It can be hard to relate to rich people.
However, some of the biggest financial mistakes rich people make are all too familiar.
“There are two things I see every high net worth person has not planned for adequately, to their measure: their child’s education, and their retirement,” says Steven M. Piascik, CPA, MT, founder and president of boutique CPA firm PIASCIK.
Piascik, who specialises in tax minimization and complex tax strategies for high net worth individuals and corporations, clarifies that adequate planning means something different depending on an individual’s circumstances.
He says clients come to see him who are focused on growing multimillion-dollar companies, and when he asks them how much they have saved for retirement now that they’re in their 50s, they say $100,000 — not nearly enough.
He encourages clients to estimate how much money they will spend per year in retirement, and finds that to afford the figures they suggest, they often need to be saving tenfold, or even 20-fold, the money they are now.
“Why aren’t high net worth individuals maxing out their 401(k) plan from their employer?” he asks. “If they’re self-employed, does the situation leave them open to defined benefit or defined contribution plans? Both are qualified retirement plans. That’s a common mistake — everyone is missing that.”
“Everyone” probably includes those of us who aren’t considered high net worth. A 2015 study from Boston College’s Center for Retirement Research found that among the data for hundreds of households surveyed in the US Census Bureau’s Survey of Income and Program Participation, only 9% contributed enough to come within 10% of maxing out their 401(k)s.
The other major expense for which Piascik finds his clients aren’t always adequately prepared is paying for their child’s, or children’s, college tuition. Again, they underestimate how much college actually costs: The College Board reports that the average annual cost of a four-year private college in the US is $43,921 for the 2015-2016 school year. For an out-of-state student at a public college, it’s $34,031.
That’s another problem we all share. In a 2015 study, student lender Sallie Mae found that the typical family only covers 43% of college costs using student and parent income and savings. Another 22% is typically covered by student and parent borrowing.
Piascik says the onus is on financial professionals to make sure their clients aren’t making these common missteps. “A good CPA should allow clients the information they need to think and ask questions,” Piascik says. “People don’t know what they don’t know, and it’s our job to inform them of the facts so they can make a good tax decisions. Then they can say, ‘OK, I want my kid to go to the University of South Carolina and I have 10 years, how much do I need to put away in a money market account earning 2%?’ All of a sudden, the $200 they were saving each month has gone up to $1,000.”