Once an investor becomes a high net worth individual (HNWI), they face a number of new retirement challenges. Additional taxes, legacy planning, succession planning, and new investment opportunities can make navigating the world of retirement planning seem nearly impossible.
The good news is that tapping into advanced strategies for wealth management, tax efficiency, and asset diversification can remedy many of these obstacles. Often, HNWIs rely on trusted advisors to determine which strategy is right for them – after all, every situation is unique, and financial products are not one-size-fits-all.
However, before you sit down with your advisor, it helps to have some ideas of what to expect. In this article, we’ll cover the basics of high net worth retirement planning strategies and answer common questions about retirement.
Key Takeaways
- High net worth individuals must consider more factors than the average retiree when it comes to retirement planning.
- For many HNWIs, they must plan for estate taxes, succession planning, and legacy preservation.
- Working with a team, often including a financial advisor, attorney, and tax professional, offers the opportunity for a comprehensive retirement plan.
Understanding High Net Worth Retirement Planning
High net worth individuals are defined as investors with $1M+ in liquid assets. Core retirement planning for HNWIs focuses on sustaining wealth while minimizing risks and taxes. At this point, retirement portfolios become more complex and nuanced as maintaining a luxury lifestyle, tax efficiency, and legacy planning becomes critical.
For example, HNWI investors will likely need specific financial planning services, such as:
- Tax optimization and tax reduction strategies
- Succession and legacy planning
- Alternative investment strategies
- Navigation of multi-generational legacies and investments
For this reason, it’s common for HNWIs to hire an experienced financial advisor to handle the retirement complexities.
Retirement Income Planning
Creating income streams to cover living expenses in retirement is essential for long-term financial success. And there are many avenues to do so. Rental properties and high dividend-paying stocks all offer opportunities for retirement income, as do annuities in the right circumstances.
That said, not all resources are made equal. Certain assets, such as Social Security Benefits and tax-efficient retirement accounts, require a strategy to optimize accounts and make every dollar last.
Maximizing Retirement Savings
High-net-worth individuals can take better advantage of tax-advantaged retirement accounts such as 401(k)s, individual retirement accounts (IRAs), and defined benefits plans. In fact, traditional retirement accounts make up 55% of the wealth of HNWIs. Not only can they typically add more to these accounts, but certain strategies open up to them. For example, mega backdoor Roth IRAs and catch-up contributions for individuals over 50 make it easier than ever to maximize savings.
Defined benefit and cash balance plans can further optimize savings, allowing for six-figure contributions and tax-deferred savings. Health savings accounts (HSAs) enable triple-tax-advantage savings and can help cover future healthcare costs – a key retirement expense.
It’s also important to diversify your savings. Investing in private equity, venture capital, and tax-efficient real estate structures like Delaware Statutory Trusts (DSTs) are all options if they are transparent, structured properly, and allow for proper management oversight.
Investment Planning for Retirement
The first principle of successful investment planning is diversification. A well-diversified portfolio includes stocks, bonds, and alternative investments. Some alternative investments include real estate, hedge funds, and private equity investments, all of which can offer potential long-term gains once liquidated if managed properly.
Another critical component is tax-loss harvesting, which can also help to reduce capital gains tax while optimizing returns.
There are also other investment strategies outside of the realm of portfolio income and expenses. For example, private placement life insurance (PPLI) can enable tax-efficient growth.
However, every portfolio must be unique, as each individual has a unique financial situation and goals. Furthermore, these portfolios must be aligned to personalized risk tolerance and time horizons to ensure peace of mind without sacrificing goal progress. Liquidity needs along the way also have to be factored into the investment plan. For all these reasons, it’s impossible to generalize what investments would be good for your specific portfolio.
Real Estate Investments in Retirement
Real estate has long been a top-tier retirement asset, with 23% of retirees expecting home equity to be a significant source of income and 10% betting on rent. Owning property can provide passive income through rent and diversify your income streams. Despite the downsides, such as significant maintenance expenses and low liquidity, there are many ways to minimize risk and tax liabilities.
There are many ways you can leverage real estate investments to generate income. For example, you can use properties to tap into home equity through downsizing, taking a reverse mortgage, or renting. However, you can also bypass owning a home directly and instead invest in a real estate investment trust (REIT). A REIT works similarly to a mutual fund – except rather than stocks and bonds, it invests in property. These real estate-backed investments pass on earnings in the form of dividends and capital gains to investors.
