The best way to ensure that your golden years are spent in the kind of lifestyle you enjoy now is to get proactive in planning your retirement. In fact, factoring in possible higher costs ahead of your needs is essential. The reward, for those who don’t, could become living out their retirement on a fixed income.

I’ve said before that I believe Social Security will be around in one form or another. However, some people have trouble making ends meet living off it today (since their Medicare premiums are deducted before their benefits are paid to them). If you habitually enjoy the best of everything now, that’s an economic status you are unlikely to enjoy downgrading to. 

The goal here isn’t to worry you; only to get your head in the game. No one regrets planning the best retirement they could, but even some affluent retirees have regretted failing to—as their nest eggs began to shrink. In hopes of preventing that, this article takes a look at what high-net-worth individuals can do to proactively prepare for retirement.

When they’re used intelligently, a 401(k) can be a great way to enhance your golden-years nest egg. At the same time, they aren’t the all-encompassing retirement planning tool that some people think they are. They have limitations and rules preventing them from being used as a primary savings vehicle or as a stand-alone plan for saving for your retirement. 

If you’re financially independent, you may have other sources of income prepared for your senior years. Nevertheless, if your 401(k) is all—or mainly—in stocks, you should consider diversifying with other investments. Stock markets are volatile by nature, but recent levels have been unusual for such a prolonged period of time. Times like these make keeping a well-balanced portfolio essential.

First, you need to determine your investment philosophy. Do you want to be conservative, or would you rather take the risk of investing in more volatile stocks? Are you willing to accept the volatility of the market in exchange for the potential of higher returns over time?

Next, how long until your expected retirement date? Time is one of the biggest considerations for determining how much risk to take with a 401(k) account. For example, someone who has 30 years until retirement is likely going to be able to afford more risk than someone who only has ten years left in the workforce. If something goes wrong and there’s not enough money saved up by then, they may actually run out of options when it comes time for them to retire.

Additionally, it couldn’t hurt to broaden your knowledge about investing: Do any companies seem likely to turn out profitable, given time? At the same time, are there any risks associated with these companies that could end up becoming negatives instead (such as making less money than expected from previous data points)? 

Take a look at the allocation strategy of your current investment plan: How much do you have invested in stocks, bonds, cash, and other investments? If these don’t align with the recommended allocation for your age group, it’s possible that you are at risk. Wealth management services shouldn’t always be hands-off, strategically.

The good news is that the market tends to bounce back, allowing investors to rebuild their assets. The bad news is that no mortal knows when it will resume a steady upward trajectory. If some of your investments are already too high or too low in value, they may not be able to correct themselves within a reasonable amount of time. 

There are generally three ways in which you can protect yourself from volatility:

1. Rebalance your portfolio so that it stays balanced on its own.
2. Invest in bonds in order to slow down losses when things get erratic.
3. Diversify into other asset classes like real estate or commodities like gold. If your 401(k) is all or mainly in stocks, you should consider diversifying with other investments.

Again, although stocks can be risky, they sometimes provide a higher return than bonds. If your 401(k) is all or mainly in stocks, you may want to consider diversifying with other investments. For instance, commercial real estate (CRE) can provide steady returns, even when the stock market falters.

All forms of real estate tend to be inflation-resistant because their intrinsic value is derived from that of surrounding properties: Even when the stock market dips, people need a place to live, office space, and so on. Unless a volcano sprouts nearby, real estate generally tends to hold its value. Most commercial leases keep generating returns regularly, as well. I’m not providing investment advice here in print, but that’s often the case. 

Stress testing helps verify the durability of your investment plan. It’s typically a solid indicator as to how (or if) your retirement plan could withstand adverse market conditions. At the same time, it can reveal indicators about whether your retirement plan is on its best possible track toward your long-term goals or not. 

That shouldn’t be undervalued because there are many variables that go into creating a successful retirement plan. Stress testing helps us account for those moving parts. As a result, you should be able to rest easy at night even when the market gets squirrely—because you know your portfolio is ready to weather storms.

There are multiple ways of performing a stress test, but the two most commonly used for affluent investors are Monte Carlo simulations and risk-based scenario analyses. These tools help wealth managers analyze how different scenarios are likeliest to affect your investments over time. Similarly, they can indicate whether or not those outcomes meet your expressed expectations for success.

