Personal Finance for High Net Worth Individuals

Cropped shot of an unrecognizable mature man calculating and going over his finances at homeAround 70 percent of wealthy families lose their wealth by the second generation, according to research by Williams Group. By the third generation, 90 percent will have lost their wealth. This can be an alarming statistic for someone who has worked hard to accumulate the wealth they have. Could it really disappear by the time your grandchildren are grown?

The fact is that if you don’t take care of your money, it can’t take care of you. Earning a high income and saving a lot of money is not enough to guarantee you’ll have enough money to provide for yourself or your heirs. In fact, high net-worth individuals should be even more diligent in how they manage their assets, because they have more to lose. This is why personal finance for high net-worth individuals is so important.

We’ve created this guide to walk you through the key elements of personal finance for high net-worth individuals so you can protect and grow the money you’ve worked so hard to earn.

Chapter 1

Planning for Retirement

There are three overarching phases of retirement planning: Pre-retirement, entering retirement and living in retirement. In the first stage (the savings or accumulation phase), it’s important to maximize your retirement savings. Too often, people put off starting to save for retirement in favor of nearer-term goals, but this can greatly handicap your long-term investment growth. Time is your investments’ greatest ally; do yourself and your savings a favor by investing early and consistently for retirement.

Another key element of pre-retirement planning is determining how much money you’ll need in retirement. It’s understandable that you might not yet be certain what your retirement lifestyle will look like at this point, but using an estimate of how much you’ll spend each year or month can put you ahead of the game. This isn’t a one-time calculation, either, but rather an estimate that you should be continually updating and revising as your situation and future plans change. If you decide to retire early, for instance, or move to another state, you can revisit your retirement plan to see how these changes will impact your retirement spending.

As you near retirement, your retirement planning will need to get more robust. This is when your income estimate should start to become more clearly defined. At the same time, it’s important to check your progress toward this savings goal. Likewise, you can start to consider how your various income sources, such as your investments, a family business, real estate and Social Security, will combine to provide for your retirement income, and how you’ll turn some or all of your overall portfolio into an income stream.

Once you’re in retirement, financial planning becomes about managing your money and portfolio so that you don’t have to worry about constricting your lifestyle or running out of money in retirement. You can also look at longer-term considerations, such as estate planning and how you’ll leave your assets to your beneficiaries.

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Chapter 2

Planning for Longevity

Planning for longevity is a key component of any financial and retirement plan. In truth, as life expectancies are increasing, retirement planning is becoming more about planning for longevity rather than planning for retirement. Today’s retirees are living for upwards of 30 years in retirement. Longevity planning is about how you’ll spend those years and provide for them financially.

This means asking important questions, such as how long you want to work and to what degree. Will you fully retire from work, or do you see yourself continuing on in a part-time or consulting capacity? How will you spend your non-working hours? Retirement can take many different forms, especially now that people are both living longer and staying active for more of their retirement years.

Longevity planning involves more than just ensuring you don’t run out of income; longevity planning looks at how you’ll stay engaged throughout your later years and create a fulfilling lifestyle.

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Chapter 3

Planning for Volatility

Volatility is a fact of life for all investors, but it may be an even bigger element for high net-worth individuals who likely rely more on their investments. Stock market declines aren’t fun, but the stock market naturally goes through cycles of growth and decline, so the smart thing to do in these times is to keep a level head and stick to your long-term financial plan.

A good financial plan should be designed to withstand any market volatility that may come. If you aren’t confident in your plan’s ability to weather market turbulence, consider meeting with a financial advisor who can help you better plan for volatility. You should be able to turn to your financial plan to remember your long-term goals when market events or stock market news prompt you to want to make changes to your investments. Use your financial plan to remind yourself why you have the investments you own.

Staying with your investment strategies throughout volatility gives you a better chance of not making emotional investment decisions, which are often to the detriment of your portfolio and long-term plan. Often, when investors react emotionally, they can sometimes sell at the absolute worst moment, wait and re-buy at a much higher level. That is the exact opposite of what successful investors do. 

