Effect of Spending Habits on Retirement Planning
The traditional approach to retirement assumes that retirees will maintain their pre-retirement standard of living as they transition into retirement, and then sustain that lifestyle throughout retirement. But a growing base of research that analyzes the actual spending habits of retirees, reveals a different story.
In reality, retirees tend to experience a slow but steady decline in real spending throughout retirement. Spending decreases slowly in the early years of retirement, more rapidly in the middle years, and then slows again in the final years, in a path that looks like a “retirement spending smile.” Even the uptick of health care expenses in a retiree’s later years are generally not enough to offset all the other spending decreases that typically occur in retirement. That’s important, because it means your clients may not need as much money in retirement as they think.
Trends in Retirement Spending
Research on retiree spending patterns is finding that in practice, retirement spending often occurs in three phases.
Early in retirement, the so-called “go-go” years, your clients are likely to continue to be active. They may even travel more than they did before retirement. After 10-15 years, they transition into the “slow-go” years, when their health and energy begin to decline, and their spending starts to decline, too, especially discretionary spending. By their 80s, most retirees reach the “no-go” years, and there is an almost total shut down of discretionary activity-related spending. Only core expenses for basic food and shelter tend to remain.
While this three-phase approach may describe your client’s discretionary expenditures, it leaves open one of the key concerns in late-retirement spending: expenditures on health care. Yet, a look at the data reveals that while health care spending becomes a larger part of the pie in the later years, it’s still typically offset by the decreases in other discretionary categories.
Even clients who fear health care expenditures may rise in the later retirement years should still assume some decrease in spending throughout much of retirement. This is especially true for the subset of retirees who:
- have full Medicare Part B and Part D coverage
- are enrolled in a Medigap supplemental policy
- have long-term care insurance
Of course, households that aren’t fully insured may need to set aside some additional funds for contingencies. And for a subset of lower-income households, the co-pays on Medicare Part B and Part D can be burdensome. For moderately affluent households, health and long-term care insurance has a remarkably stabilizing effect. In other words, despite the increases in the health and long-term care categories, when matched against other discretionary spending categories that decrease, the net result is still a decrease in overall real spending. Notably, “nominal” spending tends to rise in retirement – but not enough to keep pace with inflation, which results in a decline in real (inflation-adjusted) spending.
The bottom line is that you should be assuming some level of spending cuts for most clients in retirement, unless their net worth and spending is so modest that it’s impossible for any spending declines to occur without curtailing basic subsistence. This is especially true for married couples who generally experience additional spending declines in later years when at least one spouse is likely to have passed away. Once these adjustments are accounted for, retirees may need as much as 20 percent less to retire than what traditional models have predicted.
For more information on retirement planning, the AICPA Personal Financial Planning Division has released The CPAs Guide to Practical Retirement Planning, providing a comprehensive look at retirement planning and what CPAs need to know.
Michael Kitces, Partner and Director of Wealth Management for Pinnacle Advisory Group. Michael is co-founder of the XY Planning Network, and publisher of a continuing education blog for financial planners, Nerd’s Eye View. You can follow him on Twitter at @MichaelKitces.
Retirees courtesy of Shutterstock
100 Years of CPA Exam as Licensure Requirement
A lot has changed over the last 100 years with the evolution of the CPA profession. Old fashioned calculators gave rise to Microsoft Excel. Stacks of financial statements have morphed into data in the Cloud. And many CPAs have expanded beyond auditing or tax services through the growth of specializations such as IT assurance, financial planning and business valuation.
Despite all the change, one notable constant has remained – the Uniform CPA Examination’s alignment with professional practice and the work of newly licensed CPAs. This alignment has continuously ensured that those earning licensure have demonstrated the requisite knowledge and skills vital to protecting the public interest.
The exam as we know it has a long and storied history. With its origin based on a test first given to individuals seeking membership in the AICPA, the exam has become the well-known, rigorous gateway to our profession. Following New York’s lead in 1896, states began to pass CPA laws and develop their own assessments to ensure only qualified individuals could attain licensure. While these exams were the first step to verifying the knowledge and skills of a future CPA, there was no testing uniformity across jurisdictions.
A Standardized Path to Licensure
This month we recognize a milestone that changed the administration of the exam for the better and brought about a new era of cooperation and uniformity that standardized this qualification assessment. A century ago, in 1917, three state boards of accountancy, New Hampshire, Kansas and my home state of Oregon, became the first to accept the AICPA’s offer to prepare and grade a uniform exam on their behalf. This initial move set the stage for jurisdictions, one-by-one, to move to uniform testing, including some states that had not previously prepared their own exams. The use of a uniform exam saved the states valuable time and expense previously spent preparing and grading their own exams.
