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Will you be able to afford to retire?

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19th Jul 2011
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There are three types of accountants. Those who have started thinking about retirement and those who can’t count, explains Mark Lee.

That thought started life, in a slightly different formulation, as a joke I heard many years ago. It floated back into my consciousness as I started to pen this piece for AccountingWEB.

The so-called baby-boomers, born in the immediate aftermath of World War Two are now reaching (normal) retirement age. For many of them the question of whether they can afford to retire is at the forefront of their thoughts.

Younger members of the profession tend to make some provision for retirement; others work on the assumption that their accounting practice (or their share of the firm) will produce the bulk of their retirement income.

For the newest entrants to the profession it’s probably fair to assume that retirement in 30 to 50 years is not uppermost in their minds.

We can all count. But we can’t all predict the future. In this context an accountant’s retirement income will be dependant on your future health and family issues, the future performance of your investments and the future profitability, success and structure of your accountancy practice. 

When do you start trying to plan your retirement and how realistic are your plans – especially when these are based on the future sale of the practice or realising your interest in the firm?

The smaller practitioner (1)

I remember a conversation I had with a baby boomer accountant a couple of years ago. He was 60 and his turnover was around £110k. He said his net profits were around £80k pa.

My friend had noted that were he to sell his practice he would be lucky to secure a capital sum of much more than £100k (being around once times his recurring fees).

After paying 10% CGT, he would be left with less than £100k (and this might only be received over a 12 to 24-month period). If invested the annual income from this figure would be a very small amount as compared with the £80k annual income from his practice. His target income in retirement was only about £25k pa. Of course one hopes he would also receive pension income too.

However my friend had an alternative plan:

He reckoned that it would make more sense to simply allow the practice to run down. As long as he feels comfortable and competent to continue servicing clients why bother trying to sell his practice? If he ends up with a practice that’s only one quarter its present size his net income would be around the £25k figure he sought. To achieve the same return from investments would require him to have £1m in the bank. There’s no way he could sell his practice for anything approaching such a figure.

The smaller practitioner (2)

Another practitioner approaching 60 later told me of a flaw in the shrinking practice idea summarised above. There are some fundamental costs of running a practice that do not reduce in line with the size of a practice. Smaller practices have disproportionately high ‘fixed costs’ almost regardless of the level of fees generated.

An alternative solution is to merge the practice with one run by someone younger who is looking to grow and expand; and to seek a recurring consultancy from the new merger partner. The challenge here is to ensure that the numbers add up and make the deal sufficiently attractive to the purchaser. What you think is ‘fair’ is just part of the equation of course.

The equity partners

There are many firms around today where a small number of partners have retained a disproportionate amount of the goodwill and equity.

Junior partners may have been happy with the level of profits they have shared despite any apparent inequities in the ownership of the practice. As the full equity partners come to retire the question arises as to whether they have realistic retirement ambitions. Will the other partners be able to afford to ‘buy them out’? Can the firm access the funding required to repay their capital and over what period will this be achieved?

Often a sale to or merger with a third party is again the only realistic outcome. This was one of the drivers behind the sale of many smaller firms to consolidators like Tenon, Numerica and Vantis around 10 years ago.

Failing to plan

At the National Accountants Conference in June, Mark Lloydbottom spoke about the plight of Baby Boomer accountants. He talked about how important it is for them to start thinking, from the age of about 50, about how they will fund their retirement. In effect he noted that that failing to plan is planning to fail. Where and who will the money come from if retirement is to be funded from the accountancy firm the accountant has built up or been with for many years?

Demographic changes

This was part of the focus of a talk by Prof Richard Scase, principal of Nelson Crewe at the CCH conference in May. He spoke of a demographic revolution that affects both accountants and clients. He referenced the impact of technological change and how things will be different in the future as regards the services required by clients, the resources required to provide these services and the level of interest that younger people will have to take on the responsibilities of running the practice.

