WRITTEN BY: Gideon Drucker, CFP® AIF® ECA
I speak to high earning mid-career professionals (usually 32-49 years old) every single day.
Here are the 11 most IMPACTFUL myths that I see people struggling to make sense of consistently.
Do any of these resonate?
Here we go:
1. I want to take any opportunity each year to defer taxes that’s available to me.
This mindset is exactly what can lead to the ticking tax time bomb of having ALL of your retirement income taxable upon distribution when you can least afford it.
2. I own 12 funds in my 401k because I want to be properly diversified.
More funds does not mean more diversification. You an accomplish the exact same level of diversification between asset class, sector, and style with 4-5 properly allocated funds. After this, the more funds you own the more potential for redundancy, high operating expenses, and missed rebalancing.
3. Buying is always better than renting.
Renting can afford you flexibility to change plans as your life evolves, the opportunity to invest more capital into higher-appreciating assets, it means not paying property taxes, insurance, maintenance fees and it comes with an excellent ROH- return on hassle.
4. High income means future financial success.
Our team has does hundreds of financial plans that incorporates scenario planning….After a certain point, income is NOT one of the top 3 variables that drives the plan results….If you’re curious, savings rate is number 1.
5. I own enough life insurance to protect my family.
If you make $500,000 and have people that depend on you, you should have at least $5mm of life insurance. Term insurance can be done cost-effectively…The amount of people, before crunching the numbers, that aren’t willing to pay $1,500 per year for $5,000,000 of tax-free death benefit would astound you.
6. My bonus gets taxed at a higher rate than my salary.
All ordinary income is taxed at the same rate. Bonuses oftentimes are withheld at a higher rate which lowers the amount of your bonus that you receive in the moment. But your bonus & salary & RSU’s are all considered together in arriving at your marginal tax rate & your total tax liability.
7. 529 Plans are too restrictive…what if my kids don’t go to college?
529 plans can be used for k-12 private school, you can change the beneficiary whenever you want, you can pass a 529 plan to the next generation, and you are allowed to roll over a piece of unused 529 plans into your own Roth IRA’s. And this just scratches the surface.
8. Only the super wealthy & large families need an estate plan. Well, actually, you have an estate plan already.
It’s just that If YOU didn’t put together your estate plan…the government did it for you….and I promise, whether you are single or have 5 kids, and whether you have a $200k net worth or $20mm…that’s not what you want.
Estate planning is necessary if:
(1.) you care how your assets are distributed upon your demise (family, friends, charity)
(2.) you want to be in control of your own health & end of life planning
(3.) you want to transfer your wealth in the most tax-efficient way possible
9. I want to limit my stock market investments because stocks are risky & unstable.
The stock market is up 78x times, not including dividends since 1960. $100,000 invested in 1990, with dividends reinvested, would have grown to more than $2.2mm today. That’s a 22x return. While making no comment on the future, the stock market has been the greatest force of wealth expansion in human history. We confuse the stock market’s very real “volatility” with it’s perceived “risk” at our own peril.
10. I don’t need to map out my future financial goals…I’ll just keep making & saving more money.
Most people treat their future selves with the same intention & care that they offer strangers….not much. The more that you outline your future financial priorities & the more vivid those dreams are (IE: I want to take my family on a 2 week trip to Europe the year after I retire or I want to buy a vacation home in the country when I turn 62 so my grandkids have a place to grow up outside the city etc.), the more well-defined your future self becomes & the more likely you are to change your behavior to actually benefit your future self.
11. I need to find that one great investing idea, that one mind-blowing tax strategy, or that one financial maneuver to become financially successful.
Attaining financial independence- not being dependent on paycheck to live the life you want to live- is accomplished by being disciplined, organized, and intentional with your money. There is no secret (and I would argue that anyone touting ANY strategy/product as THE way to get wealthy is selling you something…and doing so pretty transparently).
Reaching your desired future financial outcome comes from:
(1.) Defining your desired future financial outcomes
(2.) Building a plan, built with a whole lot of margin for error, that provides you the roadmap to get there
(3.) Always working off of & updating this plan as your life evolves
Ok, team, that should just about do it for today.
If you’re interested in exploring these concepts further, simply reply to this email or click here to schedule your free "Right Fit" 15-minute call and we can chat about your current financial situation, where you're looking to go, and if we're the right fit to help you get there!