State boards’ long-standing support of a uniform assessment has ensured that, regardless of when and where candidates test, our profession can have confidence that the knowledge and skills of these individuals have been verified through a fair, reliable and valid exam. Further supporting state boards’ confidence in the exam’s effectiveness was another milestone this past April, when the AICPA launched an updated version of the exam following a comprehensive, multi-year review of professional practice. The successful launch was the latest in a long line of enhancements and updates over the years to ensure the exam remains aligned with the profession.
A Path for the Future
This evolution includes firms, large and small, and CPAs from the public, private and non-profit sectors, strengthening our foundation for the future. Through various initiatives and endeavors, we remain in tune with and anticipate the needs of clients and consumers. From supporting efforts to enhance audit quality -- the audit being the cornerstone of our profession -- to specialization and capitalizing on marketplace trends to expand service offerings, we are laying the groundwork for success today and generations to come. And for the next generation, it all begins with the exam.
As we look back to back to 1917, we have confidence that our profession has been well-served over the last century by the exam partnership between the AICPA, state boards of accountancy, and the National Association of State Boards of Accountancy (NASBA). The century-long use of a uniform method to assess candidate qualifications has strengthened the value of the CPA credential. And those of us who have passed through the rigor of exam and on to licensure maintain a deep commitment to protecting the public interest. Because of this purpose, we remain one of the most respected professions worldwide. Together, through a shared vision and continued evolution of our profession, we are paving the way for the next generation of CPAs to join us.
Roberta Newhouse, CPA, partner, Newhouse & Neistadt LLC in Pendleton, OR. She serves as the Chair of the AICPA’s State Board Committee as well as a member of the Board of Examiners.
Adding machine courtesy of Shutterstock.
Summer Jobs: More Than Money in Your Pocket
School’s out and many high schoolers and college students are taking summer jobs. Seasonal work can provide extra spending money for many teens or much needed funds for school expenses. But summer jobs aren’t just about earning a paycheck and learning how to manage the money you’ve made. These jobs provide valuable work experience and help youth develop professional skills and discover their talents. It’s an opportunity to take responsibility, learn time management skills and figure out how to get along with co-workers. Summer jobs also provide future employment references, mentorship and can even help teens succeed in school, according to Stanford researcher Jacob Leos Urbel.
This summer my 13-year-old daughter has her first job as a camper in leadership training, which got me thinking back on my summer jobs. One of the most unique positions I held was at the House of Seven Gables in Salem, MA. I was hired as a tour guide at age 15 and underwent rigorous training before the tourist season began. There was a script to learn and facts to be memorized before I was trusted to lead a tour. Oh, and then there was the uniform. All tour guides were required to dress in custom-tailored period costumes. I was provided with calico fabric for two dresses and issued a hoop skirt to be worn underneath. I would have fit right in on the set of a Jane Austen production. In fact, each tour was a performance of sorts. I loved opening the door to the secret staircase with a flourish.
The learning and development at the House of Seven Gables didn’t end with the historical facts or the skills needed to navigate tight spaces in a hoop skirt. This experience helped me hone my public speaking skills and taught me how to build rapport with people. I also learned the importance of being professional. You never knew who would be on your tour – those tourists might even end up having dinner with your parents.
I asked some of my learning and development colleagues to share memories of their summer jobs:
Melony Johnson—manager, development and engagement
A summer job that helped me to develop my professional skills was courtesy clerk at a neighborhood grocery store. I learned how to pursue opportunities for growth and know when to move on when my skills and talents are not being recognized. Ultimately, I learned:
- How to really listen
- The art of customer service
- The importance of setting goals and putting in the effort to advance professionally
Michael Grant—director, learning design and development
After my freshman year of college, I took a job out of my “comfort zone”, and worked on the sales promotions team for ADT Security Systems. It was a commissioned-based job where our small team rode around the city in a company van offering special promotional incentives (free equipment) to secure new customers. This opportunity made me increase my self-confidence and also exposed me to the following:
- Strategic marketing principles and creatively “pitching” to potential clients
- Value proposition
- Presentation and communication skills
- Negotiation techniques
- Networking and relationship building
Clar Rosso—vice president, member learning and competency
After my sophomore year of college, I was a summer intern for the Los Angeles Dodgers in their community services and special events department. In addition to learning that eating lunch in an empty baseball stadium is pretty incredible, I learned about the importance of:
- Stakeholder communications
- Giving back to your community
- Supporting nonprofits
- Managing messages with the media
- Determining when to in-source and when to outsource key business functions
What skills did you develop in your summer job? We’d love to hear from you. Share your comments below.
Jennifer Gardner, Manager--Communications and Social Strategy, Member Learning & Competency, Association of International Certified Professional Accountants
Scooping ice cream courtesy of Getty Images.