Newly-qualifieds

Do they all share the ambitions that were commonplace when I was a young newly-qualified accountant? I still remember the words of a lady recruitment consultant. She continually encouraged my ambition to progress so that I could have my “name on the notepaper “. These days the equivalent would be to be listed as a partner on the firm’s website. I get the impression that many younger people have other priorities and that ‘work/life balance’ is more important than it was 30 or 40 years ago.

As David Oliver noted at the Mercia Partners’ Conference last month, “Staff in accountancy firms aspire to be partners. One of the attractions is the ability to only work part days and to be your own boss. After all, you get to choose which 12 hours a day to work.” 

Have you given thought to your retirement? Will you be able to afford to retire?


Mark Lee is consultant practice editor of AccountingWEB.co.uk and chairman of the
Tax Advice Network of independent tax specialists. Visit his personal website and blog.

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Replies (27)

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By David Franks
20th Jul 2011 10:54

where am i going wrong?

Interested to know how the person turning over just £110k was clearing profits of £80k. We do nothing like that sort of margin.

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Mark Lee 2017
By Mark Lee
20th Jul 2011 14:25

One man band

1 part time support staff. Very small office above a high street shop. No markerting spend.

But you may be right. His net may have been lower than £80k or his gross could have been higher than £110k

Mark

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By David Franks
20th Jul 2011 14:39

Wow

Again I cant see how on earth he could service that level of income with just one part time member of staff. Was he doing the whole gamut of work himself including things like book keeping which is generally only paying £20 per hour, meaning he either worked a lot of hours or charged very high hourly rates the remainder of the time and have no non chargeable time. Did the part time member of staff manage to type all the accounts, add every one's HMRC code, have meetings with new clients, go to the post office for recorded mail, make the tea, order the stationery etc? Who answered the phone when the part time memebr of staff wasnt there as one person could not possibly have any non chargeable time bringing in that sort of money. How did he manage to attract and retain clients when he had no marketing and no one could see his office and he charged high hourly rates and had no workforce other than a part time member who sounds like superman/woman?

 

I am very interested in this and would welcome other preactice's rough margins, work force per £.

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By nickpaulley
20th Jul 2011 16:17

smaller accounting practice

I think that sort of financial model is well achievable for a smaller accounting practice - 30K overhead is reasonably achievable and would give sufficent scope to use decent software.  I also think that turnover is also acheiveable as long as the client base is of good quality and the accountant sticks to giving quality accounting and tax advice and doesn't slip into providing bookkeeping and other low value services - oh and that the practitioner doesn't have to spend too much time marketing.

But it does illustrate that it is possible to work at the accounting business model and achieve returns that practitioners with a number of staff would struggle to achieve with the increased requrement to market, deal with staff issues and the perhaps inevitable slip away from good quality clients.

But It will need hard work and longish hours at peak times.

 

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By David Franks
20th Jul 2011 16:26

Interesting

I generally work a 70 hour week but find an inordinate amount of time is taken up dealing with clients wanting things rechecked (even though there are no errors found), HMRC creating work that the client wont pay for and clients phoning with endless queries. If I could just work on work then margins would be better I also would find it impossible to work without staff as I have a stream of people in here ad hoc and on the phone all day long.

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By nickpaulley
20th Jul 2011 16:47

smaller accounting practice

 we have done something like this - and to support the concept, a guy I used to work for many moons ago is a sole practitioner with just one employee and his turnover is IOR £200K with no admin support, working from home, so it is doable.  It all depends on reputation and the quality of work and clients.

Consider doing a review of your clients and selecting the larger profitable fees.  Review the recovery rates on this work to sense- check that it is achievable. Also consider the maximum number of clients that you would like to work for - given that you need to work rather than do admin tasks.  Invest in IT as you will be relying on it.  Then gently support the balance of the fees in their move to an alternative accountant.  Outsource payroll and bookkeeping to quality partners, and we have found it invaluable to engage a telephone answering service.  Then concentrate on the core work.

Reposition your marketing to emphasise the advantages of dealing with the proprietor and experienced accountant (ie no juniors etc) and focus on year-end accounts, tax planning, management accounts and providing advice to clients at a charge out rate that properly reflects experience and qualifications.

