Navigating the financial landscape can be daunting for new prospects just starting their journey in the financial world. Then, when you factor in high income, taxes, retirement accounts, college savings, and other major life events, it can feel paralyzing. But fear not—that’s where a financial professional comes in to help!
In this blog, we’ll discuss the everyday challenges of individuals embarking on their financial journey and why seeking professional advice is the smartest money move you could make.
Pain Points of New Prospects
As individuals and couples start to get their finances in order, they typically run into 3 main challenges.
1. Managing Financial Life & Balancing Taxes
High-income earners in high-tax states face unique challenges. The tax burden can significantly impact overall financial health and retirement savings plans, making it crucial to develop tax-efficient strategies.
Living in a high-tax state means you’ll likely face higher income taxes, property taxes, and sometimes even additional taxes such as city or county taxes. This can result in a substantial portion of income being directed towards taxes, reducing disposable income and savings potential.
If you make six figures or more, your income can limit your retirement savings potential because certain tax-advantaged accounts have income maximums. Roth IRAs, for example, have an income limit of $161,000 for single tax filers for the 2024 tax year.
Not all hope is lost, however. There are some savvy savings and tax strategies for high-income earners to explore, including:
- Utilizing a Roth 401(k): This retirement savings vehicle has no income limits, so if your employer offers this option, take advantage of it. In 2024, you can contribute up to $23,000 after tax.
- Contributing to a Roth through the backdoor: A backdoor Roth IRA allows you to indirectly contribute to (and reap the benefits of) a Roth IRA. It sounds sketchy, but it’s completely legit. However, this process is a bit intensive, so you will want to work directly with your accountant and financial advisor first.
- Donating more to charity: Charitable contributions are an extremely popular way for high-income earners to save on taxes. You can take advantage of charitable deductions by making a cash donation directly to an eligible charity, donating appreciated non-cash assets, or setting up a donor-advised fund.
- Exploring Tax-efficient investments: To minimize tax liabilities, consider investing in municipal bonds, exchange-traded funds (ETFs), treasury bonds, alternative investments, and stock funds.
There’s much to consider as you balance savings, financial goals, and taxes, especially as a high-income earner.
2. Contribution to Various Funds & Mechanisms
Determining how much to contribute to retirement accounts, college savings, emergency funds, and other savings accounts can be confusing. Here are some best practices to consider:
- Retirement Accounts: Retirement is expensive, there’s no doubt about it. Most people need 50-80% of their pre-retirement income to finance their lifestyle in retirement. With that in mind, you should aim to save 15% of your pretax income each year for retirement. If that’s not possible, contribute at least enough to get the employer match in a 401(k), if applicable.
- Emergency Fund: Your emergency fund will be a lifeline in a time of uncertainty. Build a fund that covers 3-6 months of total living expenses.
- College Savings: Higher education is more expensive than ever. Over the last 20 years, tuition and fees at private national universities have jumped by about 132%. At public national universities, in-state tuition and fees have increased by 158%. To save for college, you can utilize 529 plans for tax-advantaged growth and adjust contributions based on your child’s age and educational goals. The amount you contribute each month will depend on your current financial situation and how much you want to contribute towards tuition and fees.
Ultimately, there is no magic number for how much you should contribute to retirement accounts, college savings, and other funds. You need to factor in your current financial situation, future goals, and risk tolerance as you plan your contribution strategies. Don’t forget to review and adjust contributions as your circumstances change!
3. Major Life Events and Financial Planning
Major life events like buying a home, getting married, or starting a family require careful and tactful financial planning. You may have a million questions running through your mind like:
- What’s important to you in a new home?
- How much do you need for a down payment?
- How much are you willing to change your lifestyle?
- What are your debts?
- Should you combine your finances with your future spouse?
- And, ultimately, can you afford this?
Take starting a family, for example. Having a baby is a joyous occasion, but it has a significant impact on your personal finances. You will want to take several steps to prepare financially, including but not limited to:
- Reviewing your health coverage
- Planning for maternity and paternity leave
- Arranging childcare
- Filling up your emergency savings
- Updating your life insurance
- Opening a college savings account
No matter what major life event is around the corner, always circle back to your financial plan to ensure that you can still achieve your financial goals.
Ease the pain of financial burdens with a professional
Integrating priorities and goals into a cohesive financial plan involves a strategic approach that aligns short-term actions with long-term objectives. Whether your goal is to buy a house or pay off your student debt, you must create a comprehensive budget, develop a savings and investment strategy, and regularly review and adjust your financial plan. But when you factor in taxes and saving for retirement and college, managing your financial life can be a lot to juggle on your own. That’s where financial advisors come to the rescue.
Financial advisors provide expert, personalized advice so you can make informed decisions and achieve your financial goals efficiently. They offer an objective perspective, comprehensive planning, and access to specialized resources, ensuring your financial strategy is well-rounded and optimized. Get in touch with our team today to learn more about our process!