There are five key areas on which a thorough test will focus: market risks, volatility, liquidity, inflation, and longevity. These correlate loosely to the metrics of a cardiac stress test for a human being. In other words, you might consider them to be your portfolio’s temperature, heart rate, and so on under artificially adverse conditions.

• Market Risk

It’s no secret that the market is always in motion, like a weather system. Market risk measures the possibility that an investment’s value will decline due to volatility or similar circumstances. Mitigating factors are typically a change in interest rates, inflation, or erratic behavior in the economy itself. 

• Volatility (and the Sequence of Returns)

The volatility of your investments and the sequence of returns you experience over time are somewhat interconnected. Both can affect your ability to reach your goals. Volatility is essentially how much a security’s price moves up and down over time. “Sequence of returns” refers to the order in which assets perform well or poorly relative to their historical performance over long periods. 

• Liquidity

The third element of a comprehensive retirement plan stress test is liquidity. This refers to how easily you’ll be able to access your money when you need it. A critical aspect of building financial security is having sufficient liquidity in the form of cash or other liquid assets to cover at least six months of living expenses. 

• Inflation

Inflation can be one of the larger risks to consider when planning your retirement. Left unchecked, it can erode the purchasing power of your portfolio over time, making it difficult to maintain your desired standard of living as you age. Make sure to account for it by investing in inflation-adjusted assets.

• Longevity (Life Expectancy)

Longevity is what it sounds like; an averaged measure of the period of time over which someone is expected to live. Based on age and gender, it is calculated using data from death certificates and census data.

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A high net worth affords you the option of creating a trust or revocable living trust to pass along assets after your death. However, if you are married, what happens if your partner outlives their inheritance? Could they continue living comfortably during that time period?

Financially independent people can be expected to live an average of four years longer than their spouse. This could mean an additional $500,000 or more in expenses over the course of those years. Health care could comprise the bulk of that, but it’s not just health care costs. Maintaining a home can also become burdensome when one person is unable to physically keep up with it. 

If you’re both still working, this may not be as big of a concern. On the other hand, if you retire earlier than your partner—or you live in an area where there are few jobs available—keeping up with maintenance can get expensive fast (especially if you plan on living at home during your retirement). This begs the question, “How do you plan for your spouse’s retirement?”

Unfortunately, it may not be easy. There are many variables, and no one knows what will happen in the future: Will your spouse be healthy? How much money will you both need in order to retire comfortably? 

One common solution is inheritance. However, this can be a sensitive subject for many couples and should be handled delicately. Another, possibly less controversial option is to budget carefully and make sure that the surviving spouse will not outlive his or her assets. In addition to making sure that the surviving spouse is financially secure going forward, it’s important to verify that your legacy doesn’t become a financial burden on your children or grandchildren.

This can be a complicated process because it requires specialized knowledge in estate planning and tax laws. In order to ensure your children aren’t burdened by inheritance taxes, you must take advantage of the $12 million per person exemption for federal estate taxes (which applies only once). Most states also have their own exemption amounts.

Consider consulting closely with your financial advisor and accountant to fine-tune your beneficiaries and determine whether or not you have enough life insurance coverage in place. You’ll also want to make sure that you’re keeping up with current estate laws to avoid any unpleasant surprises later on. Current estate laws can change frequently, so it’s important to keep up with changes that potentially impact your estate planning strategy.

High-net-worth couples need to focus on building the right kind of wealth that will be most helpful in supporting either of them over an extended period of time during their later years. For instance, keep aware of how long it will take for your estate’s assets to pass from one person to another upon death (especially if you are unmarried). Knowing this can help, through financial planning, to keep the survivor living comfortably during this time period. 

Inflation is an increase in the overall price level of goods and services over time. As a result, it can affect how much money you need to maintain your standard of living during retirement. It also affects how much income tax you pay on your investments (both while they’re growing and after they’re withdrawn).

There are a few different methods for calculating inflation rates. The two most popular uses are historical inflation rates and inflation indexes, respectively. Historical inflation rates are determined by looking at the Consumer Price Index (CPI) of specific years or decades or by looking at the average of multiple years. 