I am with Mark - we will probably never now fully retire but, and it is a big but, the remaining years are turning out to be much more rewarding, both financially and emotionally.

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By David Franks
20th Jul 2011 16:58

Where are you?

There is no way on earth those figures would work for us here. Are you in London?

To do £200k on your own with no admin support means bringing in around £4k a week with no non chargeable time. What about time to meet new clients or to type accounts, you say they have no admin support. Our clients would have a fit if they got an answering service and would soon leave.

Also, I have spent literally hours today filing under the IXBRL regs. It used to take me 10 mins now takes 3 hours. Any advice on quicker ways would be appreciated.

 

 

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By The Iceni Warrior
21st Jul 2011 07:58

This is very interesting debate

When I was a sole practioner working from home I had a notional charge out rate (target) of £60 per hour. I expected to achieve 35 chargeable hours per week, and to work for 48 weeks per year. I used a s/e bookkeeper at a cost of around £6,000 per year. I purchased good software and kept the hardware up to date.

All the non chargeable work had to be "overtime" and probably amounted to an extra 15-20 hours per week.

So turnover around £100k, costs under £20k leaves £80k profit.

Why did I go and change it all?

-- Iceni

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By Homeworker
21st Jul 2011 10:21

Low fees problem

I too have a small practice (turnover c£60k) working from home, which keeps the costs down.  Trouble is, when I started it 15 years ago I was conscious that clients would see me as a small practice (even though I had tax qualifications) and so I kept the fees fairly low.

I still have a large number of the original clients and although the fees have crept upwards, they are almost certainly still lower than other practices would charge.  Now I am approaching retirement, how will I be able to transfer clients to another practice?  I have tried to find a similar sized practitioner is this area but haven't managed to.

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By David Franks
21st Jul 2011 10:37

Working from home

I worked from home about 10 years ago when I first started for about three years. However, I couldnt stand the fact that at any moment, night or day, clients could just turn up at the door. I had a separate office and would hold meetings in my dining room however I have two children and the stress of keeping the house and myself immaculate at all times in case a client turned up drove me nuts. How have others got round this?

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By Jimess
21st Jul 2011 18:02

Working from Home

I went through the same thing and spent three years of my life not allowing myself to dress down, making sure the house looked immaculate and trying to keep my very inquisitive cats away from clients when they called. Add to that the growing amount of space I was needing to store client files books and records was becoming way too much that virtually every room seemed to have a filing cabinet. (Sorry all you paperless office fans - I just can't let go of my paper files).  It was even worse when I took on an employee, I would have a frenzy of loo and sink cleaning and carpet hoovering before she turned up in a morning.  Another downside was that because people knew I was at home they would unexpectedly drop in for social visits, even though they knew I worked from home. The only upside really was that I could work through on a project until it was finished without feeling that "I had to get home" and I could manage a few household tasks during quick breaks from work.  I have always had good work ethic so motivation to get work done was never a problem.  Another downside was that I tried to ensure I visited new clients at their premises/home before I gave out my office details to them so that I could maintain some degree of control on who had my personal address details and sometimes I felt that I was taking personal risks going to the home of someone I had never met before & that made me feel a bit vulnerable at times.  I finally got a small office in the centre of the market town near my home.  Now I have a room for filing, a room for working and a room for meetings - I pay a high premium compared to working at home but in terms of bringing new clients through the door it works brilliantly.  And no more cat hairs in the clients coffee!!  I do feel however that the work/life balance has tipped towards the work side since I moved in to the office, but that is the next stage I have to work through I guess.

Good luck.

 

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By bill ellison
22nd Jul 2011 08:45

small practise sales

 We are a small partnership based in Dundonald.(N.Ireland).I agree with the comments re non chargeable time.Our friends in HMRC have now ludicrous time scales and as a result ineffeciencies,that in real terms cost us a lot of money.Do we consistently charge clients for sitting in Revenue call queues or being transferred between departments.It is also exceptionally frustrating that the Revenue think that all accountants know their revised internal restructuring inside out.Since they dont, how can we.

