If you’re like many of my clients, you’ve probably made a good living for yourself, with a steady, high income and a comfortable retirement on the horizon. That’s great! But it doesn’t mean that you’re immune to making financial mistakes. In fact, throughout my 10 years of experience working with affluent families, I found that even the most well-off people have made financial mistakes at one point or another—often without even realizing it.
These mistakes probably won’t wreak havoc on your financial future, but they certainly don’t help you make the most of what you have worked so hard to build. That’s why I strive to provide my clients with the tools and resources they need to fully understand their financial picture and make the best decisions possible. Here are 4 common financial mistakes I’ve seen with high-income earners and what you can do to avoid them
Not Knowing When to Convert RSUs to Stock
As high-income earners, many of my clients receive restricted stock units (RSU) as compensation. I’ve found that one of the biggest financial mistakes these clients often make is not fully understanding how RSUs fit into their overall financial plan and when it will be most advantageous to convert and sell the stock.
Most RSUs are subject to vesting schedules based on length of employment or performance, and once the RSU has become fully vested, it is usually converted to stock. At this point, you will be taxed on the market value of the converted shares. Understanding when this will happen is crucial to minimize your tax liability. For instance, if you expect a large portion of your RSUs to vest next year, you should try to minimize or defer other income to a different year so that you are not pushed into the next tax bracket.
If your RSUs don’t convert automatically, then deciding when to convert your options to stock becomes the question. Converting at the right time can help boost your returns and reduce tax liability. Waiting until share prices are depleted or when your taxable income is lower is often a great way to maximize your RSUs.
It’s also important to think through what you want to do with the stock once it has become available. Selling it within one year of conversion may result in capital gains that will be taxed as ordinary income, whereas holding it for at least a year will allow any gain to be taxed at the preferential, long-term rate. Either way, fully integrating your RSUs into your wealth management plan is a necessary step.
Not Using Alternative Investments to Diversify
Another mistake I see with high-income earners is that they sometimes don’t realize the degree of diversification needed for their often complex investment portfolios. It’s one thing to know in theory that investment diversification is a key strategy, but it’s another thing to follow through by staying on top of your portfolio and utilizing alternative investments when possible.
Alternative investments are assets that aren’t part of the conventional investment types (stocks, bonds, and cash), and they include things like real estate, private equity, hedge funds, and commodities. In general, the purpose of an alternative investment is to behave differently than stocks and bonds, adding value to your portfolio through diversification and risk reduction.
Since most alternative investments have low correlations with standard asset classes, they can smooth portfolio volatility. Hard assets (like real estate, timber, oil, and gold) may have an inverse relationship with stocks and bonds during periods of higher inflation. Because of these differences in behavior, including them in your portfolio is a great way to manage risk by acting as a buffer against the inherent volatility of the market.
Failing to Develop a Comprehensive Estate Plan
Though many of my clients are diligent in their savings, with sizable retirement assets and high incomes, there is a tendency to think that saving and earning a lot is all they need to meet their goals. Unfortunately, this is a mindset trap that couldn’t be further from the truth.
There is so much more that goes into being financially secure than just how much money is in the bank. Estate planning is a crucial aspect of a comprehensive wealth management plan, especially if you want to pass significant assets to the next generation, or properly plan for the succession of your business. Through the proper use of trusts and other estate documents, you can ensure that what you’ve built over your lifetime is properly passed on while minimizing taxes and probate expenses.
Many high-income earners often overlook the full scope of a comprehensive estate plan and it can have devastating effects on your accumulated wealth. Making sure you are adequately covered now will save you time, money, and energy in the future.
Not Having an Income Plan
Another common mistake I see is forgetting to develop an income plan in retirement. Most people focus on what they need to do to make it to a comfortable retirement and often forget that’s only half of the equation. Your income plan during retirement will also play a major role in how long your money will last and how much will be lost to taxes.
Each retirement asset has different tax characteristics, whether it be a 401(k), a Roth IRA, an annuity, or some form of equity compensation, and understanding the timing of distributions from each source is a significant part of managing your overall tax bill in retirement.
It’s also important to pay attention to local and federal tax policies that could impact your personal or business finances. For instance, the tax portion of the Build Back Better Act, if passed, contains many provisions that could affect you if you have significant estate assets, plan to retire, or expect to have large capital gains in the next couple of years. It’s crucial to stay up to date on changes like these to amend your financial strategies as needed so you can protect what you’ve already built.
Are You Making Some of These Financial Mistakes?
If some of these mistakes sound familiar to you, don’t worry. Envision Wealth Planners is here to help. We specialize in working with affluent families who want help making the most of what they worked so hard to build. If you’d like to learn more about how to avoid these common financial mistakes and more, schedule a no-obligation introductory phone call or reach out to me at connect@envisionplanners.com or 407.720.6535.
About Sean
Sean Gerlin is founder, principal, and a financial planner at Envision Wealth Planners, an independent financial advisory firm founded on the core values of family, honesty, and a determination to be a master of the trade. With almost 10 years of experience, Sean specializes in serving affluent families and commercial real estate executives and brokers, providing comprehensive, customized financial guidance and services for their complex financial needs. Sean acts as a family CFO, managing and coordinating the many moving pieces of his clients’ financial lives. Sean is known for his commitment to building long-term relationships and paying personal attention to each client. He is passionate about helping his clients experience the relief that comes from having organized and well-planned strategies and portfolios, and he desires to help them by shouldering some of the financial burdens they face.
Sean has a bachelor’s degree from the University of Florida and holds the CERTIFIED FINANCIAL PLANNER™, Chartered Financial Consultant®, and Chartered Life Underwriter® certifications. When he’s not working, you can find him cooking, eating good food, traveling, coaching his son’s baseball team, or playing golf. He loves spending time with his wife, Nicole, and their two kids, Avery and Will, and entertaining friends in their beautiful backyard. To learn more about Sean, connect with him on LinkedIn.