5 Common Financial Blindspots I See Every Day as a Planner

Uncovering Financial Blind Spots for High-Income Professionals

In this episode of The Retire Early Retire Now podcast, host Hunter Kelly, a certified financial planner and founder of Palm Valley Wealth Management, delves into the five most common financial blind spots that high-income professionals often overlook. These blind spots can include overreliance on retirement accounts, ignoring tax diversification, insurance gaps, emotional or outdated investment allocation, and neglecting tax planning beyond April 15th. By identifying these areas and offering actionable solutions, Hunter helps listeners optimize their finances, avoid pitfalls, and achieve their long-term financial goals. The episode also underscores the importance of holistic financial planning and coordination among various advisors to ensure a comprehensive approach to wealth management.

00:00 Welcome to The Retire Early Retire Now Podcast
01:48 Understanding Financial Blind Spots
05:46 Blind Spot #1: Overreliance on Retirement Accounts
09:55 Blind Spot #2: Ignoring Tax Diversification
13:46 Blind Spot #3: Insurance Gaps for High Income Families
17:38 Blind Spot #4: Emotional or Outdated Investment Allocation
21:41 Blind Spot #5: Neglecting Tax Planning Beyond April 15th
24:28 Conclusion and Next Steps

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Transcript

0:00

and welcome back to The Retire Early Retire Now podcast. The show where we help high income professionals take control of their money, optimize their taxes, and design a life that gives them freedom long before traditional retirement age. I'm your host, hunter Kelly, certified financial planner and founder of Palm Valley Wealth Management, and today we're talking about something I see every single week working with clients that has financial blind spots. These are areas that smart, successful people, physicians, attorneys, business owners, and others often overlook not just because they're careless, it's because they're focused on building their careers, their businesses, their. Hanging out with their families and building a life that they want to live. but here's the problem. These blind spots can quietly derail your long-term financial plan. They can cost hundreds of thousands of dollars in taxes. MIS growth or unnecessary risk. So in today's episode, we're going to walk you through The five most common financial blind spots. I see how to spot them in your own plan and what to do about them. By the end of this episode, you'll have a clearer view of your financial landscape. Maybe catch something that's been hiding in plain sight. But before we get started, go ahead and leave a five star review on your favorite podcasting app. And please share this with a friend. If you have a blind spot, then they likely have the same or a similar blind spot. So what other be better way to help out your friend? Then to help them reveal that blind spot so that they can fix it and be financially free along with you. So let's jump in. What are financial blind spots? I think that's a good spot to start. Let's define what those are. Set some context and understand how we can identify them. So compare financial blind spots to driving right. You can be an excellent driver, but we all. Have missed that car to our left, that car to our right, just outside of our mirror, and maybe have tried to change lanes here or there, whether that's us being tired or again, just hitting that perfect spot in that blind spot. This is why those blind spot detectors are, almost standard at this point if they aren't already standard on most cars or vehicles. Your financial advisor can be that blind spot detector, or you'll have to be your own blind spot detector and learn how to find where my financial life am I missing an opportunity to improve, optimize. Or maybe just save a little bit in taxes, whatever that may be. So some common blind spots that I see, or reasons why they develop is busy lifestyles. most of my clients, again. Or somewhere between their mid thirties to mid fifties, and they're in the busiest times of their lives. Their kids are growing up, they're busy professionally. there's things that they want to do. They're still active in their personal lives, whether that's with their family or their personal hobbies. maybe they're building a business, whatever that may be. They are busy. Also they're building wealth and with more wealth comes more complexity. And so with that complexity, maybe there's an expertise that they're missing, that they once did not need, whether that be, investment planning or tax planning, whatever that case may be. and it becomes a little bit more complex than they're willing to put into time to, To fix that blind spot. Right. And then, one of the more common things I see, especially from wealthier individuals is fragmented advice. So oftentimes someone will have a CPA, they'll have an insurance provider. they'll have a 401k and a rep maybe alongside them at their employer, and then they have their financial advisor and sometimes. this is siloed. So a lot of times when you go see different types of physicians, right, these physicians may not talk, all the time. And you get fragmented advice. And so one of the things that a financial advisor can do is be that middle person, be maybe that primary care physician, that lead physician, if you will, to put all of these things together so that when you're CPA. gives you advice on maybe, a current year tax situation or, some tax planning advice. It jives with your investments, along with estate planning, insurance planning, whatever that advice may be, right? And a great financial advisor will help, make sure that all of those pieces are working together to help you reach, that financial freedom in the most efficient, optimized way. Right. And The thing that I want you to know about blind spots is you don't know what you don't know. It doesn't mean that you're not smart or you don't care. sometimes we just don't have an area of expertise, that we know as well as others, right? So if you're, orthopedic physician, you're gonna know a lot about joints. Maybe you don't know a lot about investing or, other parts of medicine