As a financial planner working with individuals in the 30-50 age range, particularly those with high net worth, I consistently encounter certain financial blind spots. While many people get the basics right, they often overlook key aspects of their financial lives. These oversights can have significant consequences over time.
When building wealth, financial planning becomes exponentially more critical. Small adjustments in your strategy can result in massive differences in long-term wealth. Let’s dive into the five most common blind spots I encounter, so you can avoid them and strengthen your financial future.
1. Tax Planning
Nearly every client I work with is overpaying on taxes, whether it’s from their current year’s taxes or from a lack of long-term planning. Many high-net-worth individuals fail to optimize their tax strategies, leading to unnecessary tax payments now and in the future.
Common mistakes include:
- Operating under the wrong tax entity
- Failing to maximize the Qualified Business Income Deduction (QBID)
- Mismanaging Roth vs. traditional retirement accounts
- Neglecting Roth conversions
- Overlooking self-employment taxes
- Using inefficient business retirement accounts
- Giving to charity without considering the tax advantages
- Not taking full advantage of trusts and tax-advantaged accounts
Effective tax planning is crucial, particularly for high-net-worth individuals. Proper estate planning and strategizing for business sales can save millions in taxes over your lifetime. A solid tax plan is one of the best ways to preserve wealth.
2. Insurance Coverage
Many people lack a clear understanding of their insurance needs, and it can be easy to overlook this essential aspect of financial planning. Insurance should be about protecting you from significant financial risks, not covering everyday expenses.
Here’s a breakdown of what to focus on:
- Life Insurance: Most people need term life insurance to protect their family in the event of an untimely death. A rider for converting to permanent insurance can be valuable if you need it for reasons like covering estate taxes.
- Homeowners/Auto: Protect both your belongings and your liabilities. If you don’t have enough coverage and face a lawsuit, it could cost you much more than you anticipated.
- Umbrella Insurance: This policy should sit on top of your home and auto liability limits, offering additional protection in case of a large lawsuit.
- Health Insurance: Choose the plan that minimizes out-of-pocket expenses, ensuring you’re not stuck with massive bills if something unexpected happens.
3. Investments
Many high-net-worth individuals make costly mistakes when it comes to their investments. Common pitfalls include taking on too much risk and investing in things like random stocks, speculative crypto, or investments suggested by friends without proper research.
To ensure a sound financial future, you need a globally diversified portfolio that aligns with your risk tolerance and financial goals. This includes factoring in your business, equity compensation, and other personal investments. The key is to establish a solid asset allocation and invest consistently to build wealth over time.
4. Estate Planning
Estate planning isn’t just about drafting basic documents; it’s about strategically protecting your wealth and ensuring it’s passed on according to your wishes. Unfortunately, many high-net-worth individuals overlook estate planning entirely, leaving themselves exposed to unnecessary tax burdens.
For example, many fail to leverage trusts, meaning they’ll end up paying estate taxes of 40% on wealth above the exemption threshold. Advanced estate planning tools, such as:
- SLATs (Spousal Lifetime Access Trusts)
- Generation-Skipping Trusts
- IDGTs (Intentionally Defective Grantor Trusts)
- GRATs (Grantor Retained Annuity Trusts)
These strategies can help reduce estate taxes, preserve wealth, and ensure your legacy is passed on with minimal tax implications.
5. Cash Flow Planning
Effective cash flow planning is about understanding where your money is going and ensuring you’re directing it toward your priorities. Many high-net-worth individuals don’t have clear visibility into their business cash flow, which can result in inefficiencies and missed opportunities.
The first step is knowing how much cash is necessary for:
- Emergency funds
- Taxes
- Business operations
We help clients understand how much they owe in taxes, what they need for safe harbor, and what should be allocated for business expenses versus personal use. By gaining this clarity, clients can make informed decisions about how much to keep in the business and how much they can take out and reallocate.
Mastering these numbers is crucial for managing your finances effectively.
These five areas are common blind spots for high-net-worth individuals, but with proper planning and guidance, they can be addressed. By paying attention to these often-overlooked aspects of your financial life, you can make better decisions and build long-term wealth.
