1 Don't Plan To Use Their Money Effectively

Many executives are successful in business yet they don't have a plan to build wealth reliably. High income earners often save or invest the same amounts as people who earn a lot less. Many executives started work in their early 20's and plan to retire in their 50's. They expect to live to their 80's but they have not thought about the lifestyle they want in retirement, or the amount of money they need to accumulate

SOLUTION
Executives need to 'do the math' on the number of years they can expect to be in retirement, the money they will need and the amount of retirement savings they will accumulate at current saving levels. A rule of thumb is to multiply the expected yearly income needed in retirement by 17 if the executive retires at 55, by 15 if retiring at 60, and by 13 for a retirement age of 65.

2 Often Focus On Lifestyle Toys Rather Than Investment Assets

Many executives spend large sums on lifestyle toys like cars, boats and jewellery. These lifestyle assets tend to reduce in value over time and require ongoing assets to maintain, the exact opposite of an investment asset.

SOLUTION
Find a balance for now and later. In their high-earning years executives should put a significant portion of their income into investment assets.

3 Habitually Chase High Returns Because The Average Isn't Good Enough

Executives often want to do better than average because they earn more than the average salary so expect similar from their investment. They tend to chase the next big thing, choose speculative investment options that offer high returns and get caught by investment scams. The power of greed and a fear that they could miss out drive the investment decisions of many executives.

SOLUTION
Know why you're investing. If you're investing to ensure you're going to reach a certain outcome 10 to 15 years down the track, develop a strategy that's going to most reliably be able to do that.

4 Too Much Nondeductible Debt In The Portfolio

Executives often make investment decisions for tax reasons yet have a big debt in the family home that is nondeductible.

SOLUTION
Paying home loans off as fast as possible is the first step to building wealth. Many people can find $20,000 for a tax deal yet this money would be better used paying off nondeductible debt.

5 Using Tax Advice As A Proxy For Investment Advice

Many executives get sucked in by schemes that promise tax benefits. Even if the tax scheme is successful, many do not have a plan to invest the money saved.

SOLUTION
Use a good accountant to cut the tax bill, but seek financial advice to help maximise the return on your money.

6 A Lack Of Diversification Makes Executives Vulnerable

Many executives concentrate on one investment type. The most popular is residential property, especially home units. For many, it's an investment strategy used successfully by previous generations and they think it will work for them. But the baby boomers have driven the property market and the move of this wave of people into retirement is sure to be reflected in lower property prices.

SOLUTION
Diversification for many executives involves buying another unit, sometimes in the same complex. A few have supplemented their residential property investment with shares purchased through public offers. A lack of diversification can leave executives vulnerable to a market downturn at an inopportune time like retirement.

7 Having A Self-Managed Superannuation Fund That Is Not Needed Or Not Performing

Many high-income earners have a self-managed superannuation fund that includes one or two managed funds. Professional fees and other administrative charges make it an expensive way to save for retirement. It's also time consuming.

SOLUTION
A SMSF is really only viable for someone who wants to control a range of direct investments or who's concerned with business risk. You may be better off investing into just retail funds. Lack of an effective investment strategy means many SMSFs are too conservative or too aggressive. Often they also lack diversification.

8 Failure To Nominate And Effectively Use Bonuses

Many executives take their often significant bonus, pay a high rate of tax, and then spend it on consumer goods. Executives need to nominate how they will use their bonuses at the start of the reporting period. This includes salary sacrificing a bonus into superannuation.

SOLUTION
Executives can change their mind when the time comes provided they have already nominated. In other words, you cannot decide to put the bonus into superannuation, rather than take it as cash, if you have not nominated this approach. However, you can nominate it all for super then choose to salary sacrifice only some or none. This money can then be effectively invested.

9 Not Maximising The Benefit Of Existing Superannuation Policies

Many executives are not maximising the tax benefits of grandfathering provisions on superannuation policies established earlier in their working life.

SOLUTION
There are tax benefits in combining pre-1983 superannuation policies with new super funds. The ratio of pre and post 1983 years sets the proportion of the ultimate payout where only 5 per cent of the pre amount is taxed with the remaining 95 per cent tax free.

10 Not Making Effective Use Of Superannuation

Some executives are not salary sacrificing when they should be while others are salary sacrificing when they shouldn't! Having too much in superannuation at the end (without a strategy to minimise the tax impact) sees a high marginal tax rate applied on it in retirement.

SOLUTION
Executives can reduce their taxable income by electing to receive superannuation in lieu of salary. In some cases, executives may still be better off over funding even with the higher tax rates. Investing in super on behalf of a non-working spouse maximises the Reasonable Benefits Limit of two people and has tax benefits. Executives should also consider paying their life insurance premiums via the superannuation fund. It's tax-effective and often cheaper.

Whilst all care is taken in the preparation of this material, no warranty is given in respect to the information provided and accordingly no responsibility for errors or omissions, including responsibility to any person by reason of negligence is accepted by the company or any member or employee of the company.

The information above has been prepared on a general advice basis only. The information has not been prepared to take into account your specific objectives, needs and financial situation. The information may not be appropriate to your individual needs and you should seek advice from your financial adviser before making investment decisions

 

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