6 Reasons Why Wealth Planning for Executives Isn’t Optional

1. Defining Your Purpose

You’ve worked hard to grow your wealth, but have you ever paused to ask yourself what it’s all for? Many executives focus on building their financial portfolios without stopping to define the purpose behind it. What’s driving your financial decisions, and where do you want your money to go? Literally ask yourself “what’s the money for?”

Maybe you have clear goals in mind—ensuring a comfortable lifestyle now and in the future, funding your children’s education, or making a meaningful impact through charitable giving. Or perhaps you’re still figuring it out, and that’s perfectly okay.

Taking the time to reflect on what truly matters to you isn’t just about financial planning—it’s about shaping the life you want to live. With a clear sense of purpose, you’ll not only feel more fulfilled in your personal life, you can develop a wealth strategy that supports those ambitions with clear measures of what success means for you.

As you are developing your goals, keep in mind a few pitfalls we often see with executives starting on their wealth-planning journey:

• “More” is not a goal. It’s not definable or achievable. Be specific about what will contribute to your happiness, quality of life, and overall well-being.
• Goals should be reasonable and attainable. It’s great to dream big, but when it comes to planning, being realistic can help keep those emotions and behaviors that derail success in check.
• Be honest with yourself about your desired spending and lifestyle. This will drive so many financial decisions during your lifetime and shape what’s feasible during your future retirement. Seeing how much you spend can be eye-opening, but it’s better to know that while you have time to plan. More often than not, people don’t want to decrease the lifestyle they’ve grown accustomed to in retirement or sacrifice legacy goals that are important to them.

2. Equity Compensation Management

Executive positions often come with high compensation, and it’s usually more complex than just a salary and cash bonus. Stock-based compensation, such as options and restricted stock (RSUs, PSUs, etc.), introduces several planning challenges.

The first thing to face is the cash flow and tax implications of non-cash compensation and what that means for your bottom line. Awards like restricted stock create taxable income each time a grant vests; you get shares of your company’s stock instead of cash but these shares are considered “compensation” just like cash. Unfortunately, you still have to pay your taxes with cash. Your company may automatically sell some shares as they vest to cover taxes, but usually, it is not enough to cover taxes at a high-income earner’s ordinary income rate.

Options, on the other hand, give you the right (but not the obligation) to buy your company’s stock in the future at a given price, usually at a discount from its fair market value at the time the option is exercised. The idea here is to benefit from the difference between the purchase price and what the stock is actually worth. This is called the “bargain element”. There’s no free lunch though…the bargain element is considered taxable income. An executive exercising options must have sufficient cash to pay the taxes owed on the bargain element when options are exercised, in addition to the cash needed to purchase the shares if they intend to hold the stock.

Often, an executive will have multiple grants over years and different kinds of stock-based compensation to keep track of. Forecasting vesting schedules and possible taxes in the future is key to making decisions on how best to handle vesting awards and when to exercise options to increase the after-tax value of stock-based compensation. Careful, ongoing planning is required – not a set-it-and-forget-it approach.

3. Concentration Risk

As an executive, you’ve likely accumulated significant wealth and equity over the years – but how much of it is tied to your company’s stock performance? Proper wealth planning for executives ensures that you are diversified. This involves deciding not only how to invest new funds as you build your portfolio but also how to reduce your exposure to your company’s stock, which can be difficult. Mindsets like fear of missing out, not wanting to pay taxes, and a belief that your company’s stock will continue to rise often lead to concentration risk. You don’t want to put all your eggs in one metaphorical basket.

Strategies like custom indexing can help you build a tax-efficient, low-cost diversified portfolio when there are constraints in the picture, such as highly appreciated or concentrated positions to work around. Custom indexing is a way to level up from a more traditional approach of managing a diversified stock portfolio, which typically involves buying an exchange-traded fund (ETF) or mutual fund that mirrors an index. Instead of owning the basket holding the stocks, custom indexing allows investors to mimic the risk and return characteristics of an index using some, but not all, of the individual stocks in an index. This can be especially helpful when trying to build a portfolio around a concentrated position you aren’t fully willing to part with.

Owning individual stocks can create more flexibility when it comes to things like tax-loss harvesting, reducing concentration risk, and incorporating preferences investors might have around ESG investing or restrictions on additional exposure to the sector they work in. Custom indexing can also take into account an executive’s specific tax situation and tax sensitivity, making it a strategy that may work well with the complexity that stock-based compensation and high compensation, in general, bring to their financial life. It isn’t the only option or solution, but it is an elegant one when considering all of the factors an executive must keep in mind when it comes to building a cohesive wealth plan.