for that matter, right? you don't know what you don't know. And so that's where. wealth leaks happen or these blind spots happen, right? And so let's jump into, blind spot number one. Blind spot number one. this is where I see most high income earners, fail or see a blind spot. And that is an overreliance on retirement accounts. If you're making 3, 4, 5,$600,000 or more, maxing out your 401k is not going to be enough. and Oftentimes, especially early on in your career, even when you have that cash flow, I see, these people or these clients, these professionals ignoring taxable brokerage accounts. And if you listen to this podcast long enough, you probably are like, ah, you're talking about that brokerage account again, because it's that important. one of the things that can happen, even. If, let's say the retirement account is an appropriate amount that you should be saving, before you start maxing it out and things of that nature, a lot of people will just go, oh, I'm just gonna go pre-tax. I'll max it out every year. If you do that for 20, 25, 30 years. You're going to, load up on this money that's going to be a tax bomb later on. And so if you ignore other things like, your brokerage account, your Roth IRAs, things of that nature, you can be retirement rich. but you're gonna have this tax bomb later on down the road that we'll talk about here in just a second. And also maybe, you're so focused on retirement that you're maxing out these accounts, but you're cashflow poor, right? we always talk about, flexibility and optionality. if you're putting all of this money into your retirement account, but you can't. Use any of it today, or if you can't use any of it until you're 59 and a half and that's still 15, 20, 25 years away, we need to find that happy balance, right? you don't want to get into your sixties and be in worse health than you are today and not be able to fully use the money that you're saving for, right? And so having a good plan can mitigate some of this. Maybe you don't necessarily need to max out or save. 30% of your income or what have you to meet your financial goals or maybe you're that motivated and you do need to, it just depends on what your independent goals are, right? So the power of the brokerage account, again, we talk about this a lot, but gives you that flexibility to have potentially early retirement or have that coast fire, Gives you that, flexibility gives you that potential early retirement and most importantly, will give you tax management early on in your retirement, especially if you're early retiree. one of the, couples I'm working with currently onboarding, To my firm, they have done really well for themselves. They have a nice, real estate portfolio. their income is north of three,$400,000 any given year, depending on how well they do. one of the things that they have done well is they've contributed to their 4 0 1 Ks, and their IRAs. one of the things that they are lacking is this brokerage account, and so one of the things I'm going to be helping them with is one, when can we retire? When can we. Hit our coast by our number. Right? and then how do we access this in the most efficient way? If I want to re, if you say, Hey Hunter, you can retire. Now how do I access, this in the most efficient way? And so one of those things that I'm going to be recommending is, hey, we need to start beefing up, your brokerage account, right? And they do have some money that is in their after tax. Accounts and things of that nature. but it's a very small portion over of their overall net worth and income and all that. And so one of the main recommendations is, hey, how much do we need to have in these after tax dollars? So that, My, my new client can, either choose to retire or continue to work or slow down, do more vacations, whatever, they want to do, right? And if you're one of those people that are reliant on your retirement accounts, really. Think about, am I building, some flexibility into my financial plan by having a brokerage account, or am I really just delaying myself that freedom until 59 and a half? So blind spot number two, ignoring tax diversification. Some people will call this asset location. it really is how much Roth should I have versus pre-tax versus after tax dollars in my brokerage account, right? There should be a healthy balance of each within your portfolio. And again, this is something that I see often, especially with higher earners. They're slamming everything into their 401k that they can. Deferring those taxes for later, but they don't realize that this can create, some rigidness in their tax situation as they grow older. Whereas if they can get some of this money into some after tax dollars, some Roth dollars, they're gonna have. a lot more flexibility in their tax situation as they, accumulate wealth and then decide to retire and things of that nature. this is why balancing both Roth pre-tax and then also that after tax makes a lot of sense. So one of the things that I do in my practice, by implementing the process that I, have developed the Palm Valley Pathway is I optimize. this kind of bucket approach, right? So how much should we have in Roth? How much should we have in pre-tax? How much should we have in, after tax dollars? this is one of the things that I do is say, okay, well how can we be, save some money over your lifetime and not give that to Uncle Sam? So one of the clients I'm meeting with, just this week, to review their plan, this client. This couple client, the husband is still working. He is a law enforcement officer. the wife has retired since, a couple years ago. and I'm doing a Roth conversion ladder for them over the next several years. And yes, this is something that we're gonna review every year and make sure that we're, we're doing properly, but this should save them well over about$500,000 in taxes over their lifetime. because they basically had. a brokerage account that would allow them to retire earlier, allow the wife to retire early before 59 and a half. their income drops significantly. And so now they're able to convert, this pre-tax money at a much lower rate, which if they had paid taxes on that at, at that time and put it in Roth, they would've paid a higher rate. Or if