Five Common Financial Pitfalls of High Achievers and How to Avoid Them

As a Chicago-based wealth management firm that works with high-achievers, it’s not uncommon for our team to meet successful individuals and learn they are dealing with multiple financial challenges.

To compound the issue, if you are a high achiever working with a financial advisor at a bank or brokerage house, you may not receive the custom solutions you need to achieve true financial independence. 

Working with an advisor who understands your unique challenges and circumstances can make a big difference. That’s why many high-net-worth, high-earners turn to Cogent Strategic Wealth to help them reach the next level. 

In today’s blog, we’ll look at the following five financial pitfalls that you may be experiencing as a high-achiever earning seven or eight-figure incomes each year:

• Not Offsetting Lifestyle Inflation
• Neglecting Retirement Savings
• Overleveraged with Debt
• Insufficient Diversification
• Inadequate Estate Planning

Keep it Real

Lifestyle inflation, or lifestyle creep, can be a common challenge for high earners. As your income rises, there’s a natural tendency to increase spending on luxuries such as bigger homes, more expensive cars, lavish vacations, and other high-end goods and services. 

After all, this is a way to reward yourself for a job well done.

These financial decisions can also lead to a cycle where higher net incomes are quickly consumed by higher expenses, leaving little room for savings and asset accumulation. Over time, lifestyle inflation can erode financial stability and delay pursuing and achieving your long-term financial goals for a durable, secure retirement.

Wealthy individuals often approach spending differently than the average person, focusing more on strategic allocation and investment in experiences, assets, and legacy-building rather than mere consumption. 

To avoid this pitfall, it’s important to maintain a disciplined approach: 

• Maintaining Lifestyle and Wealth Preservation: One of the foremost concerns is the ability to maintain their lifestyle without depleting their wealth. This involves careful planning to ensure that their investments generate sufficient, tax-efficient income to support their lifestyle for an extended period, potentially longer than average due to higher life expectancies associated with better healthcare.
  
• Tax Management: Effective tax planning is crucial for such families. They need strategies to minimize the tax impact on their retirement income. This can include managing the timing and type of withdrawals from retirement accounts, utilizing tax-efficient investment vehicles, and considering the implications of estate taxes.
  
• Estate and Legacy Planning: High net worth individuals often focus on how their wealth will be distributed to future generations. Concerns include not only the legal structuring of inheritances through trusts and wills but also the personal values they wish to pass along with their wealth. This also involves discussions about philanthropic desires and how to structure charitable giving.
  
• Health Care Needs: As wealth increases, so does the ability to afford more comprehensive healthcare options. High-net-worth individuals often plan for potential long-term care needs and may look into premium health services and insurance to cover unforeseen health issues without financial strain.
  
• Market Volatility and Investment Risk: The risk of significant investment losses can be a prominent concern, particularly as one nears retirement. High-achieving families often seek to strategies in their portfolios to reduce risk exposure to the fat tails of out-sized losses, while still achieving growth to outpace inflation and support spending needs.

Cogent Insights: By making disciplined choices about spending and prioritizing financial security, you can enjoy your success without compromising your long-term financial health.

Not Leveraging Contributions to Retirement Saving Plans

Ask yourself this question: Are you taking full advantage of your ability to optimize your savings toward retirement? Many high earners we meet with are not fully leveraging contributions to their tax-advantaged retirement savings plans. 

High achievers looking to optimize tax efficiency through retirement planning have several strategies at their disposal, especially when using vehicles like 401(k)s, cash balance plans, and deferred compensation plans. Here are some key strategies they might consider.

Maximize Contributions to Tax-Advantaged Accounts

• 401(k)s and Similar Plans: Max out contributions to take full advantage of tax-deferred growth. For 2024, the contribution limit for individuals under 50 is $23,000, and for those 50 and older, an additional catch-up contribution of $7,500 is allowed. Business owners can further maximize their contributions
  
• Cash Balance Plans: Particularly useful for high earners, these defined benefit plans allow for larger contributions that grow tax-deferred and are not tied to the performance of the market, potentially offering a stable growth rate.
  
• Utilize Roth Options When Appropriate:Roth 401(k): Unlike traditional 401(k)s, Roth 401(k)s are funded with after-tax dollars, allowing withdrawals to be tax-free in retirement. This can be beneficial for those who expect to be in a higher tax bracket during retirement or are experiencing a year of significantly lower income while still saving.

• Roth Conversions: Converting a portion of a traditional IRA or 401(k) to a Roth IRA can be advantageous if you expect your tax rate to be higher in the future or have legacy desires. This strategy involves paying taxes on the converted amount at today’s rates. Mega Roth conversions involve strategically converting large amounts from traditional retirement accounts to Roth accounts to take advantage of tax-free growth and withdrawals in the future.
   
