Page 381 - JoFA_2022

PERSONAL FINANCIAL PLANNING

actually be to encourage spending. For instance, draw down each year and expecting them to fit
many wealthy retirees got that way because they’ve their spending into that amount, consider an ap-
mastered the art of thrift; they are proud of how proach where the investment allocation matches the
little they spend and often skimp to live solely from spending needs and may vary year by year.
guaranteed income sources such as Social Security, For thriftier clients needing permission to
annuities, and/or pension payments. During their spend, a spend-down plan should emphasize that
working years, having to tap savings was often a retirement assets have been allocated to allow for
sign that things had gone wrong, and this mindset spending beyond the basics, as will be described
doesn’t go away in retirement. below.
For other retirees, transitioning from a regular For clients needing more guardrails to avoid
paycheck that essentially determined how much overspending, the plan should also include a
they could spend each month to a savings draw- system that mimics the paycheck stream to which
down may put them at risk of outliving savings. they are accustomed to help control spending.
Clients who are used to spending according to One approach that can help implement those
what’s available may view their penalty-free access spending guardrails is to establish a savings
to larger sums of money as a windfall and be account separate from investment assets and
more inclined to elevate their lifestyle through funded to the amount the client needs for a year’s
overspending, especially in the early years of worth of expenses. Setting up monthly transfers
retirement. In these cases, CPAs may opt to center from that account to the client’s spending account
retirement plans around spending/withdrawal can help re-create the paycheck effect. Because
limits. Helping to shift clients’ thinking here can the client doesn’t have to look at their larger
include encouraging thrift by cautioning them investment account on a regular basis, it is kept
about running out of money and emphasizing the psychologically out of the category of “available to
need for advice on how much their savings can spend today.”
support in annual withdrawals. But the recom- For all clients, putting together the spend-
mended plan must also include guideposts for down plan will require them to identify their full
when it may be more appropriate to withdraw spectrum of expenses, starting with spending that
from savings above and beyond basic needs and is deemed inflexible or fixed (utilities, groceries,
when retirees will need to rein in spending to health care, etc.), followed by estimating expenses
preserve assets. that have some flexibility, such as clothing, trans-
portation, holidays, and household goods, and then
Create a spend-down plan that works for finally leisure spending, which typically brings the
the client most life satisfaction but is also the most flexible —
While guidelines about safe withdrawal rates, such hobbies, travel, gifts, dining out, etc.
as the 4% rule, are often used to advise clients on
how much they can afford to spend each year, the Match the asset allocation to spending needs
perfect rate is up for debate and will vary drastically One approach, described by Finke in a recent
depending on market conditions in the early years conference presentation, is to help clients set up an
of retirement withdrawals. Rather than giving a asset allocation that funds fixed/inflexible spend-
percentage or set dollar amount that a client can ing with stable income sources such as bonds or

IN BRIEF can help with this. On the other hand, year-by-year basis, a better strategy
retirees who tend to overspend may sometimes may be to intentionally
■ Retirees need to shift their thinking need to set up guardrails, such as a incur taxation to reduce future required
about spending. After years of building monthly draft from their retirement minimum distributions.
a nest egg, some may have to learn to account that mimics a paycheck deposit. ■ Retirees should rethink their beliefs
become comfortable spending down ■ Retirees need to be open to a new about durable and medical powers of
savings without feeling it’s a moral approach to taxes. For instance, instead attorney and consider appointing a
failing. An asset allocation approach of seeking to minimize taxes on a trusted person under 50 years old.
To comment on this article or to suggest an idea for another article, contact Courtney Vien at Courtney.Vien@aicpa-cima.com.

24 | Journal of Accountancy September 2022