Magazine article The CPA Journal

PFP | Financial & Retirement Planning for Sole Practitioners

Magazine article The CPA Journal

PFP | Financial & Retirement Planning for Sole Practitioners

Article excerpt

Many CPAs are knowledgeable about financial planning, and they do an excellent job advising their clients. When planning for themselves, however, problems arise because many just do not get around to it. There is no urgency, no accountability except to their family (who usually assume it has been taken care of), and without appointments for meetings with a financial planner, there is no due date by which to get things in order. Partners or sole practitioners who have not made these preparations should consider this article a wake-up call.

The Purpose of Being in Business

The purpose of being in a sole practice or a partnership is to provide a needed service at an appropriate fee, while making a reasonable living and providing for a secure retirement at the time of your choosing. The operative statement here is "providing for a secure retirement at the time of your choosing." Failure to accomplish this could be viewed as a failure in operating the practice. CPAs who do not want to work until their death should give serious consideration to accumulating sufficient wealth to meet their projected cash flow needs when retired. The following sources are the most likely to do so and thus should not be neglected.

Seven Sources of Future Financial Security and Cash Flow

Social Security.

This is the statutory income that can be expected. There are strategies to maximize this cash flow source for the balance of one's life, but, on some basis, these payments will not be sufficient by themself to provide for a secure retirement.

Tax-sheltered and tax-deferred savings.

These include 40i(k) accounts, traditional and Roth IRAs, simplified employee pension (SEP) plans, savings incentive match plans for employees individual retirement account (SIMPLE IRA), annuities, and insurance policies. Pensions are usually nonexistent for those working in accounting firms, so these are not considered. For other plans, it would be irresponsible to not contribute to the maximum extent possible. Even if it would be too costly to have a plan that would include employees, IRA contributions should still be made for the CPA and, if applicable, a spouse. An employed spouse should also maximize 40i(k) or 403(b) contributions.

If other financial obligations or insufficient cash flow limit or preclude the ability to make contributions, the fee structure should be reexamined so that sufficient revenue to make these contributions is available. In the most extreme circumstances, alternatives to being in sole practice or a partner in a firm may be necessary. CPAs should also invest wisely and in a manner that can assure growth of such accounts. Leaving the funds in lowinterest bank accounts is not sufficient for the long term. It is likely that the money in these accounts would need to last over 20 years, even for someone at age 70 or 75. That calls for a long-term investment strategy and an asset allocation weighted toward equities.

Savings and investments not in tax-deferred accounts.

Included here would be land, real estate, private equity, art, collectibles, and other such assets. These would be accumulated with after-tax earnings, if any. In the authors' opinions, such savings are important, but not mandatory. Nevertheless, they should be factored into a long-term financial security plan; the greater the accumulation of total assets, the better the opportunity to take on greater risk with a portion of the funds. With time as an ally, this can further grow the portfolio. Investments or assets not providing cash flow reduce the outlook for retirement income and liquidity and should not be counted on in future cash flow projections.

Proceeds from the sale of a business or practice or a retirement buyout.

This is always precarious, as nothing is ever guaranteed until the checks clear. …

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