Financial Advice for High Earners

As a high-income earner, you may often dream about spending your golden years in comfort & luxury.

But how do you ensure that?

The key to achieving this dream lies in efficient wealth management.

There are many ways in which high earners can protect their finances and manage their wealth for risk minimization.

Some of these methods include:

• Establish Your Risk Tolerance and Timeline
• Core-Satellite Portfolio Technique
• Reducing Tax Obligations
• Investments for High Earners
• Retirement and Superannuation
• Insurance for High-Earners
• Always Be Prepared with an Emergency Fund

In this article, we’ll share some key pieces of professional financial advice to help you secure your financial success even after retiring. Let’s explain the proper financial planning methods for wealthy individuals and the right way to create an investment strategy considering your already high income.

Establish Your Risk Tolerance and Timeline

As a high-income earner, you may start by determining your risk tolerance and timeline. It’s better to be aware of your comfort level with investment risks and tailor your strategy to achieve both short- and long-term goals and business goals. If you are looking for financial success and want to do proper financial planning, here are your options:

Young vs Old Earners

Young high-income earners tend to take risks to achieve long-term success.

The situation is different when it comes to older earners as they may use short-term investments when looking to retire in their 50s and 60s. They often prefer to save capital and invest in shares which would complement their income. They also tend to go with safer options such as bonds or dividend-paying stocks which have lower risk and predictable returns.

Financial Assessment & Goal Setting:

For starters, all high-income earners must have a clear understanding of their current financial position before going any further. You can start by reviewing your income sources, tracking your expenses, and identifying your major liabilities; use mobile apps to better visualize your cash flow.

High-income earners tend to set achievable goals for the future, such as:

• “I want to be able to afford a $500,000 house by the end of 2025.”
• “I aim to have $1 million in retirement savings by the time I turn 50.”
• “I want to reduce my credit card debt to zero within the next 12 months.”

That’s how goal-setting will help you come up with a comprehensive financial plan.

Core-Satellite Portfolio Technique

The Core-Satellite Portfolio Technique is one of the favourite technique among high-net-worth (HNW) Australians. For high-income earners who wish to invest in the stock market with limited risk and a reduced taxable income, the Core-Satellite Portfolio Technique may be a great recourse. Here’s how it works – this technique will divide your income in two parts:

• The Core Part: This is the largest portion of your portfolio, usually around 50%. You may invest this money in a low-cost index fund that tracks the S&P 500 stock index.
• The Satellite Part: These are smaller, specialized investments that make up the remaining 50% of your portfolio. For example, you might invest 10% in a bond fund for stability, 20% in a biotech fund to target a specific industry, and 20% in a commodities fund to diversify.

High-income earners who prefer to go this way will invest in low-fee index funds (for the core part). Investments are held for the long run (i.e., reduced tax obligations). Diversified satellite investments limit the risk and investors earn above-average returns by targeting specific sectors in the satellite part.

Reducing Tax Obligations

How about reducing your taxable earnings so you’ll have to pay fewer taxes? It’ll be the foundation of creating a strong, reliable financial position for your post-retirement days. A reduced taxable income will automatically lead to lower tax burdens and better wealth accumulation. Let’s discuss a few ways high-income earners may reduce their tax obligations efficiently:

Salary Sacrificing

Some high-income earners opt to put a portion of their pre-tax earnings into their superannuation account. This strategy potentially reduces their taxable income so they pay fewer taxes than before.

The money you contribute to your super is taxed at a lower rate of 15%, up to a limit of $27,500 each year (based on 2023-24 limits). It is important to note that any money your employer mandatorily contributes on your behalf will count towards this cap, too. That’s why “salary sacrificing” is a great way to lower your tax bill and also save enough money for retirement.

Negative Gearing

The “negative gearing” strategy works when owning an investment (such as real estate) costs more than the profits it incurs. You may wonder how it helps high-income earners. Well, they tend to utilize the investment losses caused by negative gearing to reduce their overall taxable income. So, a person would prefer to have a lavish vacation rental that costs more in maintenance than the amount they get in rent. But it’ll lower their taxable burden, offsetting the investment loss here.

