By: Paul Morrone
Unless you graduated college making a ton of money, chances are you lived part of your early adult life living some version of paycheck-to-paycheck. It’s a natural part of the lifecycle of financial evolution. Some will stay comfortably in the lane of spending what they earn, being careful not to overspend, prudently saving for emergencies and likely putting some money into their retirement accounts for the future. Others will experience parabolic growth in their incomes, and without careful planning can easily wind up with a disorganized mess that maximizes frustration and minimizes efficiency. As income rises, so does complexity, which means the impact of well thought out and executed plans rises in magnitude as well.
Building a wealth management plan means running your personal life like a business. Yes, there should be a basic understanding and long-term tracking of your financials (income, expenses, assets and liabilities), but beyond that, high earners can benefit from having systems and structure in their life to help keep them on track as things get more complicated. This means making intentional decisions related to savings – how, when, where and why funds will be saved – factoring in tax limitations and long-term consequences of building significant wealth. Part of this is creating an ongoing review process, not during tax season, but throughout the year, that address knowns and unknowns on the horizon.
When earnings become significant, typically this creates opportunities to create other sources of income as well. It could be as simple as portfolio income, that will ultimately be small at first but can quickly rise to tens or hundreds of thousands of dollars per year in passive income. This creates additional tax liabilities (and planning opportunities), which can become especially significant for high earners who can see tax rates on investment income exceed 50% when you factor in things like state taxes and the net investment income tax. Those invested in private investments may have to plan for things like funding capital calls or liquidity events that are out of their control – and timing can have a huge impact on the outcome from many different perspectives. There can also be property sales, recapitalization events and dividend payments that can create one-time realization events and infusions of cash as well.
Because planning is an ongoing process – not at a singular moment in time – it allows for continual evaluation of things beyond income and expenses to make sure that any external risks and opportunities relevant to your financial plans are being addressed. Changes in income and net worth need to be put into context with respect to the additional complexities they bring. Purchasing an additional piece of property may warrant an increase in liability coverage and may also require additional tax planning depending upon whether it is a rental property or not. This may also trigger a need for additional life insurance or have an impact on your estate plans, especially if you’ve purchased a piece of property in a state other than your state of domicile for tax purposes. Furthermore, you’ll also need to review the asset ownership (owned by an entity such as a trust or LLC, or personally) and update your financial plans, life insurance amounts, property insurance and estate plans accordingly. While purchases of real assets impact virtually every aspect of a financial plan, the same analysis framework should be applied to other events that occur much more frequently. This means proactively addressing the impact of events such as the grant or vesting of company stock, an inheritance or the analysis of a concentrated equity position.
When there are several irons in the fire, the opportunity cost of a mistake is multiplied and can ripple into virtually every part of your financial and estate plans – which is exactly the type of risk that we are working with people to mitigate.
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