How to Create a Retirement Savings Policy Statement for Your Clients

“Live for today – plan for tomorrow” has always been my firm’s mantra, yet clients and advisers have often understood this reality far too late in the client’s earnings years.

As retirement nears, clients are often so excited to spread their wings that they sometimes forget how spending money on travel and luxury items, for example, impacts their long-term savings. The key is to help them create a Retirement Savings Policy Statement (RSPS), a detailed summary of savings guidelines and how to measure retirement life choices. Doing this earlier in their working years helps increase the likelihood that they will have the necessary funds for retirement.

The RSPS takes into account current savings and a lifelong approach to increase saving for the future. It requires a client to be realistic about goals and plans in case something changes, such as an unexpected illness or family crisis.

First, identify your clients’ current retirement savings rate. See table below showing income sources on the left and savings on the right. Here, a couple can see their current savings rate compared to the suggested target rate of 12% for the year. An illustration like this also provides the adviser with occasions to identify additional savings’ opportunities for the client. For example, by shifting savings from spouse #2’s IRA to his 401(k), the client could increase the employer match dollar for dollar, thereby creating additional savings with no impact on the client’s current lifestyle.

Current Income Sources

Retirement Savings Sources

Spouse #1 – gross wages $75,000

401(k) savings $3,000

401(k) match $2,000

IRA savings $1,500

Spouse #2 – gross wages $45,000

401(k) savings $1,000

401(k) match $500

IRA savings $4,500

Total Earned Income – $120,000

Total Retirement Savings – $12,000

Current Retirement Savings Rate

10%

Targeted Retirement Savings Rate for This Year

12%

$14,400

Next, create guidelines for retirement savings. Identifying ways each client can save money is crucial. Cutting needless spending and finding creative ways to save money will always differ for each client, but the process will identify the best plan for their future retirement. Here are some savings guidelines:

Set an attainable savings rate for the year. Perhaps a client’s goal is to save 12% for retirement this year. Moving an IRA to a 401(k), or increasing their monthly contribution to an IRA, are just two ways to accomplish this.

Use non-retirement accounts for additional savings. Limiting savings to retirement accounts may not be enough. Adding to taxable investments accounts may not only increase the client’s savings rate, but also diversify the tax treatment of future retirement accounts.

Cut spending to increase savings rate. Assign a budget to spending habits, spending $100 less per month, for example. Understanding where clients currently spend is the first step to understanding how they can save more. Understanding the potential future value of that monthly $100 for retirement can also become an encouraging motivator.

Make earnings count. Retirement isn’t about the short term; let earnings on all accounts accumulate and reinvest.

Create a 5-year plan to achieve a realistic savings rate. Reach a 15% retirement savings goal more quickly by having a quantifiable plan. A 5-year plan is easier to understand and act on than a 30- or 40-year retirement plan because it is simple and packaged in a timeframe that is more achievable than a longer-range plan. If the goals are not achieved within the first five years, set in motion a second five year plan until the goals are met. After the target rate is met, the 5-year planning should continue to ensure continued adherence to the plan and to establish good planning habits as they approach retirement. For example, the initial five year plan for the couple in Figure #1 should address moving from their current 10%, first to 12%, and ultimately 15% over the 5-year period.

Third, identify conflicting goals and rank them. Whether it’s saving up for a car, your kid’s college tuition or moving to a nicer neighborhood, assign a priority to each of your goals, and determine how they relate to retirement. Some luxuries can be put on hold, while college tuition might take precedent.

Finally, create a policy for allocating annual raises. Allocate each raise between the client’s current standard of living (SOL) versus future SOL goals. This is accomplished by dividing each raise into three distinct categories. The first is represented by the current Consumer Price Index (CPI) and maintains the client’s current SOL. The second allocates additional spending to increase the client’s current SOL, and the third is dedicated to savings for the client’s future SOL.

Establish objectives and specific boundaries so that your clients meet their goals, but also plan for any changes that may occur. Allocation of each raise to these spending components is a key step in keeping or raising your client’s retirement nest egg. The process also has a useful side benefit because it identifies the client’s actual “spending inflation” that should be used in your retirement projections in lieu of the ubiquitous CPI which, as stated earlier, merely maintains the current standard of living.

Revisit the RSPS Annually

It’s important to revisit a RSPS each year to determine if it needs to be adjusted based on any changes, unexpected gifts or any other life occurrences. Help your clients revise their goals and timetables accordingly. Having these plans in place will go a long way toward a successful and stress-reduced retirement.

More information on retirement can be found in my The CPA’s Guide to Practical Retirement Planning. Members of the PFP Section have full access to the entire guide, retirement planning topics in the PFP Learning Library; nonmembers can access an excerpt here or buy the Guide through CPA2Biz. Visit the PFP Division’s Retirement Planning Center for more information on a variety of retirement topics. I will also be speaking on retirement planning at the Advanced PFP Conference in January 2016 as a part of the retirement planning track.

James A. Shambo, CPA/PFS, Lifetime Planning Concepts, Inc. In addition to running his own financial planning and investment advisory firm, Jim is a regular speaker on financial planning topics at the AICPA PFP conferences, various state CPA societies and Financial Planning Association state chapters.

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