Kaye and his colleagues ask all clients, regardless of their asset level, to think about how they want to live now, what would happen if they became disabled and what they would want to do in retirement. They project inflation rates of 3% for most expense items and 7% for education. They're also factoring in pending Medicare changes.
"Clients see their wish list and get sticker shock. It winds up being a terribly good learning experience," says Kaye, who also discusses survivor needs and uses Monte Carlo simulations to help clients see all possible scenarios.
Kaye is also a big advocate of converting traditional IRAs to Roth IRAs, a strategy that no longer faces income limits. His firm encourages small business owners to consider a "triple-decker" pension plan, which combines a 401(k) plan, a cash balance plan and a profit-sharing plan (PSP). By employing this trio, clients can often shelter more money for their families.
Advisor Gary Shor, vice president of financial and estate planning at AEPG, shares an example to illustrate the potential savings of a triple-decker strategy. Let's say a doctor earning $245,000 a year puts a total of $5,250 into a PSP for his two non-highly compensated employees and receives a PSP allocation of $49,000. Adding cash balance and safe harbor 401(k) plans for an added combined cost of $4,350 for his employees lets him allocate an additional $176,675 for himself. (Actual figures will vary based on specific plan data.)
One caveat: Since a cash balance plan is a real pension plan, "the owner is on the hook each year to fund it. The biggest hurdle is if someone is nervous about their cash flow," says Shor.
As for converting a traditional IRA to a Roth IRA, Shor notes that this is not an all-or-nothing proposition. Investors may be best off doing a partial conversion, something they should speak with their accountants about, he says.
Shor also shares with clients simple but effective savings strategies such as waiting 24 hours before purchasing large-ticket items, using eBay to purchase and sell slightly used items, saving money in qualified accounts that are hard to access, using cash whenever possible, borrowing tools from a neighbor and collecting loose change in a jar. He's collected $500 twice.
Kaye has observed that grandparents who haven't offered to contribute to college costs may be more than willing to do so if asked. With his encouragement, a client broached the subject with grandparents who are now generously footing the $50,000 a year college bill for two grandchildren. Unlimited tax-free education gifts are permitted as long as they're paid directly to the educational institution.
If someone plans to hold a vehicle for a number of years, it may be cheaper to lease and buy it out at the end of the lease after negotiating the residuals, says Kaye. He and a client with a Mercedes called the car maker at the end of the client's four-year lease. The client got the vehicle, which sported a $38,000 end-of-lease buyout purchase price, for $32,000.
Buying a car on New Year's Eve, when car dealers are trying to make their numbers for the year, is a strategy he's personally used a couple of times. That's when he got $20,000 off a demo Porsche Panamera for his wife. Vehicle buyers should also check to see if they're eligible for a Section 179 deduction and bonus depreciation, he says. These tax breaks can add up to thousands of dollars.