We have a saying out here on the West Coast: "Big Hat, No Cattle".
It refers to someone who is all about their image, with little substance behind an embellished facade.
It also highlights that it's not what money you make, it's what you keep that counts. 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 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 charitable gifts
- 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 not in cash, but in various companies and funds, oftentimes their own business. For many, the value of their business and the income from other investments is the source of their wealth. If the local market or the broader stock market were to crash, their net worth could shrink drastically in a matter of days. Without a solid investment strategy, those that are poorly diversified or too concentrated in one asset could see their net worth vanish overnight.
Concern #3: Retirement
High-Earners are not always Good Savers - consider those High-Earners who arrived at that status via a unique job, like being a superstar athlete. They could face a forced lifestyle change after their regular income goes away. In fact, many athletes are closer to financial normalcy than we think. They have a short career span, with high expectations for lifestyle assets like homes, private schools, and expensive cars. Athletes may also face significant health issues as they age. Earning a lifetime of income in a few months or a few years means making a lifetime of financial decisions just as quickly - and correctly.
Concern #4: Insurance
High-Earners & Good Savers face unique risks, like the constant threat of expensive business or personal litigation, or the risk that a torn ligament could end a 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 their needs second or third.
Concern #5: Asset Protection
Most High-Earners & Good Savers will accumulate assets and real property. Creditors have a certain right to come for those assets to satisfy a debt. Depending on the state, assets can be sheltered in certain retirement accounts or shielded in trust.
Concern #6: Estate Planning
We could all stand to give some consideration to what happens with our assets and wealth after we’re gone. It is of particular concern for High-Earners & Good Savers who will usually have a significant amount of wealth to pass on to their heirs.
Under the current tax code, the federal government sets a "cap" and will not tax the first $11 million of an individual's estate. However, just a few years ago that "cap" number was $1.0 million. When an estate exceeds that amount, the tax on the estate is 40 percent. There are also state government estate taxes to consider.
When the line is the sand is changing in orders of magnitude -$1 million versus $11 million - High-Earners & Good Savers are rightfully concerned.
Concern #7: 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 about your financial well-being, right? Unfortunately, not always. Financial advice remains subject to troublesome double standards. It’s still up to you to spot the subtle differences and heed the quality of advice accordingly.
There is an army - an entire few industries - lurking out there waiting to pounce; waiting to make a buck off the High-Earner & the Good Saver.
This content is developed from sources believed to be providing accurate information. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.