Michael T. Wright, JD, CFP®
February 10, 2017
Many executives and professionals – attorneys, physicians, engineers, corporate executives, and entrepreneurs, to name just a few – begin earning enough compensation in their 30s and 40s that they should start seriously considering their long-term financial future. While all professionals have unique individual financial goals, financial independence, i.e., the freedom to live a desired lifestyle without needing to work for an income, is a common goal of many professionals. Yet, many professionals also face significant personal financial challenges such as student loans, mortgages, partnership buy-in debt, childcare expenses, education expenses, and increasing costs of living. For the busy professional juggling the dual demands of building a career while raising a family, there is often very little time to focus on thinking about the long-term financial future. There is often even less time to spend learning the intricacies of the many financial areas of their lives that they need to address, such as cash flow management, investments, taxes, insurance, and estate planning. Given these challenges, how can professionals leverage their current compensation and economic opportunities to start their journey towards future financial independence?
The first step towards future financial independence for professionals is to identify their long-term financial and life objectives (where they want to go) – a seemingly simple concept but often difficult task. Simple in concept in that a professional should begin working towards financial independence with a tangible goal or destination in mind. Difficult in that tuning out the noise, uncertainty, and chaos of everyday life to focus on identifying realistic long-term goals is challenging. However, taking the time today to focus on concrete goals, such as paying debt off by a certain year, saving a certain amount for a child’s education, buying a vacation home, etc., is necessary to successfully construct a framework for making decisions and taking actions supportive of the financial future rather than detracting from it (e.g., using a bonus to pay down student loan debt rather than take a luxury vacation). If a professional’s current financial situation can be labeled Point A, and the successful accumulation of enough wealth to achieve financial independence is Point B; the next step, after identifying what financial resources are currently available, is to figure out what additional resources are needed for the professional to successfully move from Point A to Point B.
While there are myriad wealth-building techniques that can help a professional move from Point A to Point B, successfully reaching Point B begins with controlling cash flow, or allocating dollars earned among different categories. These categories include debt payments, savings (for an emergency fund or short-term goals), investments (for long-term goals), living and lifestyle expenses (living expenses being fixed and lifestyle expenses being discretionary), and taxes. While taxes and certain living expenses (shelter, food, clothing, transportation, etc.) are inevitable, professionals have a broad degree of freedom in how they choose to allocate their remaining dollars among the categories supportive of financial independence (paying off debt, saving, investing) and categories detrimental to financial independence (excessive lifestyle expenses). Simply put, while it is important for professionals to live a lifestyle that they and their families enjoy, the more that a professional saves and invests for the future, the more likely he or she is to achieve financial independence.
Another important wealth building tool for professionals is understanding and maximizing employer-provided benefits, including equity compensation. Professionals often receive generous employer-provided compensation and benefit packages, but it can be a challenge to take full advantage of the often complicated compensation and benefit packages and integrate them into a comprehensive financial plan. Employer-provided benefits can include retirement plan matches and contributions, group insurance (disability, supplemental life, long-term care, etc.), deferred compensation programs, employee stock purchase plans, company-provided financial planning services or reimbursement, and the ability to invest alongside clients in investment opportunities. In addition, many business and executive professionals receive equity compensation (e.g., restricted stock, performance-based restricted stock, non-qualified stock options, and incentive stock options). While equity compensation can be extremely valuable, it can also create significant tax (there is often insufficient tax withholding on equity income for high income professionals) and investment portfolio (concentration in company stock) challenges. Finally, proactive and accurate tax planning can help professionals keep a larger amount of the income that they earn, thereby increasing the amounts available to save, invest, and use to pay down debt.
At the same time that they are busy building wealth, executives must also manage numerous risks that can threaten their ability to achieve financial independence. Investment portfolio returns over time are a critical part of achieving financial independence, but earning portfolio returns can require subjecting a portfolio to the unpredictability of the capital markets for a long period of time. There is also a risk that the professional does not earn the necessary long-term market returns because he or she is constantly selling in or out of the markets in response to emotions such as panic or exuberance. Therefore, appropriate portfolio risk management and sticking to an asset allocation the professional is comfortable with is key. Another threat to financial independence can be liability for accidents, injuries, or death involving a professional’s automobile or property. Multi-million dollar judgments are commonplace today, and if a professional does not have adequate and properly coordinated property and liability insurance, even an innocent accident can wipe out a professional’s financial resources. Relatedly, professionals should also ensure that they have sufficient malpractice and/or error & omission insurance, either personally or through their employer, to protect against potential professional liability. A third risk that a professional must guard against is long-term disability, which is much more likely to occur to a professional than premature death. Therefore, having sufficient disability insurance in place to provide a continued income is a critical component of protecting a professional’s quest towards financial independence.
Financial independence is a realistic possibility for many professionals if they make it a goal early enough in their careers and are willing to make the tough decisions and take the hard actions necessary to achieve it. While it requires imagination, planning, knowledge, and execution, professionals should look to identify their financial and life goals and successfully implement and execute a strategy to achieve financial independence, either personally or by hiring an appropriate professional team to assist them. That way, professionals can set the stage for attaining a level of personal, professional, and financial achievement such that they are free to focus their time, effort, and resources on the things that are most important to them.