CPAs who do financial planning are frequently asked to help with retirement planning. The technical aspects of retirement planning are fairly straightforward. However, the human side of the problem must also be considered. Sid Mittra, PhD, CFP, professor of finance at Oakland University in Rochester, Michigan, explores some of the key questions planners must ask in helping clients develop an effective retirement plan that realistically meets their future needs.
Planning for any financial goal generally means finding answers to key questions. These answers form the basis for assembling the resources necessary to meet that goal. In planning for retirement, here are some questions that must be answered to ensure the plan being developed will adequately meet all of the retiree's needs:
* How much income will be needed at retirement?
* What rate of inflation should be used in projecting income and expenses?
* How much retirement income is expected?
* How long should retirement income continue?
* Will the family be able to meet any retirement income shortfall?
While these are difficult questions, they must be answered responsibly if the client is to enjoy a comfortable retirement.
Here's a retirement budget for a hypothetical family. John and Betty Burr have been married for 22 years and have two grown children. Betty is a corporate executive and John is a dental technician. Both participate in corporate retirement plans. Betty is 45 and John is 43. They plan to retire in 20 years. RETIREMENT EXPENITURE ANALYSIS
The Burrs'current expenditures are shown in exhibit 1, page 1?A.
The planner's task is to estimate expected expenses during retirement. There are no hard and fast rules for estimating retirement expenses. The accepted rule of thumb is that retirees will spend 70 to 80% of their preretirement expenditure level. This rule may be too rigid and often is misleading because it does not recognize the differences between various categories of expenditures and differences between anticipated postretirement lifestyles.
A better approach to estimating retirement expenditures is to divide fixed and flexible expenditures into several key categories and ask clients to estimate expenses in each category. This approach provides them with an opportunity to fine-tune their retirement income estimates.
Exhibit 1 reveals the Burrs' plan to continue making mortgage payments after retirement; consequently, their housing expenditures remain virtually unchanged.
Another area of interest is entertainment expenditures. Some families may wish to drastically reduce entertainment expenses after retirement, while others may plan to spend a great deal more traveling or developing other expensive hobbies.
After retirement, the Burrs expect to spend a total of $85,100 per year, which is approximately 50% of their current expenditures. RETIREMENT INCOME The Burrs expect to receive annual income of $60, 000 from corporate and noncorporate retirement plans and Social Security.
Social Security $10,200
401(k) Plan 9,200
Social Security benefits can be calculated with the help of a Social Security pamphlet called Estimating Your Social Security Retirement Check. Or, for people age 61 or older, the Social Security Administration will provide an estimate. Employee benefits departments can estimate income from pension, profit sharing and 401(k) plans. Income from IRA and Keogh plans can be calculated by projecting the value of each plan at retirement and using annuity tables to estimate the amount of lifetime income such a sum will provide.
At retirement, the Burrs expect to have annual living expenses of $85,100, but income from retirement plans and Social Security is expected to be only $60,000. …