 The Revenue are causing us to spend less time on our business and more time in it.This will ultimately lead us to either employ an extra body and reduce margin or not concentrate on marketing,credit control,client liaison and reduce margin.Time management works well if the time is constant,if not we struggle

 

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By HLB
24th Jul 2011 19:07

Retirement Plans

Interesting comments about the smaller practice but the original question was about retirement. I would be interested to know what your retirement plans are. For me, a partner in a two partner firm and in my early fifties it is becoming something in the forefront of my mind, particularly as there seems to be a lack of suitably experienced and motivated young accountants in our locality (South Wales) who have the ambition to buy into a business. I have discussed this with practitioners in other areas who are finding the same. Then there is the funding issues as banks are unwilling to lend as they used to. Are we all to work until we drop!!

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Mark Lee 2017
By Mark Lee
25th Jul 2011 19:37

More info on The Smaller Practitioner (1)

 Thanks to HLB for taking us back to the original question and the real focus of this article.

In the meantime I've now obtained further details from the baby boomer accountant I referenced above:

"Turnover back then was around £110k, but profits were  more like £65 to £70k rather than £80k.   Overheads broke down to about £10k for the office rent rates etc.  about £22k for the main in-house contractor,  and about £8k for everything else, including my other subcontractor who was about £3k.   Very little travelling cost, and no secretary, as for some years most stuff is by email and pdf, pretty much everything is generated electronically and filed online, (including company accounts)  and very few actual paper letters are sent to anyone. Many years ago I learned to touch type, so I can type quicker than I can write by hand.    With printing and stationery costs down to a about 15 reams of copy paper and few toner cartridges per year,   and postage down to a maybe the cost of three hundred first class stamps,  I struggle to find legit expenses to get my tax down! "

Hope that helps those who wanted to know how he did it!

Mark

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By carnmores
26th Jul 2011 11:00

havent you got anything better to do than

indulge your sadistic side ;-)

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By arthvirg230
26th Jul 2011 11:20

It's easy if you know how.....

These days we have COMPUTERS - I can turn round a £1000 fee on a small limited company job in less than 3 hours..... multiply that by the number of working days in the year....simples!

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By David Franks
26th Jul 2011 11:38

3 hours?

Firstly, no small Limited company in our area would pay £1000 for accounts, unless they included and element of book keeping which would then be over the 3 hours. Secondly, can I check whether in that 3 hours you are including the typing of the accounts and also the filing under IXBRL? I am finding that entering data for the latter then filing using ct600 software is now taking 2.5 hours when I could do it pre-IXBRL in 20 minutes. If you have got a way of speeding this up or software that is quicker, then I would be very interested to get a recommendation.

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By susanna russell-smith
26th Jul 2011 11:39

No problem

I don't find it hard to achieve that sort of ratio.  Living in London and working from home without any staff, my costs have never exceeded 25% of turnover even though I now only work around a quarter time - no marketing and doing everything directly onto the computer has to be the answer (and definitely not doing the likes of bookkeeping etc).

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By Robjoy
26th Jul 2011 11:48

£1K fee for small limited company

Sitting here on the other side of the fence - the small limited company potential client. I've been bookkeeping (up to liaising with accountant, leaving little, if anything, for him to adjust to arrive at published accounts, for a variety of businesses, not only my own) for more than 30 years.

I used to get an accountant to 'Do' our own small limited company accounts and CTA. The last time was for the 2007/08 accounts, turnover £35K - he charged me £785 plus VAT. He gave it to a junior who spoke to me as though I was a complete ignoramous not entitled to any explanations, and who made three mistakes, one of which she refused to correct. Big surprise: I do the final accounts and CTA myself now!

It's a real dilemma for both the small client who genuinely cannot afford more than a modest fee, but who recognises the limitations of their knowledge and the risk of getting it wrong, and for the accounting practice which has to keep its own business profitable. The reason we all know: pointlessly ever-increasing complexity of regulations in accounting and taxation.