6 Money-Saving Tips You Can’t Afford to Miss
Those fun, light-hearted GEICO commercials that ask if you are tired of paying too much for car insurance hone in on the idea of wasting your money –– paying too much for something or not getting enough.
As a CPA who is passionate about making my hard-earned money work for me, it’s important to take time to critically analyze what my cash is doing. Busy lives often lend themselves to costly complacency in one’s personal finances. Basically, we want bill paying done and our retirement planning intact with as minimal effort as possible.
At least once per year, I do a serious deep-cleaning scrub on my family’s finances. I look at what we’re paying and why, and I see where we need to do better. This “scrub” saves us thousands of dollars and I suggest each of you take a few hours each year to review your finances critically. Don’t let your money run itself; it needs you to keep it on track.
Here are six tips to make your money work for you (consider sharing these with your clients):
- Carefully review your credit/debit card auto-drafts.
Did you join Consumer Reports to get insight on what car to buy and forget to cancel it after your purchase? Or sign up for other subscription services that you haven’t used in months? Review your statements for these $10-20 no-value bills. Though small, they add up quickly.
On the flip side, auto-draft anything you can to your credit card. You’ll consolidate bill paying, and get paid to pay your bills. Often, electricity, water, cable, etc., can be auto-drafted. One can easily earn hundreds of dollars each year (in points and rewards) by effectively using a credit card. But, don’t forget to pay off the balance each month! Interest on credit cards is extremely costly. I suggest setting up another auto-draft to pay your credit card bill directly from your bank account.
- Bundle your insurance (home, automobiles, etc.), and scrutinize rate increases.
These bills can significantly fluctuate each year as your insurance carrier offers new incentives or changes its rates (sometimes arbitrarily). This year, I noticed our home and auto insurance went up by about $1,500. After calling my agent, I learned that there was an explanation for some of it (insurance regulation hiked up the price), but there was no excuse for the bulk of it. After asking my agent to price shop, I decreased my bill and increased my coverage. My agent wasn’t going to do this price shopping without my nagging, but a five-minute phone call saved me over a thousand dollars.
- Review your investments.
Make sure you are deferring appropriately to your 401(k), taking advantage of company matches and profit sharing plans. Also, ensure you’re planning for retirement with other investment vehicles (IRAs, etc.). Review your portfolio, making sure it’s well-balanced. Consider contacting your 401(k) or brokerage adviser to confirm your investments (as a whole) keep your plans on track. Consider making serious adjustments the older you get; the closer you are to retirement, the less risk you may want to take.
- Know the market rates for cell phone plans, cable, internet, etc., and don’t be afraid to negotiate.
Cell phone rates have actually gone down recently as more competition enters the market. If you bundle plans with family members, you may be able to save even more. Plus, many employers offer their employees discounts for certain carriers.
Cable/internet, for example, is a bill that I need to renegotiate each year. Otherwise, they go up significantly. Call your cable/internet company and ask about promotions, and let them know you’re not happy that your bill went up. Talk to someone in their customer retention group. They usually have more flexibility to keep your rates lower (or offer you freebies like premium channels) to keep you from switching to a competitor. If it doesn’t go well the first call (and you have time and patience), call back. A different representative may give you a better deal.
- Review your debt financing and interest rates.
Prioritize what to pay off quickest based on which item has the highest interest rate. Explore where you may be able to decrease interest rates by re-financing or consolidating debt. Make an extra payment that goes directly to principal. You can save significant money by paying off your debt sooner.
- Know what you’re worth (net equity).
Annually, prepare a financial statement. Add up your assets (cash, investments, property, etc.) and subtract your liabilities (loans, etc.) to yield your net worth. Are you too heavily in debt, or saving enough for retirement? These are important questions to know your true financial health.
I use Mint.com (a free application) to track our family’s progress, but a simple spreadsheet or other system works. The point is: don’t let your finances be a surprise to you.
The AICPA is committed to helping us achieve financial security. Visit feedthepig.org for additional tips and resources to help you budget, invest and reduce debt.
Susan C. Allen, CPA, CITP, CGMA, Senior Manager, Tax Practice and Ethics-Public Accounting, Association of Certified Professional Accountants
Savings courtesy of Shutterstock.
New Liquidity Disclosures for Not-for Profits: Are You Ready?
Under current financial reporting standards, not-for-profits are not required to illuminate clearly restrictions that affect the availability of liquid resources in their financial statements. But this is all about to change with the Financial Accounting Standards Board’s (FASB) new financial reporting standard (Accounting Standards Update (ASU) 2016-14), effective for fiscal years beginning after December 15, 2017.
