COBRA Part-time work for health insurance benefits Hardship 2014 Required health insurance or penalty Long-term care insurance and the new elder planning Medicare eligible still at age 65 How we die matters to retirement planning Need to budget at least $250,000 at age 65 for rest of life Personal Financial Planning Section #AICPApfp 31

32 Health Insurance Options Medicare Part A Hospital coverage Mandatory; no premium with sufficient work history Part B Medical coverage Part D Prescription drug coverage Private insurance companies offer many plans Initial and annual election (October 15 December 7) Important to re-evaluate plan every year Parts B and D are voluntary; monthly premium tied to income If you do not initially join B and/or D, you may end up paying a penalty if you elect to join later Personal Financial Planning Section #AICPApfp 32

33 Health Insurance Options Medicare Supplemental Policies (Medigap) Offered through private insurance companies Covers gaps in original Medicare NOT required to purchase a Medigap policy Different types of policies are offered Standardized and assigned a letter (A through N offered now) to reduce confusion The same plan letter (Plan E for example) will have no coverage differences regardless of the carrier The difference comes in price and level of service Foreign Travel Emergency Coverage is available in Plans C,D, F, G, M and N Personal Financial Planning Section #AICPApfp 33

34 The New Retirement Many Boomers are being faced with downsizing or layoffs at a time in their lives that make it difficult to find new employment in their field of expertise In forced early retirement: Early withdrawals from pensions or IRAs What to do with life insurance Equity in residence or home equity loans Personal Financial Planning Section #AICPApfp 34

35 The New Retirement In retirement by design: Health insurance Where will you live Roth Conversions Inherited IRAs Spousal rollovers RMDs Personal Financial Planning Section #AICPApfp 35

36 The New Retirement What will you do in retirement? Hobbies Work Volunteer Teach Mentor Relax Personal Financial Planning Section #AICPApfp 36

37 Personal Financial Planning Section #AICPApfp 37 Why Do Retirement Planning for Your Clients? You want your retiring clients to end up like this NOT this!

38 Personal Financial Planning Section #AICPApfp 38 Questions?

39 AICPA PFP Section Member Resources PFP Section members, inclusive of CPA/PFS credential holders, have access to resources on the latest planning strategies and trends in personal financial planning services so that they can practice competently and profitably. Visit aicpa.org/pfp/resources. Estate Tax Retirement Investment Insurance & Risk Management Practice Management Legislative/ Regulatory Professional Responsibilities Consumer Content Personal Financial Planning Section #AICPApfp 39

40 Resources to Transition from Tax to PFP aicpa.org/pfp/pathway PFP Practice Center: a guide to adding or expanding PFP services in your practice Whitepapers and guides, including Roadmap to Developing and Managing a CPA PFP Practice Checklists, including Analysis of a Tax Return for Personal Financial Planning and Personal Financial Outlook Member communications Financial Planning Digest (twice a week digest summarizing PFP news, trends, legislation & more) PFP News (weekly e-newsletter featuring member-exclusive resources, news & events) Bob Veres Inside Information newsletter, e-columns & media reviews ($349 value for FREE) Forefield Advisor ($469 value for FREE) Client education and communication tool Written by CPAs, attorneys and other subject matter experts More than 3,000 resources covering personal financial planning, including estate, tax, retirement, investment and risk management planning Visit joinpfp.org to become a member Personal Financial Planning Section #AICPApfp 40

41 Related Resources for PFP/PFS Members Retirement Planning (aicpa.org/pfp/retirement) The CPA s Guide to Social Security Planning The CPA s Guide to Financing Retirement Healthcare The CPA s Guide to Financial & Estate Planning Guidance on Roth Conversions Resources on Safe Withdrawal Rates Long Term Care Resources Listing of Retirement Learning Opportunities Personal Financial Planning Section #AICPApfp 41

42 PFP Learning Opportunities AICPA Conferences Advanced PFP Conference (January) Tax Strategies for High Income Individuals (May) Advanced Estate Planning Conference (July) Sophisticated Tax Planning for Your Wealthy Clients Conference (November) Webcasts and podcasts led by experts from around the country Personal Financial Planning Section #AICPApfp 42

43 CPA/PFS News and Events PFS Exam Register for Summer or Winter window Discounts, sponsorships and volume pricing available Education Opportunities In-depth courses in estate, retirement, tax, investments, insurance, and PFP process In-person and online PFP Boot Camp Self-study PFS exam review course Learn more at aicpa.org/pfs Personal Financial Planning Section #AICPApfp 43