 

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By carnmores
26th Jul 2011 12:12

david franks

why on earth is it taking you so much longer now - are you using  the HMRC software or 3rd party and if so which

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By David Franks
26th Jul 2011 12:43

See below

We are using VT accounts that requires manual entry onto a TB and then entry on many pages but that only covers the accounts. When I purchased it I thought it would cover tax computations but it doesnt so i am using HMRC for that then attaching the IXBRL file created for the accounts part by VT accounts. There is a lot of duplication and it is driving me nuts!

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By Old Greying Accountant
26th Jul 2011 13:08

Just playing with figures ...

... If you had the right clients you can make a very nice living.

Limited company accounts and CT600 - from good quality books, average charge say £650? 3 of those a week x 48 = @£93,600. You also have the directors personal tax returns, 48 x 3 x say average £150 = £21600.

You could do that from home, with no support, and have plenty of time for a low golf handicap, as long as you stay off AW! 

Online iXBRL filing, we use IRIS which automatically tags the minimum standard notes, on the few occassions where a couple of bespoke items need tagging it may take a few minutes extra, not 2+ hours. IRIS is fully integrated so the figures come straight of the accounts production module, so just have to do the capital allowance entries and review non deductible items etc.

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By HLB
26th Jul 2011 14:17

Retirement!

I'll try again to get back on track. Taking a sole practitioner working from home with a turnover of £100k and earning say £60k, how much does he/she have to save to be able to afford a comfortable retirement income of say £30k (excluding state pension on the assumption that he/she wants to retire before state retirement age) and on the basis that if the fees are saleable they will generate a modest capital sum. My calculations suggest about £600k +, with no erosion of capital.  Next question - how long will it take to accumulate investments of £600k?

The reason I have chosen £30k is that is the figure a friend of mine just retired on aged 59. He also had a lump sum (I don't know how much but it wasn't peanuts). He was a primary school teacher, latterly a deputy head!

Comments please.

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By maacprime
28th Jul 2011 08:30

Tagging

Presumably you use 3rd party software to prepare and submit CT returns.

TaxCalc does a decent job of tagging and doesn't cost too much.

Use that to prepare the tax computation.

 

 

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By susanna russell-smith
28th Jul 2011 17:38

@HLB

I daresay £600k could bring in £30k pa.  And to build up £600k, have your children (no more than two) young and off your hands by the time you're 55 - live reasonably frugally in the meantime, invest anything spare wisely, possibly as the deposit on a second house which you rent out and, after a few years, the rent covers the expenses (20 years on, the annual rent is greater than the original cost) and has paid off the mortgage in the meantime.  From age 55, you'll have 5-10 years without children or a mortgage to save maybe £30k per annum to make up any shortfall.  Or you could just try sucking up to wealthy childless Great Aunt Maud...

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By Comptable
28th Jul 2011 20:32

What is this thread about????

HLB is almost the only person here talking about the subject matter.

Everyone else seems to be an ostrich looking in the sand today.

The point is VERY SERIOUS and VERY VALID but the discussion is way off mark

(have you met my mother-in-law and my maiden aunts? bit like them chatting really)

Can someone start a relevant thread on ths?

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By Old Greying Accountant
29th Jul 2011 08:58

IN YOUR OPINION

What is being said is that a sole practitioner working at home can return a very high margin and many may choose to scale down rather than retire. I for one will carry on as long as I am competent to, I enjoy my work, once the mortgage is cleared, school fees finished etc my income requirement will be significantly less.

Work should be fun, if not you should explore other careers. Why would I want to stop doing something I enjoy, and, having seen many friends, family and clients die pre-retirement or shortly thereafter know you have to strike a balance - I don't say be spendthrift, but I wouldn't live like a pauper now when the future may never come.

So we are answering the question, by saying, you might not want to, just because it is not how you choose to answer the OP doesn't invalidate the comments posted.

As somebody said on another thread, a good accountant is one who looks at all the angles, not just the obvious ones.

 

 

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