To reduce the volatility in your portfolio, look for ways to diversify not only your investments, but more importantly, your investing strategies. Investment diversification doesn’t work if all of your investments rise and fall together, in sync. That just gives you a portfolio with more moving parts. Instead, investors should have a variety of strategies, which behave differently in different market climates. Think of it like the weather. Owning a dozen pair of sunglasses may help on sunny days, but it does little when it rains. Investors can own stocks, bonds, commodities, real estate and other investments and strategies that blend well in all kinds of market environments. Talk with your financial advisor about ways to spread your investment risk across different asset classes and strategies to minimize the volatility in your portfolio.

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Chapter 4

Planning for the Unexpected

Even investors with robust financial plans can get surprised by unexpected events. Just look at 2020! 

However, one way to avoid unwelcome surprises is to plan for the unexpected. Build an emergency fund of cash or cash-like equivalents that you can use in case of an emergency, like the sudden loss of income or unexpected healthcare expense. The purpose of the emergency fund is to prevent you from needing to sell your investments when the unexpected happens. As mentioned above, time is your investments’ best ally; the last thing you want to be forced to do is rob them of time because of an unexpected emergency.

Planning for the unexpected also means having adequate insurance. This includes medical, auto, home and life insurance to provide for your loved ones in the event of your passing. It can be tempting to skimp on insurance coverage when you’re young and healthy, but the point of insurance is that it will be there to help you through the unexpected.

You may also want to create a plan for natural disasters if you live in a high-risk area. Discuss your situation with a financial advisor you trust to determine the coverage options for common natural disasters where you live.

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Chapter 5

Planning for Inflation

With increasing lifespans and longer years in retirement, inflation is becoming a bigger concern for investors and retirees. And it’s something that’s very commonly overlooked, especially since we have not seen worrisome inflation in the U.S. since the late 1970s and very early 1980s. Historically, grand inflationary cycles tend to ebb and flow every 40 years. Since the last one ended in 1981, 2021 is the 40-year mark, meaning that inflation is due sooner than later. 

Inflation is known as retirement’s silent killer because it slowly erodes the value of your money over time. You almost never see it coming. You just wake up one day and realize that while $20 in your pocket used to buy an entire shopping cart of groceries in the ’80s, today, it only buys two or three items.

The good news here is there are several ways investors can combat the negative impact of inflation on their lives. 

For one, choose income streams with inflation protection. Some income streams have built-in inflation protection, such as:

  • Social Security. Social Security and Supplemental Security Income (SSI) have an annual cost of living adjustment, also known as COLA.
  • Annuities. Annuities usually come with an optional add-on that will increase your benefit amount as inflation rises.
  • Long-term-care insurance. Some long-term-care insurance policies offer automatic benefit increase riders that automatically increase each year.
  • Real estate. Real estate has two main benefits: Your property value will generally rise overtime. Plus, you can use it for rental income.

You don’t have to use all of these strategies, but creating multiple streams of income that rise with inflation can be an excellent way to stretch your dollars in retirement.

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Chapter 6

Planning for the Future

Last but certainly not least, it’s especially crucial for high net-worth individuals to create an estate plan. Estate planning is a bigger concern for higher net-worth individuals who have more assets and complexity. 

The purpose of estate planning is to ensure those assets are handled and passed on how you intended with as little tax impact as possible. To do this, a financial advisor can help you set up a trust that can stipulate how and when assets should be given to beneficiaries. Trusts can also help you minimize the taxes your heirs will face when they receive your estate, not to mention avoid the costly and time-consuming probate courts.

When establishing a plan for your financial future, getting the right help is crucial. 

At Heritage Capital, we offer a unique way to try us out with no obligation. You only have one shot at building a good retirement, so make sure you do your homework when hiring a financial advisor (or switching financial advisors) to work with. Mistakes can be extremely costly. 

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If you’re ready to get some help, schedule a no-cost, no-pressure meeting with the team at Heritage Capital. We will learn about each other and see if we are a good fit. Don’t put it off any longer. Get the conversation started.