A Retirement Planning Guide for High-Net-Worth Individuals
Planning for retirement is an important component of everyone’s financial planning, including that of a high-net-worth individual (HNWI).
What is a high net worth individual (HNWI)?
There is no industry-recognized definition for an HNWI. One of the most commonly accepted criteria is an individual with $1 million or more in investable assets, excluding real estate. However, other definitions include individuals possessing assets worth $5 million or $10 million as HNWIs.
What is a ultra high net worth individual (UHNWI)?
People above the $50 million or $100 million thresholds in assets are categorized as ultra-high net worth individuals (UHNWIs). However, as a common ground, the definition of high-net-worth individuals (HNWIs) and ultra-high net worth individuals (UHNWIs) as stated by the SEC (Securities and Exchange Commission) is a person with $75,000 as investible assets or a total net worth of $1.5 million.
While the exact definition of HNWIs differs, a common assumption is that an HNWI has substantial assets that can help fund their retirement. So, if you are an high-net-worth individual, you are likely to have amassed a large retirement corpus for your golden years. However, having a high net worth or considerably large asset bank does not imply that you do not need to plan for your retirement.
Irrespective of how large your retirement corpus is, it can be quickly depleted if there are not sufficient sources of income to replace your high pre-retirement income. Additionally, high-net worth retirement planning and wealth management differs when compared to retirement planning of an average retiree, since your financial situation is more complex than others. Your tax situation also requires intricate management, making retirement planning all the more essential.
Hence, if you are a HNWI that wants to maintain the same standard of living during retirement, minimize taxes, and gain financial freedom, it is recommended that you create a fool proof retirement plan that perfectly aligns with your requirements.
Proactive high net-worth planning can substantially enhance your ability to live a comfortable retirement. Here is a high-net-worth retirement planning guide that can help you get started:
A Retirement Planning Checklist with 6 things that you should consider before retirement planning.
1. Understand your unique financial needs:
The first step in high-net-worth retirement planning is to acknowledge your retirement needs. There is no one-size-fits-all retirement plan. Whether you are seeking advice from a professional financial advisor or drawing up a retirement plan on your own, it is advisable to start by determining your unique retirement needs. For instance, you might wish to maintain your current lifestyle during retirement, while another HNWI might consider traveling around the world as a retirement objective.
Hence, it is important to know what kind of retirement you need. If you have plans to travel extensively during retirement, funding this lifestyle will require more savings. However, if you wish to lead a simple retirement life and maintain your current living standard, you will need a sum that can replace your current income. Irrespective of the lifestyle you intend to live, taking the time to evaluate your expenses and determining the income sources is a vital part of high-net-worth planning.
You can begin by listing out your living expenses. This includes everything from mortgage payments, outstanding loans, current living expenses, college tuition payments, donations, healthcare costs, insurance, dining, entertainment, home repair, transportation, travel, gifts, and everything else. Once you know your expenses, determine your retirement income. With your expenses and retirement goals in hand, you can assess if your retirement income will be sufficient to fund your needs.
It is also important to know your income from all sources, including retirement accounts (a 401(k), an IRA (Individual Retirement Account), etc.), investments, cash deposits, and cash accounts, fixed income sources (Social Security, Pension), real estate, etc. Once you have determined your expenses, lifestyle, and monthly income, you can take the next steps towards laying down the building blocks of a reliable retirement plan.
2. Plan to make your money last longer:
At its core, the most critical challenge in retirement planning for high-net-worth individuals is ensuring that your money lasts all through your retirement. As lifespans increase, longevity risk, and the risk of outliving your retirement corpus, have substantially increased too. Another factor affecting high-net-worth retirement planning is the steeply rising inflation.
If you have a high net worth, a decline in the purchasing power of your savings can have an unreasonably negative effect on your retirement. Hence, protecting your purchasing power is a critical factor to consider in high-net-worth planning. If you depend on your investments to make a large portion of your retirement income, select the optimal investment strategy for your savings to overcome longevity risk and inflation risk. You can also diversify and protect your investment portfolio from inflation risk with tax-saving retirement savings accounts such as a 401(k), an IRA, or a Roth IRA. Contributions to these accounts are tax-deductible and grow in your portfolio tax-free.
