Founder & CEO of Artisan Financial Strategies LLC. She is fascinated by the interplay between gender, money and power.
As a successful professional, you’re pretty much on top of things. You’re a responsible adult with a job that reflects your abilities and dedication. You’ve likely got a solid income, savings and investments along with a CPA and a financial advisor to help you cover your bases. And yet, you’ve also got significant gaps in your financial strategy that put your future at risk.
Wait, what? It’s not what you want to hear, I know, but after 24 years in the financial advisory space, I’m telling you that it’s very probably true. Your financial plan is most likely missing key elements, and as a result, you and the people you love are more vulnerable than you think.
Yes, you have accountants and trusted advisors—maybe multiple kinds. Those professionals may be quite good at what they do, too. But unless you have someone looking at the big picture, the patchwork of services you pay for almost certainly leaves dangerous gaps in your financial plan. Here are the top five financial risks I see among the highly successful professionals in my practice.
Estate Planning Implementation
You had attorneys draw up documents that cost a bundle to articulate your estate plans in detail. That’s great! Now here’s a question: When was the last time you looked at those fancy schmancy documents?
If you’ve gotten married or divorced, had another kid, buried an intended beneficiary, created new accounts, acquired additional assets or done anything else that happens in normal life, then those documents may no longer reflect your wishes. If you don’t go back and change the listed beneficiaries and account ownership on every single asset (account, property, insurance policy, etc.) then it doesn’t matter what your estate planning documents say; the assets will go to the beneficiary listed on the account or policy—even if it’s your ex-wife.
Additionally, many highly paid professionals have a revocable living trust. If you do, then it’s critical that you retitle probatable assets to align with the language used in the trust. That includes coordinating LLC memberships and corporate ownerships properly. A shocking number of people create an RLT but fail to take these critical last steps, which renders the trust utterly useless.
With the ever-changing tax code, it’s becoming more important to address tax planning for retirement income, including required minimum distributions from tax-advantaged accounts such as 401(k) plans and IRAs.
Your savings strategy should prioritize tax diversification, which means accumulating retirement assets in three different “buckets”: tax now, tax later and tax-free. Without this kind of strategic tax diversification, you may discover that the income you budgeted for a comfortable lifestyle in retirement doesn’t go as far as expected when you have to split it with Uncle Sam.
Adequate Liquidity And Active Tax Loss Harvesting
Liquidity that’s not in concentrated stock positions is a big stumbling block for successful professionals because equity in the employer’s company often plays a big part of their total compensation package. It’s easy to wind up with over 10% of a balance sheet composed in shares of the large company you work for—and that could seem like a fine idea, given a natural bias toward it. The problem is that your finances may take a serious hit if the stock is down when you need to access funds.
If you’re regularly accumulating company shares, it’s important to execute trades during strategically advantageous windows. Your financial plan should include a rational approach for determining when to sell and diversify versus holding onto the position.
Create an investment policy statement that sets a target percentage of your balance sheet for this stock, and then stick to the policy. Be sure to consider how these shares can support a tax loss harvesting strategy to lower your overall tax liability. Also remember to plan for taxes as the stock vests, which may mean paying quarterly estimated taxes.
Emergency Savings Account
I am constantly amazed at the number of professionals who don’t have a designated emergency account with adequate liquidity. The general rule is to hold enough to cover all living expenses for three months in easily accessible cash—not stock, not anything else. But that’s not enough cushion for C-suite and other highly remunerated roles. It can take substantially more than three months to find another position at your level, so your emergency savings fund should be built to carry you quite a bit longer.
Clearly Defined Offense And Defense Positions For Every Stage Of Life
Markets wax and wane. Therefore, it is critical to maintain different vehicles to draw from in varying market conditions. Time for college and your company stock is down 30%? That’s a problem if your education savings rely on those funds. Whatever the situation, the point is that you don’t want to be forced to sell one type of investment during a down market since you’d have to liquidate more shares than you would at another time. Even professionals with ample net worth need designated accounts with purpose-specific investment horizons. They can help protect your balance sheet from disaster.
None of this is rocket science, but an awful lot of smart people wind up in worse financial shape than they should be, simply because nobody on their financial team was looking at the big picture. You owe it to yourself to find a coach who can direct the whole game, not just one play.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.