If you’re a high-income earner – especially one who’s developed a higher level of income as your career or business has grown - you've likely encountered distinct financial concerns and challenges that differ from those of others. These issues are often compounded by the inability to talk to others or ask for advice when they don't understand, can't relate, don't have experience with your challenges.
If you haven’t yet hit the threshold of or don’t identify yourself as “High-Net-Worth (HNW)” you should still read on, because you may be surprised by how many ways these challenges can come into being for people who didn’t always find themselves in this position.
Some of these challenges impact a person due to common life and work events. If you receive any form of equity compensation at work, for example, you may be staring down at least some of these risk and tax challenges sooner than you expect. If you’re working through a career progression that has taken time to develop, you could also be on the precipice of tough decisions and new questions you might not have had the opportunity to prepare for.
As a relatively simple example of something even more advanced, take the estate and gift tax exemption. Taking a first look at the figures, many people assume this is not a problem that affects them. If you’re making that call at age 35 or 40, however, you could be making a mistake. Combining some reasonable assumptions about how much you can save per year, the length of your working life, reasonable investment returns, the help of a strong accumulation and distribution strategy from advisors, and the possibility of a drastic reduction in the exemption in the coming years you may realize that it’s possible that you’ll not only reach some of these limits, but maybe even push well past them.
What paths can lead to these challenges?
- Sale of a successful business or equity stake in a business.
- Successfully growing one’s career, advancing from junior level roles to senior level or even ownership.
- Becoming successful in a largely performance-driven and/or commissions-based role, like sales.
- Growing income over time, and successfully increasing savings rates with it – compounding savings and investments over a long period of time.
- Having highly appreciated shares of individual companies, often from seasoned investments, gifting, or inheritance with compounding over a long period of time.
- Inheritance, sometimes unexpected, from parents or older relatives.
- Earning equity compensation from an otherwise salaried role, especially as an early or long-time employee.
- Working in a highly compensated role, and finally moving past barriers from earlier in life such as not having built a successful practice yet and paying off professional debt from education, licensing, and credentialing processes.
What challenges and concerns will we encounter that we may not have been prepared for?
- Minimizing tax burdens/need for tax-management strategies.
- More savings, same limits: Many common tax-management approaches used by the average person (like work retirement plans/IRAs) hit hard contribution limits or phase-outs once income increases past a certain point.
- Higher rates: High earners often are subject to higher tax rates, and the need to be tax-conscious becomes more urgent.
- Taxes now or later? There’s a pressing need to balance tax management across all relevant time periods (not just this year), while simultaneously keeping properly diversified exposure.
- More investable assets: both a blessing and a curse.
- Larger stakes = greater stress: Many worry intensely about making the right investment decisions, managing risk, and keeping up with market trends, as the risk of the same percentage losses now represents much greater dollar figures.
- Increased desire for more thorough diversification: related to the above, as the consequences of “normal” volatility are sharpened with size, the need for greater numbers of uncorrelated assets to suit your specific risk/reward and liquidity profile become apparent.
- Scary levels of concentration: Large concentrated positions in a single or very few individual securities (often from equity compensation) generate a difficult to navigate balance between holding high levels of concentrated risk and potentially incurring large tax liabilities.
- Inefficiency and duplication: All holdings should serve a purpose, and with increased size and complexity, many holdings may serve the same purpose in different parts of your portfolio, which requires oversight to avoid overlap, unplanned redundancy, and unintended holistic portfolio allocations across accounts.
- New opportunities cut both ways: while more opportunity may seem like an advantage, it can also quickly turn into complexity and disorganization. It can be extremely difficult to assess where non-traditional investments and business interests fit within a holistic financial picture.
- Variable income and liquidity:
- Many sources of high-earner / HNW status come with variability: business earnings, performance comp, equity comp, profit sharing, and commissions, for example.
- Paired with this, many investment opportunities or equity comp structures involve limited or unpredictable liquidity and growth over long periods.