Since, as a high-net-worth individual, you fall in a high-income tax bracket, these tax savings can be meaningful. Alternatively, you should deploy sound strategies to ensure your savings corpus lasts your retirement. You can consider delaying your Social Security benefits until the age of 70. Delaying Social Security withdrawals till the age of 70 can increase the Social Security pay-out by 32% compared to withdrawing at your full retirement age. Alternatively, if you take Social Security at age 62, you will experience a 29.17% reduction in your full retirement age pay check.
3. Manage your investments and risk:
The fundamental approach to investing and managing risk does not change much in high-net-worth retirement planning. However, your goals may be different, just like your risk tolerance and investment horizons. Your investment portfolio should align with your financial goals, risk appetite, and investment horizon, as well as be optimally diversified.
In terms of financial goals, as an HNWI, you might not have general financial objectives, such as managing debt or creating an emergency corpus. It is safe to assume that HNWIs have no mortgage and own a substantial emergency fund. However, you would still need help with estate planning and providing for your future generations. So, your investments need to be structured to ensure you achieve your goals, like passing on a tax-friendly estate to your heirs. You can consider evaluating your investment portfolio as per your risk tolerance and time horizon.
If you are a high-risk investor, you may choose more volatile and high-return stocks. Alternatively, if you have a low-risk capacity, you may opt for secure government bonds, index funds, low risk stocks etc. As a high-net-worth individual, you have the opportunity to diversify your portfolio and manage your risk better. HNWIs may diversify holdings across large-cap stocks, as well as international stock markets.
Moreover, as an HNWI, you can invest in more asset classes than just stocks and bonds. You also have the chance to invest in potentially profitable small businesses across segments like healthcare, technology, and financial services. This will create a powerful, diversified portfolio and a second source of income during retirement. Apart from these, make sound investments to manage your healthcare expenses during retirement. Healthcare expenses can consume a large portion of your retirement corpus.
As per Fidelity, an average 65-year-old couple retiring in 2021 will likely spend $300,000 in medical expenses during retirement. This number is exclusive of long-term care expenses. And as per the Department of Health and Human Services, a person turning 65 in 2021 has a 70% chance of requiring long-term care in his life. To plan wisely for your healthcare expenses, you can invest in a Health Savings Account (HSA), Medicare, Medicaid, health insurance exchanges, and COBRA (Consolidated Omnibus Budget Reconciliation Act).
4. Minimize your taxes:
Taxes potentially drain your capital. And as an HNWI, you are at a higher risk of paying more in taxes and capital gains than an average person. Hence, the more you minimize taxes, the more your assets are protected from risk.
Your retirement planning and wealth management should ideally include efficient tax planning and management strategies to maximize the amount of income you keep after taxes. Several tactics can help an HNWI to minimize taxes. You can aim for long-term capital gains or form a business to write off business-related expenses. You could opt for tax-saving retirement accounts like IRA, Roth IRA, etc., and maximize your contributions.
You can also invest in an HSA that allows you to make tax-deductible contributions every year for medical expenses not reimbursed by high-deductible health plans. Apart from investing wisely, you may consider choosing to live in a tax-friendly state during retirement to lower your retirement taxes. Tennessee, Arkansas, South Carolina, Colorado, Nevada, District of Columbia, Hawaii, and Delaware, are some of the most tax-friendly U.S. states.
Be careful while using your retirement securities, as they can also impact your tax duty. For instance, think of postponing withdrawing your Social Security benefits to defer your tax liability to a time in the future when your income will probably be lower. In the case of 401(k), be careful not to withdraw before the age of 59.5 to avoid paying a 10% penalty.
