Hello Friends!
This week we're diving into the unique financial challenges of high-earners. have unique financial challenges despite their high income levels.
We'll present each high-level strategies for tackling each.
1. High Tax Burden
The higher one's pay, the higher the general tax burden. Proactive tax planning is critical to legally minimizing tax liabilities.
Common strategies include investing in tax-advantaged accounts like IRAs and HSAs, tax-loss harvesting, and deductions and credits like charitable giving.
2. High Student Loan Debt
Many professionals, especially in medical and legal fields, graduate with substantial student loan debt.
Evaluating loan forgiveness and payoff options is an important first step. Comparing loan payoff options to reduce higher-interest debt first is often the next best second step.
3. Lifestyle Inflation
For many high-earners, spending increases quickly since income increases quickly. This is particularly common in the medical fields where incomes can balloon quickly after living frugally for many years. When this happens, there's often too little savings for long-term goals.
For many faced with this challenge, working with a financial planner helps get a long-term cash flow plan in place without feeling like you're trying to take on too much after long work days.
4. Investment & Retirement Planning
High-earners typically need sophisticated planning around investments and retirement since they can typically invest more than 401(k)s and IRAs allow in a year. They also may have most of their wealth tied up in business or company stock than can be comfortable in the long run.
Diversifying investments to align the overall investments with long-term goals and risk tolerances are important.
Depending on income levels, there may also be unique investment opportunities as an accredited investor or qualified purchaser.
5. Risk Mitigation & Insurance Needs
Higher incomes tend to come with the need to protect larger assets like homes and savings.
Why? Because most high-earners cannot replace their incomes in the case of injury. And in the case of liability lawsuits and creditors, most state regulations (and federal regs) protect very little.
Most common ways to manage this are through malpractice and professional liability policies, life and disability insurance, and carefully coordinated umbrella liability policies.
Note: it's increasingly important for your professional to read the fine print and make sure small things aren't excluded by the insurance policy, like if you have a German Shepherd, or bring your pet to work.
6. Estate Planning
Three issues can combine here. First, most don't consider estate planning until much later in life which can cause challenges in setting up preferred tactics like trusts.
Second, those with business ownership typically don't think about how they would like their businesses run or sold in their absence, leaving the decisions left to unprepared spouses and children.
Third, if you are part of a blended family--a family consisting of children from previous relationships--there are often additional dynamics to consider in advance.
Common tactics are trusts, wills, healthcare directives, business partnership agreements and succession plans.
7. Cash Flow Management
Managing cash flow, especially for entrepreneurs and those who run their own practices, can be challenging.
Most of the time, accountants work on the business side of things, leaving the personal side untouched until tax time. A financial planner experienced in small business finances is recommended helping incorporate how business cash flow will impact personal finances.
8. Burnout
The pressure to maintain or increase earnings often leads to working long hours without adequate downtime. Over time, this can lead to unhealthy stress levels and burnout.
Financial planning to achieve short-term and long-term goals can help alleviate cash flow pressure, and taking regular time away from work can help with recharging.
Have a great week!
Garrett
Tuesday, 20 February 2024
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