By Jason Epps, CFP®, CRPC®
Some people think high-income earners have it easy when it comes to saving money, but that’s just not the case. Sure, high-income earners might have the potential to save more, but unless they’re strategizing how to save, where to save, and what to save for, some high-income earners are struggling to save the amounts they need to reach their goals each year.
But of course, financial planning isn’t all about saving. For high-income earners, financial planning includes strategic tax planning, estate and legacy planning, investment and portfolio diversification, and much more. Below, we describe the top 5 financial planning challenges for high-income earners, with some suggestions for how to overcome them.
1. Cash-Flow Management
Just because you make good money doesn’t always mean you’re good at managing it. All too often, we see high-income earners who end up spending most of what they make on expensive items while sacrificing their savings for the future. To reach your goals and ensure you can maintain your lifestyle for years to come, you need to be saving much of what you’re making now.
As a high earner, you need to pay yourself first. Contribute to tax-advantaged retirement accounts, high-yield savings accounts for short-term cash needs, and other investments that put your hard-earned money to work for you.
2. Saving For Retirement
Even so, high-income earners face other obstacles in saving for retirement. Annual limits on contributions to retirement accounts are usually too low for you to make meaningful advances toward your retirement wealth. For example, the contribution limit to a 401(k) in 2021 is $19,500 (plus an additional $6,500 if you’re over 50). The contribution limit to an IRA is only $6,000 (or $7,000 if over 50).
Experts recommend that most people need to contribute at least 15% of their income toward retirement, so we’ll use that benchmark as a simple example. If you earn $500,000 per year, you would need to contribute $75,000 per year to meet that 15% goal. Maximizing contributions to a 401(k) and a traditional IRA don’t even come close, so you have to be more creative in finding optimal ways to save for retirement.
3. Tax Planning
High-income earners also risk paying much more than they need to in taxes because their tax returns are more complex. Yes, of course you’ll be in a higher tax bracket. But finding ways to lower your taxable income as much as possible and reduce taxes on capital gains is an important component of financial planning for high earners.
For one, you should absolutely be maximizing contributions to your tax-advantaged accounts, such as an IRA, 401(k), and HSA plans. Second, a tax advisor can help you with year-end tax planning strategies, such as bunching itemized deductions, capital loss harvesting in non-qualified investment accounts and, if applicable, choosing when to make qualified business purchases.
4. Protecting Your Assets
With larger assets that are meant to protect you and your family during retirement and in case of emergencies, you need to make sure that wealth is protected from external risks. If you pass away and your assets haven’t been properly designated or protected in a trust, much of your wealth could end up going to the government in taxes or estate fees. No one wants that.
Not to mention, your assets need protection as they’re growing, too. It’s important to find a balance between protecting your assets from market volatility and as well as from inflation outpacing your returns. For this to happen, your portfolio must be properly diversified and updated to your changing life circumstances and proximity to your retirement date.
5. Neglecting To Have A Plan
Reaching goals takes time no matter your income level. And failing to have a plan means you’re not optimizing strategies to reach those goals—or possibly not working toward your goals at all. When you know what you want your money to do for you, you can then develop a plan to make that vision happen.
And to ensure you’re making good decisions that are right for you and your family, you need a team of experts on your side. At KFA Private Wealth Group, we help you chart the steps you need to take to reach your goals and keep you accountable for staying on track. Email jepps@kfapwg.com or call 301-305-8875 to schedule an appointment with us today.
About Jason
Jason Epps is vice president and private wealth advisor at KFA Private Wealth Group, a registered independent advisory firm founded on the premise of providing conflict-free financial and investment advice. With over 15 years of experience, Jason possesses the unique knowledge and expertise necessary to provide his clients with the most applicable and beneficial financial guidance that helps them find confidence in their financial future. Jason is a CERTIFIED FINANCIAL PLANNER™ (CFP®) practitioner and a Chartered Retirement Planning Counselor℠ (CRPC®) and believes that a financial plan is only as strong as the advisor’s understanding of the core values and beliefs of each client. He serves a diverse range of clients, from young accumulators to pre-retirees and retirees, including business owners and professionals in a variety of fields. Jason is passionate about giving back to his community and volunteers with various organizations in the D.C. metro area. He also has coached youth travel and AAU basketball since 2009. When he’s not working, you can find Jason spending time with friends and family, traveling, trying out new restaurants, and cheering on local D.C. sports teams. To learn more about Jason, connect with him on LinkedIn.