5. Create a fool proof estate plan:
Estate planning is a vital component in retirement planning for high-net-worth individuals. Estate planning involves determining how your assets will be conserved, managed, and distributed in the case of your death or physical or mental incapacitation.
A comprehensive estate plan ensures that your assets are passed on to your selected beneficiaries as efficiently as possible. The objective is to minimize estate taxes and maximize clarity in the distribution of assets. Moreover, an estate plan is also critical for HNWIs in case you suffer physical or mental incapacitation.
Typically, estate planning involves drafting a will, creating a trust, making charitable donations, assigning a power of attorney, specifying the will executor, naming beneficiaries, giving lifetime gifts, and planning for family business succession. Estate planning gives you complete control over how your assets are passed, dispersed, and used after your death.
A comprehensive estate plan can help you accommodate your needs and specify who will take decisions on your behalf when you are unable to do so. You could create a living trust and place your assets in the trust to use for your benefit during your lifetime, and eventually pass them on to your designated beneficiary after your demise. You can also assign a power of attorney and specify other directives such as medical wishes to ensure that your estate affairs are well-guarded even when you are not around. High-net-worth planning can be more complicated for HNWIs due to the number and value of assets involved.
There are higher chances of family feuds and probate unless you effectively prepare an estate plan to protect your beneficiaries. For this purpose, you can create a will, where you explicitly mention all your assets, their worth, and the distribution percentage for each beneficiary named in the will. Set up guardians and trustees for the estate, and in case of minor children or pets, specify who will take care of them and what will be their rights in the estate. Ensure there is no ambiguity in the will.
It is also wise to appoint an executor for your will. An executor is a person who will read your will and execute it as stated. The executor will dispense assets, recompense debts, pay estate taxes, etc. You can pick your bank, family member, friend, or lawyer to be your will executor. Most importantly, as an HNWI, it is advisable to create an estate plan to lower the taxes for your beneficiaries in the future.
In 2021, estates with a value of up to $11.7 million are relieved from federal taxes. To lower estate taxes, you can give lifetime gifts to your spouse and children. The lifetime gift tax exemption is $11.7 million in 2021. There is no limitation on the number of people you can give gifts to. However, the gift can be taxable to the giver in form 709.
Alternatively, you can consider creating an irrevocable life insurance trust (ILIT) to lower estate taxes for your beneficiaries. In an ILIT, you cannot amend the terms and related aspects once it has been formed. Your named beneficiaries can alter the terms. ILIT will function like a trust, where you transfer the asset ownership to another person and reduce the estate tax burden for your children. If you include your life insurance policy in the irrevocable trust, the death benefit is covered in the estate. However, if you pass away within three years of creating this trust, the earnings from the insurance plan will be a taxable estate item.
Apart from these estate-tax reduction measures, as an HNWI, you can also sponsor the education of your children or grandchildren, donate to charitable organizations, create a family limited partnership, form a Qualified Personal Residence Trust (QPRT), etc. You can also minimize estate taxes by making conditional wealth transfers to custodians of your children.
Overall, retirement planning for high-net-worth individuals and their families can be complex. With valuable assets, complex estate restrictions, intricate tax subjects, and more, it is beneficial to engage with a professional financial advisor for further guidance.
For additional questions on the most suitable retirement plan for your financial needs and goals, visit Dash Investments or email me directly at email@example.com.
About Dash Investments
Dash Investments is privately owned by Jonathan Dash and is an independent investment advisory firm, managing private client accounts for individuals and families across America. As a Registered Investment Advisor (RIA) firm with the SEC, they are fiduciaries who put clients’ interests ahead of everything else.
Dash Investments offers a full range of investment advisory and financial services, which are tailored to each client’s unique needs providing institutional-caliber money management services that are based upon a solid, proven research approach. Additionally, each client receives comprehensive financial planning to ensure they are moving toward their financial goals.
CEO & Chief Investment Officer Jonathan Dash has been profiled by The Wall Street Journal, Barron’s, and CNBC as a leader in the investment industry with a track record of creating value for his firm’s clients.