Big Hat, No Cattle

We have a saying out here in the West: "Big Hat, No Cattle". 

It refers to someone who is all talk, and no action. For us, it refers to someone who earns a high income but is unlikely to save much. After all, it's not what you make, but what you keep.

Sure, the more money you make, the easier it should be to save. But sometimes, a big income just means bigger expenses. Just like it takes effort to be a High Income Earner, it takes discipline and practice to be a Good Saver.

Our clients tend to be both High Earners and Good Savers. They've spent a lot of time developing these habits. They don't want their efforts to be squandered by a bad market, a bad government, bad advice, or an unlucky roll of the dice.

Here a few concerns that we're hearing from them.

Concern #1: The Tax Code

High-Earners & Good Savers pay a large share of tax revenues that power our national budget. Although tax rates are lower than the 1960s and the 1980s, with a federal income tax rate of 37% (plus Medicare surcharges and potential state taxes) taxes represent a sizeable chunk of expenses.

Yes, individuals can take advantage of provisions within the code to reduce their tax liability and they do. Yet, they are rightfully concerned about the power of the government to effectively reduce their net worth. Depending on which political party is in power and the economic landscape, we could see changes in the tax code that could:

• Remove beneficial deductions, such as for retirement savings
• Increase estate taxes
• Return the top tax brackets to pre-1980 levels of between 70% and 90%

Concern #2: A Volatile Market

Most High-Earners & Good Savers are heavily invested in various public companies and funds, oftentimes their own private business. During a market crash, their net worth could shrink drastically. Without a solid investment strategy that incorporates all of their assets, poor diversification and concentration could permanently impact their net worth.

Concern #3: Retirement 

High-Earners are not always Good Savers. Consider the late start many physicians experience, often not earning a significant income until their thirties. They might also face a pile of student debt. Consider those High-Earners that have arrived at that status via a unique job, such as a professional athlete. They could face a forced lifestyle change after their regular income goes away. In fact, many professional athletes are closer to financial "normalcy" than we think. They have a short career span, plus lifestyle expectations including homes, cars, or the financial support of others. Earning a lifetime of income in a few years means making a lifetime of financial decisions just as quickly, but with less room for mistakes. 

Concern #4: Insurance

High-Earners & Good Savers face unique risks, like the threat of expensive business or personal litigation, or the risk that an injury could end their career. High-Earners & Good Savers take out additional insurance policies to protect themselves and their money. Examples include malpractice insurance, errors and omission insurance, umbrella insurance, and key man insurance. These are necessary items when purchased prudently; however, many insurance sales are based on a commission first, and buyer's needs second or third.

Concern #5: Estate Planning

High-Earners & Good Savers will naturally accumulate assets. Creditors have certain rights to come for those assets in order to satisfy a debt. Depending on the state, assets can be sheltered in retirement accounts or shielded in other ways.

Even in their death, the assets of the High-Earner & Good Saver find no respite. Inherited wealth can be a curse to those that are unprepared to receive it. Family wealth can be a curse, not a gift. Comments from children of some of the largest family fortunes in America highlight inherited wealth as a recipe for a life devoid of fulfillment and purpose.

Plus, the federal government seeks a cut if an individual's estate exceeds ~$11 million. While $11 million is more than enough for many, in the early 2000s the same limit was $1 million. Estates in excess of the limit are taxed at a rate of 40%. When the limit is changing in orders of magnitude - $1 million versus $11 million - High-Earners & Good Savers are rightfully concerned. 

Concern #6: The Wolf in Sheep's Clothing

In the medical profession, physicians practice according to a familiar standard: “First do no harm.” It seems there should be a similar level of commitment for anyone who wants to advise you on your financial wellbeing, right? 

Unfortunately, that’s not always true. Financial advice remains subject to harmful double standards. That is why Open Window exists: to be a stronghold for your family’s finances. 

Here is how to find the advice you need.