As an accountant for over 40 years, I may be biased on the importance of your clients’ need to understand basic accounting concepts. The successful investor Warren Buffett said, “Accounting is the language of business.” Accounting — including knowing how to read one’s own financial statements — is also the language of planning for and living well in retirement.
When clients are still receiving paychecks, they’re often more likely to overlook their financial statements. After all, they know the money is coming in and will likely support the lifestyle they have grown accustomed to. Like a company that is required by accounting rules to produce periodic financial statements such as income statements, balance sheets, and cash-flow statements to help them better gauge their profitability, solvency and liquidity, helping clients prepare and understand their personal net worth statement is critical. This is so they can assess their overall financial health and stability before making investment and spending decisions.
As financial advisors, your role is not to become CPAs, but to assist clients in increasing the value of their assets while helping them mitigate and hopefully reduce their liabilities over time.
Don’t Assume Accountants Will Not Need Help
Even with my accounting background and having collaborated with our financial advisor, Tom, to determine our streams of income in retirement, my wife and I were in for a rude awakening during 2022, my first full year in retirement.
The stock market plunged about 20% in 2022 — its worst year since 2008. Sticky inflation and aggressive rate hikes from the Federal Reserve battered growth and technology stocks and weighed on investor sentiment throughout the year. Geopolitical concerns and volatile economic data also kept markets on edge. As a newly minted retiree, it was challenging to watch our net worth drop by over $350,000 during our first year of retirement!
In addition, 2022 taught us that inflation can have a major impact on our retirement needs. Higher prices combined with greater medical expenses in our older years make it critical to ensure our income and investments can support our longer lives.
The good news is that by sticking with our long-range plan in collaboration with Tom, we were able to recoup over half of these losses with the positive returns experienced last year in 2023 and all the losses with the great returns so far in 2024.
Mitigating Market Mayhem
But what also kept us calm during these turbulent times was how Tom helped us understand the impact of the stock market and inflation on our financial statements, and how we could adjust and react accordingly.
For example, as our net worth statement reflected a continuously declining net worth value, Tom suggested that we should cut back on expenses to offset the market declines in our portfolio. Thus, by taking his advice, we were able to reduce our monthly spending by 5% to 8% for the second half of 2022, thereby mitigating the negative market impact. Discretionary expenses we cut back on included dining out and going to live sporting events.
Make Accounting Meaningful to Clients
So how can you help your clients better understand the accounting that can help them make better decisions that can lead to better outcomes in their pre-retirement and retirement years?
Accounting helps us determine our clients’ net worth in preparation for their retirement. But don’t tell them that you’re going give them an accounting lesson unless you want them to yawn with boredom. Instead, let them know you’re going to help them assess whether they are ready for retirement. Here are a few concrete steps you can take:
Show Them the Money
To see if your client’s retirement contributions are on track, start by tallying the balances for all their existing savings and investment accounts. You can explain to them that it’s important for them to get a realistic picture of their net worth — their assets (the things they own) less their liabilities (the things they owe). Even if they understand this terminology, it’s a lot different and more meaningful to see the figures in terms of their own personal situation.
And don’t just show them the numbers you’ve crunched. Taking the time to sit down with them to prepare their net worth statement will be a lot more impactful in helping them understand and helping them see that you care. Here are some steps.
Step 1: Determine the current value of their house and other real estate
You can assist your client in finding the current market value of their real estate holdings. We own two condominiums in Pennsylvania, one in Philadelphia and another in Hershey. I update the market values for our condominiums annually by getting reports from real estate apps such as Zillow or Trulia. Another useful source is for clients to reach out to the realtor who helped them buy the property.
Your clients may need help with determining if they should downsize their home as they are near retirement. Through helpful advice from our advisor, my wife and I sold our primary house in 2013 in advance of leaving our busy careers to embark upon a pre-retirement stage of life in 2014.
Step 2: Calculate how much money clients have in their checking and savings accounts
Have your clients bring or send you their most recent bank statements to determine the current balances. We have two checking accounts: one at a local bank near our condominiums as well as our primary account with our advisor’s firm. I suggest having your clients pull their statements quarterly from their online accounts to give you an update on the current account balances.
Step 3: Determine the value of client’s retirement accounts
Financial advisors should be the key source of helping clients determine the current value of their retirement accounts. This includes reviewing quarterly statements related to 401(k)s, 403(b)s, IRAs and any other investment accounts. If your clients have bounced around numerous jobs over the years and have multiple employer-sponsored accounts, you can help them reach out to prior employers to access the current value of these retirement accounts. Our advisor not only helped us locate these accounts, but more importantly, also helped us consolidate these accounts.
Step 4: Calculate the value of any other assets your clients own
The last step on the asset side of the equation is to help your clients determine, on an annual basis, the current market value of any other assets they own. This could include vehicles, antiques, jewelry, etc. To assess the current market value of our two vehicles, I simply use an online website such as Kelley Blue Book (KBB), Edmunds or Carvana. For specialty items such as antiques or jewelry, I suggest using an appraiser.
Step 5: Calculate the value of any liabilities related to clients’ assets
This ultimate step in determining your clients’ net worth is to assist them in listing any liabilities. For starters, help them look at current statements to determine any debt balances related to the assets we listed in the prior steps. For example, do they know how much more they have to pay off on their mortgages and car loans? Other common debt items for our clients include credit card balances, student loans, personal loans and medical bills. They may also hold other debt instruments such as a home equity lines of credit (HELOC).
There are two schools of thought on the proper method of paying down your debts:
Snowball method. Here you you pay off the smallest loan as quickly as possible and then continue this process on the next smallest debt until all loans are paid off,
Avalanche method. Here you initially pay off the loan with the highest interest rate, and then continue to pay off the loans with the next-highest interest rate until all are paid off.
As an accountant, I preferred the avalanche method as it saves the most amount of interest expense over time.
The Tax Picture
Clients may also have to factor in the tax aspects of some of the decisions mentioned above, such as selling real estate or other properties. Despite having numerous certifications in accounting and finance, I am not a tax expert. In fact, when we faced a large capital loss from selling our beach home, our financial advisor suggested that we consult a local tax firm to understand how we could utilize this capital loss to offset some capital gains in our stock portfolio. This saved us a lot of money. My best advice for advisors is to recommend other professionals as needed!
Final Thoughts
As my wife and I edged closer to retirement over the last decade of our working life, we concentrated on our net worth statement. This allowed us to review our long-term goals and it ensures we are on track for achieving our retirement targets. Through saving efforts and tracking our monthly budget, we were able to achieve this debt-free nirvana in 2017.
We started by adjusting our spending from a two-earner income in 2014 to a one-earner income. With lots of guidance from our advisor, we were able to live more frugally. We took advantage of the many low-cost entertainment options offered through the University of Illinois campus where I had started a second career as an accounting professor. We attended sporting events and concerts on campus. Universities often offer their low-cost events to members of the community regardless of whether they’re affiliated with the school.
The final piece of the puzzle in our debt solution came in April 2017 when we sold our beach house in the Outer Banks, N.C. (OBX) and were able to pay off our last remaining mortgage.
Tom, our financial advisor, constantly advises us that a disciplined investor is a wealthy investor because they have learned that market fluctuations are normal, and that patience pays off. This was certainly the case for those disciplined enough to stay in the stock market during the painful declines of 2022 and then see the tides turn (as they always do eventually!) in 2023 and 2024.
But it’s more than riding the tailwinds of the markets that matters. Having a good understanding of basic accounting is what really helps clients achieve success.