In this update, FASB clarifies that the nature of an asset isn’t the only quality that affects its availability. Specifically, liquid resources are quickly converted to cash and available to fund general expenditures within one year following the balance sheet date. Internal (board-designated) and external (donor-imposed) restrictions could mean certain sums of cash and cash equivalents may not be used for general expenditures. If a board designates an amount of cash to be set aside for a building renovation, for example, it cannot be used to buy office supplies.
The new guidance requires enhanced financial statement disclosures regarding an organization’s liquidity and availability of resources. Both qualitative and quantitative information are required. The qualitative component describes the organization’s liquidity management plan, or how liquid assets are managed to meet cash needs for general expenditures within one year following the balance sheet date. Quantitative information regarding those assets and their availability to meet current-year needs may be presented either on the face of the statement of financial position or in the notes to the financial statements.
Potential donors, grantors, creditors and other not-for-profit constituents want to know that the organizations they are evaluating have sufficient resources to meet financial obligations as they come due. By making sure that restricted cash and cash equivalents are clearly presented, FASB’s new guidance increases transparency in the financial statements and promotes a more thorough and accurate understanding of the organization’s ability to fund operations.
How do we implement these changes?
While the new requirements make sense in theory, their practical implications can be confusing. This blog post addresses several questions we have encountered thus far in our conversations with AICPA Not-for-Profit Section members regarding the implementation of ASU No. 2016-14.
Question 1: My not-for-profit organization doesn’t currently have a “liquidity management plan.” Do we have to create one to comply with the new standards?
Having a liquidity management plan is a best practice, but not a requirement per the standards. FASB says that qualitative disclosures should describe how a not-for-profit entity “manages its liquid resources available to meet cash needs for general expenditures within one year of the date of the statement of financial position” (“Pending Content” in ASC 958-210-50-1A (a)). This leaves room for interpretation, although sample liquidity note disclosures are provided in ASC 958-210-55-5 through 55-8 and 958-205-55-21.
An organization’s liquidity management plan or process will depend on its sophistication and size, the type and complexity of its activities, and its specific liquidity risks, among other factors.
Question 2: Does my not-for-profit need to set up a liquidity reserve?
Liquidity reserves are not required under GAAP. The decision to set up a liquidity reserve is made at the discretion of management and the board. However, it is important to note that if a liquidity reserve is approved by the board, specific disclosure is required under the new standards.
Question 3: An example provided in the new standard states, “The $1,300 liquidity reserve, created in a prior year when the governing board designated net assets without donor restrictions, was included as a reconciling item in Not-for-Profit Entity A’s note on liquidity risk and the availability of resources because the intention of the designation was to support unanticipated liquidity needs and not general expenditures.” Wouldn’t liquidity reserves be considered assets available for use within one year, given the nature of the reserve?
We understand the confusion here, but the answer to the question is that the classification of a liquidity reserve in the context of the newly required liquidity disclosures would depend on the nature of the assets comprising the reserve and the ability of management to access them.
Question 4: Can a not-for-profit entity early-adopt just the liquidity disclosures?
Yes, this is an option. Liquidity disclosures are an addition to current requirements, rather than a change in existing disclosure requirements. Therefore, the new liquidity disclosures can be added at any point.
Question 5: In the year of adoption, must a not-for-profit present liquidity disclosures for the prior year as well?
The entity may choose not to present the prior-year liquidity disclosures in the year of adoption. In all subsequent years, prior-year disclosures should be presented.
We anticipate many more questions in the months to come, as not-for-profit organizations begin preparing to implement the new financial reporting standard. The ensuing changes are significant, so it is critical to begin preparing now for implementation. If you are in that process or have questions we haven’t covered in this article, you may be interested in the upcoming webcast being hosted by the AICPA’s Not-for-Profit Section on June 28th: Implementing the Financial Statement Presentation Standard – Mastering the Most Difficult Challenges.
Cathy J. Clarke, CPA, Chief Assurance Officer – National Audit and Assurance Quality Group, CliftonLarsonAllen LLP. Cathy’s primary responsibilities include overseeing the audit quality with the firm, being a technical resource for her firm's audit and assurance practice and quality review of assurance and accounting engagements. She is the immediate past chair of the AICPA's Not-for-Profit Industry Expert Panel. Throughout her career, Cathy has served a variety of clients in numerous industries, with an emphasis on not-for-profits and healthcare entities.
Tim McCutcheon, CPA, Partner – National Not-for-Profit Practice, Eide Bailly LLP. As a CPA for over thirty-five years, Tim has served not-for-profits as CFO, independent auditor, tax advisor, business consultant, volunteer and board member. His experiences from both inside and outside a wide variety of organizations gives him a practical and balanced view of industry issues and the concerns of the industry's varied stakeholders, constituents and other interested parties.
Not-for-profits courtesy of Shutterstock.