- Early financial independence potential:
- Having the potential to become financially independent and retire before age 65 is exciting, but it comes with different risks and challenges than most traditional planning is prepared to deal with.
- Early-retirement = long retirement: When the high-income earning years stop, many worry about whether their savings will be enough to sustain their lifestyle throughout what will now be a very long retirement period, especially if they have grown accustomed to a high-cost lifestyle.
- Standard plan age restrictions: Typically, qualified accounts don’t allow distributions (income you need to fund your life, if you’re not working) until age 59.5 without penalty, regardless of whether you feel like you’ve earned enough to start taking them.
- Sequence of Returns: If you plan to be retired for up to 50 years, you can expect a lot of severe market downturns over that multi-decade timeframe.Even small percentage cash flow differences generated by well-designed, flexible distribution strategies can become massive dollar amounts of recurring annual income in retirement at large asset levels.
- Asset protection and estate planning:
- Protecting wealth from creditors, liability, and transfer friction can become a major concern.
- Size comes with complexity, and complexity brings the need for thoughtful gift and estate transfer plans that account for all of your goals, with a lot of contingencies and possible outcomes you may not have already thought all the way through.
- Estate tax considerations must be contended with early and in advance, not at the end of life, when it’s too late to take many forms of meaningful action.
- Sudden change of goals, objectives, and capabilities:
- For many at the outset, the goal of financial planning is to grow at all costs in hopes that you’ll have enough to retire one day. It’s important to know when you’ve already begun to win the game, so you can shift your focus from “growth at all costs” to protecting and effectively using what’s already being earned and built.
- Rate of return is on top of many people’s minds when they think of financial planning, but once you’ve reached a certain level or come closer to the stage in your life for spending and distribution, you’re likely to realize predictable growth and results are more important than maximum growth and results.
- More pieces to your financial puzzle and more options for what to do next can mean more efficiency and optimization considerations to work out, and most high earners are too busy with their area of expertise to justify dedicating the time required to keep up with all the nuances.
What can help you feel better equipped to handle these challenges?
- Coordinate and organize:
- Create a comprehensive financial plan that considers all aspects of your financial situation, including investments, taxes, risk, estate planning, insurance, and more.
- Coordinate an entire team of financial professionals, such as accountants and attorneys, to ensure that your financial plan is well-integrated and effective.
- Understand your cash flow:
- My partners and I often say that people don’t like awake at night because they earned 8% instead of 9% over a given period. They lose sleep because they worry about not having enough cash when they need it.
- Create a plan to manage your cash flow increases to ensure that you’re making the most of your opportunities and protecting what you've already worked hard for.
- Understand the role of both liquidity and properly uncorrelated diversification in managing your ability to spend money when you need and want to, over appropriate time frames for you.
- Get help in evaluating opportunities:
- Some high-income earners and those with substantial assets wind up feeling inundated with investment opportunities that may not be suitable for their goals and risk tolerance.
- Qualified professionals like our team can evaluate where these kinds of opportunities fit within the context of your entire plan and can help you understand the risks and other considerations that come along with them.
- Make sure your plan works in different possible environments:
- It’s prudent to consider that no one knows exactly how long economic environments, business cycles, variable income levels, tax laws, and individual business performance trends will last.
- The number of variables that affect a financial plan in the end are vast.
- Take action to build plans that work not just in the most probable set of conditions but in the highest number of possible future conditions.
- This may include thoughtfully managing holistic risk, developing deeply uncorrelated investment portfolios, creating cash flow management plans, and implementing tax-efficient strategies that allow for a level of control as tax levels change over long periods of time.
For some, high-income-earning capacity comes about more suddenly or recently, and it often doesn't come with a personal or professional background that helps them to prepare.
On a personal level, I’ve been in those shoes and experienced confronting many of these challenges first-hand. My team and I take pride in being uncommonly positioned to help you navigate many of the challenges that can come with sudden changes in income and financial circumstances.
2024-178293 Exp 07/26