At the same time, there are dozens of different inflation indexes which show how much prices have gone up over time. Some of them even break down how much prices have increased by category, like food and housing, specifically. Inflation rates can be higher than expected, lower than expected, or vary within the same range that was expected. 

It can also affect your income tax bracket, your capital gains tax rate, and your estate tax rate during retirement. For example, if your income as a retiree is larger than it was before, that increase could bump you into a higher tax bracket. This is especially important with regard to your retirement planning because your income can increase—not only due to normal wage growth, but also—from Social Security payments factoring in, as well. 

Meanwhile, many HNW individuals are able to keep working after retirement age because their increased wages will keep them in a lower tax bracket. That is preferable to paying higher taxes on Social Security benefits received later down the line (and possibly having less money available during those years, as a result).

As you get older, the government assumes that you need more money than before. This is because older people often have higher healthcare costs and lower incomes than younger people do. Ironically, due to this assumption, they are likely to raise your taxes as you age. This is their means of preserving the value of Social Security and other benefits for seniors like Medicare.

For these reasons and more, inflation can have a significant impact on the taxes you pay after retiring. Those who aren’t aware of how it works can wind up taking home less money than they expected (and potentially paying more taxes, as well). To ensure that doesn’t happen to your finances, keep an eye on the inflation rate. Ideally, your investments should be growing at a rate similar to—or higher than—inflation rates, themselves.

From time to time, over the past few years, clients have occasionally asked if I overcharge them or other people in their social circles. My answer is always “No,” but there’s more to it than that: As a matter of accountability, I’m happy to detail how you can find out for yourself.

Here are some of the questions to ask yourself about your advisor:

• Do they have a written plan to achieve my financial goals?

A written strategy should help you stay focused on the long-term goal and avoid making bad decisions along the way. 

• Am I getting the same investment options I would on my own?

If you have a small portfolio, it’s possible that your advisor doesn’t offer the same investment options that you might be able to find for yourself. That’s not ideal, but it does happen. 

• Does my advisor check in with me only 1-2 times a year?

Underwhelming advisors think of “financial planning” as a one-time event that takes place during the first meeting—and then never again for years. 

• Have I ever felt like my advisor was leading me astray?

A high-net-worth financial advisor, in particular, should always have the ability to explain why they recommend a particular investment type and how they’ve arrived at their recommendation(s). 

• Has my advisor ever told me they “don’t understand how” they did it, but they made me money before leaving for a vacation?

If your advisor has ever said something like this, consider a change ASAP. This lack of transparency, alone, screams “SCAMMER:” Trustworthy advisors want you able to see (and, where possible, understand) the value that they deliver you.

• Do they make promises that sound too good to be true?

If a financial advisor or product salesperson tells you that you can have something for nothing, be wary. In the financial world, there are no free lunches.

• Has my advisor bragged about making a “special deal” for someone else that wasn’t available to everyone else?

There are two main reasons why this is a bad sign: First, it indicates that your advisor is not transparent. Second, it sounds like unethical conduct. 

If you feel that your registered investment advisor may be overcharging you, there’s no harm in asking them to explain their fees and exactly what they do for you. If they seem shifty or confused as to why this is important, consider switching financial advisors in Connecticut. 

Retirement planning can be hard work. Nevertheless, making sure that everything is in order in time for your retirement can help ensure having enough capital to support your desired lifestyle (or at least one comparable to what you had during your working years). Balancing tax efficiency with long-term growth helps, as well.

However, while your plan’s tax efficiency is an important element, it’s not the only important factor. In fact, if you’re a high net worth individual, including real estate in your IRA can have multiple advantages. It bears repeating that diversifying your portfolio into it is generally a shrewd way to protect against market fluctuations and reduce volatility in the value of your other investments.

At the same time, real estate is a long-term investment that can provide consistent returns with the potential for significant appreciation over time. Leverage can be an effective strategy for both increasing returns and reducing risk in your real estate IRA. However, these assets should always be approached with caution. There are many factors that go into deciding whether or not this is right for you. 

If you’re looking to invest your wealth into real estate, make sure to consider all of the details first. Heritage Capital, LLC is happy to review them with you. Contact us and see why we’re known for our high-net-worth retirement planning in Connecticut.