As financial advisors, it is our job to protect our clients from their worst instincts and most self-destructive behaviors. Every financial advisor wants to work with high profile, successful people. Frequently, those people are surrounded by “yes” men, so it can be uncomfortable to tell them “You really can’t afford a new Ferrari or a ski cabin in Aspen.” However, sometimes that is exactly what needs to be said.

Following are some important financial planning concepts we stress with business owner and celebrity clients.

1 - Emergency Fund

The typical financial planning rule of thumb is that you should have 3-6 months of living expenses in a safe liquid account. This amount, however, is simply inadequate for someone whose income varies widely and/or where one person is the sole or primary breadwinner. Some client situations warrant a 12-month emergency fund or more.

2 - Smoothing Out Your Income

Many business owners ride the financial rollercoaster that comes with good months and bad months or seasonality of earnings. We encourage business owner clients to deposit all earnings into their business checking account and then take a consistent draw (i.e. salary) from their business every two weeks. This draw should be enough to cover basic living expenses. At the end of the year, if there is money left over, it can be invested for longer term objectives (i.e. retirement) or one-time expenses. The level of salary drawn from the business should be conservative so that a normal fluctuation in revenues does not require the business to borrow or dip into emergency funds.

3 - Sustainable Withdrawal Rate

Most financial planning journals suggest that the safe “initial” withdrawal rate for a 65-year-old retiree is only 4% of his or her portfolio value. The plan is to increase the withdrawal amount each year for inflation. This means that a $1 million portfolio will distribute $40,000 the first year of retirement and then $41,200 the next year (assuming 3% inflation) and so on. A 4% initial withdrawal rate may seem low, but consider that after 25 years, this same portfolio would need to be distributing almost $84,000 to keep pace with 3% annual inflation.

Now consider a professional athlete whose career may be over by the age of 30. His portfolio may need to support him and his family for 50 years or more! Also consider that he may have been earning and spending several million dollars per year during his short career. In order to maintain that level of spending, he would need a portfolio valued at 25 times what he was spending pre-retirement (assuming that his portfolio is his only source of income and an initial withdrawal rate of 4%). Therefore, to maintain a $1 million a year lifestyle, he would need to have $25 million saved by the time he retires (assuming he does not have a pension or continued earnings). Many professional athletes, who earn $5 million a year, spend more than $1 million and save far less than the hypothetical $25 million in the above example. In addition, very few are ready, willing, and able significantly to downsize their lifestyles while they can still do it on their own terms. As a result, Sports Illustrated estimated in 2009 that 78 percent of NFL players are bankrupt or facing serious financial stress within two years of ending their playing careers and that 60 percent of NBA players are broke within five years of retiring from the game.

4 – Wild Card Investments

Many business owners, celebrities, and professional athletes come across the opportunity to invest in new and exciting businesses such as restaurants, night clubs, energy drinks, etc. These investments are exciting and attractive because they give the investor the promise of diversifying his income stream and planting the seeds for his next career. However, the failure rate of these investments is much higher than most people realize. These types of investments typically should represent only a very small portion of the celebrity’s overall investment portfolio.

5 – Managing Risk

It has been well-documented by those who study and write about behavioral finance that most people consistently underestimate the chances of bad things happening to them. Even when we know that 30% of people will become disabled prior to age 65, most people assume that the chance of it happening to them is much lower. The whole purpose of financial planning is to protect a client’s lifestyle. Comprehensive planning, therefore, must include insurance, which protects clients and their families from things like premature death, disability, lawsuits, etc. This protection is especially important for business owners, celebrities, and athletes who may have a higher exposure to certain risks.

6 – Coordinating a Team of Financial Professionals

High net-worth people want (and need) the best insurance professionals, the best estate planning attorney, the best CPA, and the best money manager. However, in order to generate and implement the best overall plan, all of those professionals need to communicate with each other and work together. Frequently, the money manager or financial advisor is the quarterback of the planning process. So look for a financial advisor who has the right relationships for all of your planning needs.

Conclusion

Earning a lot of money is glamorous. However, it also creates complexity and responsibility. Financial planning for business owners, celebrities, and professional athletes is more involved than it is for the average American family. Celebrities may not need to sweat the cable bill or wait for the white sale to buy new linens, but financial success has its own set of challenges. Find a financial advisor you trust before investing a single dollar. Look for an advisor who is interested in your long-term success, both in business and in life. Your relationship with your advisor will be one of the most important relationships you will ever have. Once you find the right advisor for you, don’t be afraid to ask a lot of questions. Your planning will be more successful if you understand what your advisor is doing and why.

FOR MORE INFORMATION:

If you have questions or comments about financial planning or other financial issues, please contact Jeremy Kisner, CFP at (480) 272-7116. Mr. Kisner is the President of SureVest Capital Management, a fee-based financial planning and wealth management firm with offices in Las Vegas, NV and Phoenix, AZ. For more information visit: www.svwealth.com.