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The Biggest Financial Mistakes I See With High-Income Earners

By Michael Nedreski

As someone who specializes in working with high-net-worth clients, I've found that even those at this level of wealth can fall victim to common financial mistakes—and sometimes they don't even realize they're making them! That's why it's important to know the common mistakes that high-income earners and business owners make so you can take the proper steps to avoid them. By keeping an eye out for these pitfalls, you can make sound financial decisions as you work toward staying on track toward your goals. 

The good news? There are some tips and key steps you can take that may help you avoid making such costly mistakes. Here are four common financial mistakes to watch out for.

Not Knowing When to Convert RSUs to Stock

As high-income earners, many of my clients receive restricted stock units (RSU) as compensation. One of the biggest financial mistakes these clients often make is not fully understanding how RSUs fit into their overall financial plan. It's important to know when it will be most advantageous to convert and sell the stock. 

Most RSUs are subject to vesting schedules based on length of employment or performance, and once the RSU has become fully vested, it is usually converted to stock. At this point, you will be taxed on the market value of the converted shares. Understanding when this will happen is crucial to minimizing your tax liability. For instance, if you expect a large portion of your RSUs to vest next year, you should try to minimize or defer other income to a different year so that you are not pushed into the next tax bracket.

If your RSUs don't convert automatically, then deciding when to convert your options to stock becomes the question. Converting at the right time can help boost your returns and reduce tax liability. Waiting until share prices are depleted or when your taxable income is lower is often a great way to maximize your RSUs.

It's also important to think through what you want to do with the stock once it has become available. Selling it within one year of conversion may result in capital gains that will be taxed as ordinary income, whereas holding it for at least a year will allow any gain to be taxed at the preferential, long-term rate. Either way, fully integrating your RSUs into your wealth management plan is a necessary step. 

Not Diversifying With Alternative Investments

Another mistake I see with high-income earners is that they sometimes don't realize the degree of diversification needed for their often complex investment portfolios. It's one thing to know in theory that investment diversification is a key strategy, but it's another thing to follow through by staying on top of your portfolio and utilizing alternative investments when possible. 

Alternative investments are assets that aren't part of the conventional investment types (stocks, bonds, and cash), and they include things like real estate, private equity, hedge funds, and commodities. In general, the purpose of an alternative investment is to behave differently from stocks and bonds, adding value to your portfolio through diversification and risk reduction.

Since most alternative investments have low correlations with standard asset classes, they can smooth portfolio volatility. Hard assets (like real estate, timber, oil, and gold) may have an inverse relationship with stocks and bonds during periods of higher inflation. Because of these differences in behavior, including them in your portfolio is a great way to manage risk by acting as a buffer against the inherent volatility of the market. 

Not Having a Comprehensive Estate Plan

Though many of my clients are diligent in their savings, with sizable retirement assets and high incomes, there is a tendency to think that saving and earning a lot is all they need to meet their goals. Unfortunately, this is a mindset trap that couldn't be further from the truth.

There is so much more that goes into being financially secure than just how much money is in the bank. Estate planning is a crucial aspect of a comprehensive wealth management plan, especially if you want to pass significant assets to the next generation, or properly plan for the succession of your business. Through the proper use of trusts and other estate documents, you can ensure that what you've built over your lifetime is properly passed on while minimizing taxes and probate expenses.

Many high-income earners often overlook the full scope of a comprehensive estate plan and it can have devastating effects on your accumulated wealth. Making sure you are adequately covered now will save you time, money, and energy in the future.

Not Having an Income Plan

Another common mistake I see is forgetting to develop an income plan in retirement. Most people focus on what they need to do to make it to a comfortable retirement and often forget that's only half of the equation. Your income plan during retirement will also play a major role in how long your money will last and how much will be lost to taxes. 

Each retirement asset has different tax characteristics, whether it be a 401(k), a Roth IRA, an annuity, or some form of equity compensation, and understanding the timing of distributions from each source is a significant part of managing your overall tax bill in retirement. 

It's also important to pay attention to local and federal tax policies that could impact your personal or business finances. For instance, the Inflation Reduction of 2022 Act has several tax provisions that could affect your finances. It's crucial to stay up to date on changes like these to amend your financial strategies as needed so you can safeguard what you've already built and make the most of the updated tax credits. 

Avoid These Costly Mistakes

At White Oak Wealth Partners, we understand how important it is to make smart decisions when it comes to your finances, both in your personal life and in your business. If you're looking for help with your financial picture, we would love the opportunity to use our years of expertise and valuable insight to support you toward your goals. To get started, contact us by calling 814-835-4551, emailing MICHAEL.NEDRESKI@LPL.COM, or scheduling an appointment here.

About Michael

Michael Nedreski is managing partner at White Oak Wealth Partners, a specialized financial lifestyle and wealth management firm serving entrepreneurs, business owners, executives, and their families. Mike has 30-plus years of experience in the financial services industry and is committed to serving his clients through holistic financial planning, disciplined investment strategies, and proactive personal service. Mike and his team are continuously looking for innovative and proactive ways in which to serve their clients, acting as their independent wealth coach and personal CFO. 

A native of Erie, Pennsylvania, Mike began his career in the financial services industry in 1988. He has earned the Chartered Retirement Planning CounselorSM (CRPC®) conferred by College for Financial Planning and Life Underwriting Training Council Fellow (LUTCF) designations. Mike is also an active member of the Financial Services Institute (FSI) and Financial Planning Association (FPA).

When not working, Mike enjoys spending time with his wife, Amy, and their seven children. He volunteers in his community and at his church and his children's schools. An outdoors enthusiast, Mike loves hunting, fishing, golfing, and spending time near or on the water. He also enjoys working out and watching some of his favorite sports teams, the Pittsburgh Pirates and the Cleveland Browns. To learn more about Michael, connect with him on LinkedIn.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. Alternative investments may not be suitable for all investors and involve special risks such as leveraging the investment, potential adverse market forces, regulatory changes and potentially illiquidity. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses. No strategy assures success or protects against loss. Alternative investments may not be suitable for all investors and involve special risks such as leveraging the investment, potential adverse market forces, regulatory changes and potentially illiquidity. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.