Such real estate investments are called negatively geared investment properties.

Franking Credits

Here’s how it works: When you invest in an Australian company and it pays you dividends, it means that the company has already paid all the taxes on profits from which these dividends are coming. You won’t have to pay taxes on these dividends again! The government helps you avoid double taxation in this regard by giving you “franking credits” for the taxes paid by the company.

As a high-income earner, you may get a tax refund if you receive more franking credits from all these investments than the taxes you owe. It’s like cherry on top of the dividends you’re being given!

Establishing a Trust

Many individuals with a high income prefer to establish a Trust over leaving a Will. A Trust is simply a legal arrangement where one party holds properties for another party’s benefits. High-income earners in Australia may manage their wealth more efficiently and secure the financial future of their heirs by establishing a Trust, since it offers these benefits:

• Unlike a Will, the contents of a Trust remain private (and don’t pass probate)
• You enjoy multiple tax benefits and have more control over who gets your assets after your passing
• Your assets are shielded from creditors or legal claims

Investments for High Earners

High-income earners often prefer to invest a portion of their hard-earned cash to diversify their portfolio and keep their financial position secure post-retirement. However, they should learn how to navigate the complicated investment market smartly.

If you’re interested in learning more about different investment strategies for high-income earners, we may have a few tricks up our sleeves to help you make sense of the fundamentals.

Diversification is Key

As a high-income individual, you may diversify your investment portfolio instead of putting all your eggs in one basket. This way, you can lower the risks by investing in different sectors. A higher earner can diversify their investments by putting their money in stocks and bonds. It lowers the market volatility’s impact.

Lower Risk Investments

High-income earners should consider investing in:

• Bonds
• Stocks
• Term Deposits
• Real Estate Investment Trusts

If an individual seeks stability and consistent returns, they can invest in blue-chip stocks with a history of stable dividends. These companies offer reliable income streams and platforms for capital appreciation, which is favourable for preserving wealth while generating passive income.

High Risks, High Rewards

If you’re a high-income earner, you may invest a part of your savings in stocks that have the potential to grow quickly. These stocks are often risky, but they also promise a good ROI if they perform well in the market. Some examples of these investment types are:

• Stocks of new technology companies that are coming up with innovative products and services
• Mutual funds that invest in companies in developing countries, where the economies are growing rapidly
• Investments in new businesses that are just starting out and have a lot of room to grow

Retirement and Superannuation

Do you wish to save money for your golden years? Australia’s superannuation system allows you to set aside money for your retirement years, taking advantage of tax benefits and long-term investment growth.

Concessional Contributions

A high-income owner can contribute to their super fund as it provides them with the opportunity to grow their retirement nest egg and reduce the amount of their tax bill. Individuals are entitled to personally contribute up to $27,500 into their super fund of choice – including the payments made on behalf of their employer every year. However, exceeding the deductible superannuation contributions by exceeding the $27,500 cap will make the taxpayer pay an effective tax rate of 49% in tax.

Non-Concessional Contributions

Non-concessional contributions refer to personal contributions made to your super fund from after-tax income. They are not taxed when they become part of your super account because you’ve already paid income tax on this money. It helps you increase your retirement savings more quickly, but you can expect to pay additional taxes and penalties if the limit is exceeded.

SMSFs

Self-Managed Super Funds are superannuation funds managed by the individual. It offers control to its owners over investment choices and retirement savings. SMSFs can have up to six members, typically family or close associates, unlike traditional super funds, with each member being a trustee, responsible for complying with legal obligations and making sure the fund’s assets are managed appropriately. It is a tedious task to manage SMSF as it requires significant time, expertise, and compliance with regulations, which is necessary for members to understand their responsibilities fully and seek professional advice when necessary.

Frequently asked questions