5 things to review if you earn more than most: net worth, taxes, estate planning, insurance, and portfolio risk.
Some of the most successful professionals earning high annual incomes can make big financial blunders. Why? Because they’re busy doing what they’re good at -- being doctors, attorneys, business leaders, and performing other highly-skilled roles. These in-demand professionals often don’t have the time or expertise to take proper care of their own financial situation.
This circumstance can leave their families vulnerable to costly financial mistakes. If you make a good income, review these five tips to discovery if you might have an important financial need. Special thanks to Forbes for the article idea.
Tip #1: Know Your Net Worth
High earning individuals often accumulate assets ranging from investment accounts, retirement accounts, insurance policies, and real estate. One of the more common mistakes with top-earning professionals is a missing net worth statement -- a consolidated list of all assets and liabilities.
If your net worth statement is out-of-date (or you don’t even have one), you may unknowingly be creating tax issues for your estate. For instance, if insurance policies are not properly utilized within your estate, you could be pushed over the estate tax limit and wind up paying unnecessary estate taxes. Armed with a complete net worth statement, you can make better financial planning decisions.
Tip #2: Pay Taxes Now On Retirement Accounts
Many current high earners may also remain in the top tax bracket after retirement. That means all deferred income, pensions, investment income, and even Social Security benefits could be taxed at a high rate in the future. Consider using all available after-tax savings strategies now to help minimize taxes later. As an example, Roth 401k contributions (if your company offers the option), have several advantages over traditional 401k contributions:
- No income limit to making Roth 401k contributions.
- Roth 401k growth is tax free.
- Roth 401k funds can be rolled directly into a Roth IRA when retiring or leaving a company.
- There are never any required minimum distributions (RMDs).
Tip #3: Estate Planning For Your Family
Once someone has a taxable federal estate ($5,490,000 for an individual or $10,980,000 for a married couple in 2017), it may make sense to use more advanced estate planning strategies to remove assets or the growth of assets outside of the estate. If you see exceeding this threshold as a possibility, you should consider consulting with a qualified estate attorney.
Tip #4: Review Your Insurance
There are several areas of insurance that you should review as a high-income earner.
Although it comes in many different forms, life insurance often plays a key role in estate planning. Your unique family needs will dictate what life insurance strategy to have in place. Getting this right can be a key factor in your family’s financial success.
Other types of insurance are also important. Disability insurance will protect you during an unexpected accident or illness. Long-term care insurance will help pay for care during a long-term illness like dementia. An umbrella policy will cover liability issues related to your personal property. All of these insurance areas are helpful to review with a good, independent insurance agent.
Tip #5: Understand Your Portfolio Risk
Risk is an unavoidable part of everything you do. You have to take some level of risk to generate reasonable investment returns. Taking additional investment risk can provide larger returns, but also increases the potential downside.
The level of risk you take should always be matched to your financial goals and objectives. Aggressive investing can cause declines of 30% or more during bear markets. If you can tolerate that kind of downturn (very few can), you may want to explore more aggressive investment strategies. Regardless of your tolerance for risk, you should understand the types of investments you own and what sort of risk is inherent with each one.
Use A Professional
Each of these tips can be vital to your financial success. However, some of these areas require specialized knowledge involving tax planning, estate planning, and insurance. We recommend using a professional whenever venturing into unfamiliar financial territory. This will help you steer clear of the financial landmines that trip-up many other high-earners.
We enjoy our role as a key financial resource to our clients. If you need a referral to a specific professional, please reach out to us -- we’re happy to make an introduction!
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