they wait until RMDs, when. They have to take that money out of these accounts, those taxes would be much higher, right? Allowing yourself to have flexibility is going to give you opportunity to save on your lifetime tax bill. And this is where Roth conversions can come into play. I've done some podcasts on that, but if you want to hear more about PO or if you wanna hear more about Roth conversions and me to talk about some real life scenarios, we can certainly do that. Just let me know. There's a text me button in my show notes and I would love to do another episode on that as well. But, Planning, for conversions. The earlier you can do it, the better, right? if you know that you're gonna have some low income years or some transition years, whatever that may be starting to think about, Hey, is there an opportunity where I can do some of these Roth conversions, can be a game changer in how much you're gonna pay in taxes, along with how much you can build in wealth eventually, right? Do not ignore tax diversification and asset location. Make sure that you have a healthy mix of both Roth pre-tax and then after tax dollars. Blind spot number three. Insurance gaps for high income families. Great life insurance, but zero disability coverage or employer plan only. I want to focus mainly on disability insurance here. but life insurance is certainly a blind spot as well, especially as, families, income grows. their liabilities grow with bigger homes and cars and things of that nature, so you certainly want to. life insurance in mind. I'm gonna focus on disability insurance. but the same goes for life insurance as well. Life insurance just gets a little bit more of the glamor and the thought, because of, just marketing and things of that nature. you should always think about income protection as your foundation, because your biggest asset, especially early on in your wealth building years, is your ability to earn income. and a lot of times employers will offer, disability insurance, but it's only going to cover maybe 40 to 60% of your income. Right. And if you can live off that. and still be financially stable and set, then maybe that's all you need. But for most people, you're gonna need more than 40 to 60% of your income. So as you're running your analysis for, Hey, what happens if I become in, injured and cannot work, can't perform surgery, can't go into the office, whatever that may be. How much money per month would I actually need? And how is that taxed? Because oftentimes employer plans are taxed because they are paying for it. whereas your personal coverage will be tax free because it's paid with after tax dollars. And so you wanna fine. Hey, where's that gap and how do I fill that gap? if you have a specialized profession like a surgeon, then you would wanna make sure that you have proper definitions. Because what if you are a, a surgeon, you break your hand, cannot u perform surgery anymore, but you can still practice in medicine, maybe seeing patients or teaching or what have you. You're just gonna make as much money. There's disability policies that will cover you for that as well. the other thing that I want to make sure of is, short term disability generally. This is kind of a side tangent, generally is a waste of money if you have your three to six months worth of, emergency fund. But if you don't, if you're just starting out and you're like, Hey, I just don't have enough cash, then short term disability would be good. But short term is what it sounds like. It only cover you, covers you from for three or six months. So as long as you have that. In your bank account. usually I would say, Hey, save the money unless they're giving the employer's giving it to you for free. Save the money, and just go ahead and get long-term disability. Everyone's a little bit different, so please see a professional about that. But, that's a general, just education there. So, long story short, we wanna make sure that we're reviewing our insurance on a yearly or. bi yearly. Basis. we wanna make sure that we're reviewing life insurance to make sure that we have enough in case we pass away, but also making sure that we are filling any gaps that our employer disability plans may not cover. because again, the last thing you would want is you to have great life insurance, but you get injured and cannot perform, your profession anymore, and then you're outta luck there. you cannot, You won't be able to collect on that life insurance policy. and so that would put your wealth at a very great risk. and so that would be blind spot number three, blind spot Number four, emotional or outdated investment allocation. So the biggest example here, or blind spot that I see here is that I see clients and individuals have. Tax inefficient investments inside of their brokerage accounts, right? while your allocation may be good, your. What you're investing in is not very tax efficient. And if you're a high income earner, that's going to make a big difference over a long time. The other things that I see is maybe holding too much cash, selling when you shouldn't. Maybe there's a pullback in the market like there was last Friday. People get freaked out and they go into too much cash, concentration of, single stock. And this is something we talked a little bit about last week or just never rebalancing, right? So these are all common things. And so you wanna make sure that you are reviewing this on a periodic basis and making sure that you are, matching one, your risk tolerance with how you're invested. So if you're more risk adverse, you probably shouldn't be in all equities because you're gonna get a lot of volatility, in certain time periods of the market. So it's gonna go up and down more than if you were to have a little bit more cash or fixed income. because. those just don't move as quickly. And the other thing we talked about a little bit last week is emotional attachment to certain investments. So if you do have a large holding in a particular stock, whether that be company stock or just a stock that you've had forever. really think about should I be holding this or should I sell this? Is it serving my portfolio or is it not right? and again, if you want more detail on that, you can listen