By: Paul Morrone
I’d be willing to bet that many of my peers will be millionaires one day – most will be 401k millionaires from retirement plan contributions alone by the time they are in their 50s or 60s. But with the growing complexity of the regulatory environment, uncertainty around future taxation, and unpredictable financial market returns, I’d also be willing to argue that a 401k millionaire may not be enough to support the needs of a career high earner in retirement.
Long-term saving is a nebulous concept, mainly because there isn’t a uniform way to approach it. Your starting point, benefits, salary, expenses, assets, liabilities and tax picture are going to be different than virtually anyone else on earth. This means care must be exercised in making decisions early on about how you want to structure your wealth decades later. At the beginning this may mean something as simple as choosing ROTH vs pretax contributions to a retirement plan. Later on, this could mean determining how to exercise stock options or quantifying concentration risk related to vested and unvested employer stock. Those who invest in real assets may be evaluating interest rate, liquidity or valuation risk associated with owning illiquid or hard to value assets.
Now don’t get me wrong, it’s great to see one’s net worth increase, no one is going to argue that. But how accessible is that wealth to you? Are you limited by tax handcuffs until 59 ½? Have you placed all your eggs in one basket or is your long-term financial solvency completely dependent upon the performance of a single company? Are you able to control the timing and amount of your income tax burden? Building a personal balance sheet that is diversified from a tax, liquidity, investment and cash flow generating standpoint takes years or decades to effect – and the time to start is when you get your first paycheck.
Further compounding the importance of putting a plan together is the simple fact that the price of inaction is massive. Passively accumulating too much cash, taking the set-it-and-forget-it approach to building wealth or assuming the worst won’t happen is a recipe for disaster. Those with discretionary cash flow and an income to support a robust savings plan should be taking calculated and measurable steps now – with the intent of giving themselves financial freedom in the future. Getting there may not always be simple, and qualified guidance can help avoid the many common missteps we see every day.
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