4. Allocating Cash Flows for Short and Long-term Needs

You may have insight into your goals and purpose for your wealth, but do you know how to allocate your cash flows to support them?

Looking at your current cash flows and projecting future cash flows helps executives understand what’s actually needed to achieve their goals, whether it’s maintaining an elevated lifestyle in retirement, paying for their children’s education, or charitable giving. Modeling these various scenarios and seeing how spending and saving decisions can impact them provides insight into how to allocate cash flows now to meet short and long-term needs.

Making the most of tax-deferred opportunities to save and invest, such as a 401k at work, is usually a good starting point for executives when it comes to funding a long-term goal like retirement. But even that isn’t so simple…with pre-tax contributions, Roth contributions, and even “mega backdoor Roth” choices in the mix, it can be hard to know what’s best without thoughtful forward tax planning.

Saving for retirement has its place and you should absolutely maximize your workplace benefits and make sure you get the entire employer match and contribution. It can be tempting to invest as much as possible in all the other tax-deferred accounts available to executives, such as deferred compensation plans and supplemental executive retirement plans, but these come with the risk of overfunding long-term goals at the expense of shorter-term goals and may not be the most tax-efficient course of action in the long run. The requirements for taking distributions from many of the supplemental plans available to executives beyond their 401k often result in more taxable income than you want and need over a short period of time. Couple this lack of control over distributions with uncertainty around future tax rates and you create a situation where you may pay more taxes on distributions in the future than you would have paid had you realized the income while working.

Devoting cash flows that aren’t needed for spending to a taxable investment account can create flexibility to fund shorter-term goals and create more opportunities for tax diversification in retirement, as gains in taxable accounts are usually taxed at capital gains rates (which are typically 10, 15, or 20% under the current tax code depending on your income). Distributions from pre-tax retirement accounts are taxed as ordinary income and, with mandatory distributions from retirement accounts, your tax picture may not be what you pictured when you are living in retirement.

Depending on your goals, there may be other tax-advantaged accounts that are appropriate outside of retirement accounts, such as 529s for funding education expenses or specific vehicles for charitable giving. Again, careful planning is required to ensure you don’t overfund accounts that are intended for a specific purpose.

Looking at your cash flows and your goals holistically can give you better clarity and insight on how best to allocate funds from your paycheck.

5. Estate Planning

As a high-earning executive, your estate is probably a little more complicated than most—namely, significant assets such as real estate, vehicles, and investments, as well as a portion of your wealth tied up in stock-compensation plans that may or may not transfer to beneficiaries. From retirement plans and deferred compensation to life insurance, everything has its own web of beneficiary designations, and if you’re not keeping up, things can get away from you quickly.

Probate is a hassle on a good day, but for beneficiaries dealing with a complex estate, it’s an outright nightmare—especially when they’re already navigating the grief of losing a loved one. The last thing you want is for your family to inherit chaos.

With work, family, and hobbies taking up your time and energy, it’s easy to lose sight of what your documents say and whether they need to be adjusted as life changes or even as legislation changes. Additionally, making sure that your assets are titled appropriately based on your estate plan is often overlooked. Legacy planning is essential to keep your loved ones from having to deal with a major headache after your passing.

Another aspect of estate planning for executives to consider: it’s not always about what you leave behind. It might also be about managing what you might inherit. Working alongside a trusted advisor allows you to navigate this complex scenario alongside your aging parents for the best possible financial outcomes after their passing.

6. Identifying and Mitigating Risks

Income and earning potential are often the biggest drivers for executive wealth accumulation. But what if something happened, such as an illness or injury, that impacted your ability to work at that level? Disability insurance is often overlooked and employer-provided policies usually aren’t sufficient to replace the income that you and your family have grown accustomed to.

Executives in particular have certain components of their compensation, like bonuses and stock awards, they may rely on to meet their current spending needs and to fund future goals. Often, disability insurance provided through an employer will only cover a portion of your salary, which may be insufficient to meet your current needs and derail your ability to accumulate wealth for future goals. It’s beneficial to supplement any employer benefits with a private policy that better addresses an executive’s specific situation and needs. Many of these considerations hold true for life insurance coverage as well.

Another area where you may want to mitigate risks is personal liability. An accident or injury that’s deemed your fault could deplete the majority of your assets in a lawsuit. Liability tied to your policies for homeowners and auto insurance may not be enough to protect your assets in the event of a lawsuit. Umbrella policies can help mitigate that risk.