to last week's episode. But, the other main thing I wanna talk about here is the difference between risk tolerance and risk capacity. business owners have a hard time with this. and I'll be the first one to say I'm probably the same way. in a lot of ways with my personal stuff, but risk tolerance is how much risk are you willing to take, right? fluctuation in the market going to keep you up at night or are you fine with those fluctuations? If you're a business owner, you're probably willing to take more risk inherently, right? Because owning a business is heck a lot, riskier than. Going to work for some big corporation and collecting your paycheck every two weeks. Your risk capacity is a little bit different, right? Your risk capacity is, can you actually take on this risk? So if you take on this risk and the negative side of that risk, comes to fruition, is your financial situation. Not good, right? Or can you take on this risk? And even if the bad situation occurs, you're fine. Right? And so you have to find that balance of what is my risk tolerance and what can I actually handle from a number standpoint, and then build a portfolio from there. And again. This is where the Palm Valley pathway comes into play. I can help you optimize that, and tell you, Hey, you are taking too much risk. We need to disre de-risk from this single holding, or, we need to add some fixed income, or you're too much in cash. You ac actually could theoretically take on more risk if you would like. Right? And so you really want to think about, Hey, am I optimizing my tolerance for risk versus my capacity for risk? Right? the other thing I think there is the risk. Am I taking, is it aligning with my goals? If not. Then you should probably make a change of some sort, right? So create an allocation discipline that removes emotion, and allows you to stay invested for longer periods of time, and then review that either quarterly. Semi-annually or annually, right. Blind spot number five. Neglecting tax planning beyond April 15th. So tax planning is not a beginning or a tax season type deal is a all year round. So I'm meeting with clients right now. And we are talking about tax planning opportunities. this morning before recording this podcast, I was having a conversation about Roth conversions with the client. So we're gonna do, we're going to do a fairly large Roth conversion for her on January 1st, or there shortly after I've given her situation. I'm meeting with a client a few weeks where we have, a contributed to her donor advised fund. And paired that with a Roth conversion as well. there's lots of different, tax planning strategies that you can do. and a lot of times because the tax code is so complex, most people just either assume that the deductions they're taking on a year to year basis are enough. Or they don't give it much thought. They just say, Hey, my CPA is filing my taxes. It's fine. filing your taxes and doing tax prep is different from tax planning. And if you can do tax planning, then you're working on, Saving or mitigating your overall lifetime tax bill, right? And that's what we want to do, is Hey, how much can I keep in my pocket to do the things that I wanna do? And not from a selfish standpoint. Maybe those things that you wanna do are selfless, donate to your favorite charities, uh, leave a legacy to your family, do more family vacations now, whatever that may be. Right? Having a plan for tax planning throughout the year, is one of the biggest things that can help you with your overall lifetime tax liability and neglecting tax planning is one of the bigger blind spots that I see, especially for higher income earners. So some of the common things that you can talk about, again, year round, Roth conversion, donor advised funds. if you have company stock inside your 401k, there's a thing called, net unrealized appreciation. You can look at tax loss harvesting, which is saving one of my clients this year. so there's all kinds of opportunities that you can look for each and every year, each and every quarter of every year, to help you lower that lifetime tax liability, right? And so you should be integrating. Conversations with your CPA, with your enrolled agent, whoever's doing your tax prep with your financial planner to incorporate tax planning so that, that advice like I talked about earlier, is not siloed. It's not your CPA giving you one set of advice and your advisor giving you one set of advice. They're working together so that, again, you can lower that lifetime tax liability. So those are the five blind spots that are super common in my practice and people that I meet with. blind spots aren't about being bad with money. They're about being too busy to see everything, right. You're running a business, you're busy in your career, you have a family, kids, they have activities. things are just busy, right? And so this is where I can come in and step in and help you see those blind spots. So most can be fixed with awareness, coordination, and proactive planning. Again, that's where I can step in. That's where a good financial planner can step in. So, if today's episode made you realize that. I have one of these blind spots, or maybe there's a blind spot I don't even know that I have. Let's uncover it together. Visit my website, palm Valley wm.com. We can schedule a free consultation, or you can text me through the show notes, and let me know that you want to have a conversation. Would love to do that, to see if I can help you find and fix your blind spots so that you can. Get closer to, being more financially free, having those options to do the things that you want to do with the people that you love, right? So thanks for listening to The Retire Early Retire Now podcast. Don't forget to, leave a review on your favorite podcasting app and share this episode with a friend who might be missing something in their financial world. Until next time, stay intentional, stay proactive, and take the next step toward financial freedom. This podcast is for educational purposes only. It is not meant to be financial or investment advice. Do not make decisions solely based on this podcast alone. Please seek professional help when making decisions about your own situation.