• Consider Deferred Compensation Plans: Non-Qualified Deferred Compensation (NQDC): For those with high incomes, deferring a portion of income to future years through an NQDC plan can reduce current taxable income and defer tax payments until funds are withdrawn, potentially at a lower tax rate in retirement.
  
• Leverage Health Savings Accounts (HSAs): If eligible, maximize contributions to an HSA, which offers triple tax advantages—tax-deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses. In retirement, HSAs can be used to pay for healthcare costs effectively with tax-free money.

The missed opportunity to benefit from enormous employer matches, tax advantages, and compounded growth over time can result in a shortfall in retirement savings, potentially delaying retirement or reducing your quality of life during retirement.

Cogent Insights: To avoid this pitfall, prioritize contributing the maximum allowable amounts into your retirement accounts each year. For example, in 2024, the IRS limits for 401(k) contributions are $22,500, with an additional $7,500 catch-up contribution if you are 50 or older. Consider consulting with a Chicago financial advisor who can assist you in creating a comprehensive retirement savings strategy.

Debt

Having too much debt is a common problem among many people; however, for high earners, who often have access to significant lines of credit and loans, this can lead to accumulating substantial debt through mortgages, car loans, credit cards, and personal loans, which can quickly become overwhelming. Consider this: the high-interest payments associated with these debts can erode your disposable income and limit your ability to accumulate more assets for retirement. 

Cogent Insights: To avoid this financial pitfall, you should practice disciplined borrowing by only taking on manageable debt within your budget and prioritizing paying off higher-interest debts first. Creating a comprehensive debt repayment plan and avoiding unnecessary borrowing can help maintain a healthy financial balance sheet and prevent debt from undermining the achievement of long-term financial goals.

Watch our video: “How Working With an Objective Financial Advisor Can Make a Difference”

Over-Concentrated Investment Portfolios

Another common financial pitfall is having an over-concentrated investment portfolio, especially if you heavily invest in your industry or a single company stock:

• This lack of diversification exposes you to significant risk if your sector of the economy or employee-owned company underperforms.

• Overconcentration can lead to substantial losses and jeopardize financial security, while under-concentration consequences may result in missed growth opportunities.

Evidence-driven investing™ can be particularly beneficial for tackling this issue as it relies on rigorous research and historical data to guide investment decisions. By focusing on factors such as asset allocation, low-cost index funds, and long-term market trends, evidence-based investing helps create a more balanced and resilient portfolio. 

Additionally, Cogent employs innovative tax mitigation strategies tailored for high achievers.We use sophisticated tools to manage your wealth more effectively. We address how to liquidate large assets and concentrated equity holdings without incurring significant tax hits. You’ll also learn about our personalized approach to wealth management that not only addresses diverse financial needs but also ensures long-term benefits, helping you live a life unencumbered by financial constraints.

Cogent Insights: Regularly reviewing and rebalancing your portfolio can ensure that it remains aligned with your financial goals and risk tolerance, providing a more stable foundation for your investment strategy. This disciplined approach can protect you as a high earner from the dangers of overconcentration and support sustained wealth accumulation simultaneously.

Failing to Plan 

As Benjamin Franklin once coined: Failing to plan is planning to fail. As a high earner, you can get into significant trouble if you neglect adequate financial, retirement, and estate planning, especially if you have substantial assets, which can create complex legal and tax challenges for you, your family, and, ultimately, your heirs. 

Wealth transfer can become lengthy and incredibly costly without a proper estate plan, often subjected to higher estate taxes, probate fees, and potential disputes among beneficiaries. This can diminish the value of the inheritance and delay its distribution, causing financial and emotional stress for loved ones.

Cogent Insights: Tax planning is crucial for meeting financial goals while complying with constantly changing regulations. As the tax landscape grows increasingly complex, sophisticated tax and estate planning services become increasingly important. By leveraging tax-advantaged accounts and tax-loss harvesting strategies, we help clients minimize tax liabilities for their estate while enhancing after-tax returns to maximize long-term wealth accumulation.

Why Cogent Strategic Wealth?

Many of our clients are busy, high achievers who may not be inclined to spend much time overseeing and managing their wealth. At this point in their lives, they are busy with their careers, interests, and families. They often feel stressed, frustrated, and maybe even worried about how hard they’ve worked to get to where they are and how they can protect their accumulated wealth. 

Who should you trust to oversee your financial future?

We recognize that true wealth extends beyond figures—it’s about matching your financial decisions with your values, goals, and life’s vision. Through meaningful “Cogent Conversations,” we create a relationship based on trust, openness, and a shared dedication to your future financial success. At a minimum, we can provide the knowledge and tools you need to manage your wealth accumulation, preservation, and distribution journey confidently and clearly.An experienced wealth advisor who fully understands your financial situation is crucial for successfully managing your interests. We’re here to help. Let’s schedule an introductory call.