Tax Planning for High Net Worth Individuals
High-net-worth individuals face unique tax challenges that can make financial planning more challenging. If handled properly, however, there are also opportunities for tax mitigation. One must look at more than just the income tax to successfully reduce the total tax liability. Capital gains taxes, state-specific tax laws, estate taxes, and generation skipping taxes all have to be considered.
There are a few straightforward ways to reduce your tax liability, such as contributing to defined benefit plans, cash balance plans, and HSAs. Charitable giving options, such as donor-advised funds (DAFs) and charitable remainder trusts (CRTs), also offer ways to reduce taxes while supporting your favorite charities. Another common strategy is Roth IRA conversions during low-income years to minimize future tax liabilities.
In some cases, you can also leverage income deferral strategies, such as installment sales for real estate or private businesses, to spread out tax burdens over time.
State and county taxes can also significantly impact your ability to save for retirement and enjoy your golden years. That’s why it’s important to address state tax considerations early on, such as by relocating to tax-friendly states or setting up trusts in tax-advantaged jurisdictions.
You may also want to emphasize the importance of integrating these strategies into a broader retirement and estate plan.
Estate Planning for High-Net-Worth Individuals
A comprehensive estate plan includes wills, trusts, powers of attorney, and beneficiary designations. For HNWI, there are advanced strategies, like irrevocable life insurance trusts (ILITs), family limited partnerships (FLPs), and grantor-retained annuity trusts (GRATs). In many cases, you can include donor-advised funds (DAFs) and charitable remainder trusts (CRTs) in your estate plan to reduce estate taxes and support causes you care about.
Estate planning, however, is not a one-time endeavor. It’s critical to regularly update estate plans to reflect changes in tax laws or personal circumstances. Creating an estate planning checklist can help organize key documents and ensure you cover all the necessary steps.
Healthcare and Long-Term Care Planning
Healthcare expenses are one of the most significant costs in retirement. Failing to plan for rising healthcare expenses and long-term care needs is a failure to plan for retirement and quality of life – regardless of your net worth.
Health savings accounts (HSAs) for tax-efficient savings and long-term care insurance to cover potential costs can offset these unknown expenses. Creating potential health expense plans based on family history or expected health needs can also help you to prepare for long-term costs.
Lifestyle Goals and Spending
High net worth individuals often have unique lifestyle goals and spending habits that require careful consideration in retirement planning. These goals may include maintaining multiple properties, traveling extensively, or supporting charitable causes. To achieve these aspirations, high net worth individuals must meticulously plan their retirement income and expenses to ensure they have sufficient resources to support their desired lifestyle. A fiduciary advisor can help high net worth individuals create a personalized retirement plan that aligns with their lifestyle goals and spending habits, ensuring financial security and peace of mind throughout retirement.
Cash Flow Projections with Inflation Adjustments
Cash flow projections are a critical component of retirement planning for high net worth individuals. These projections help individuals understand their income and expenses in retirement and ensure they have sufficient resources to support their lifestyle. To create accurate cash flow projections, high net worth individuals must consider inflation adjustments to ensure their purchasing power is maintained over time. A financial advisor can help high net worth individuals create cash flow projections that take into account inflation adjustments and other factors that may impact their retirement income, providing a clear roadmap for financial security in retirement.
Sustainable Withdrawal Strategy
A sustainable withdrawal strategy is essential for high net worth individuals to ensure they do not outlive their retirement assets. This strategy involves creating a plan for withdrawing from retirement accounts, such as 401(k) or IRA accounts, in a way that is sustainable over the long term. A qualified financial advisor can help high net worth individuals develop a sustainable withdrawal strategy that takes into account their retirement goals, income needs, and investment portfolio. By carefully planning withdrawals, high net worth individuals can enjoy their retirement years without the fear of depleting their resources prematurely.
Working with a Team of Professionals
Most HNWIs work with financial advisors, usually a fiduciary, as well as other professional lawyers, attorneys, tax specialists, and trusted advisors to successfully plan their retirement. While using a “financial team” approach is a great idea, a full 60% of HNWIs identified wealth managers as their primary advisor which makes sense given the typically holistic approach wealth managers use.
The right financial advisor is critical and can help coordinate with the rest of the team to provide in-depth and tailored guidance on wealth management, tax efficiency, and estate planning. As a result, working with an advisor you trust can ensure you have a comprehensive retirement team with all the expertise you need to design a practical plan.
The right advisor is the one who offers 100% objective advice and has the experiential base to understand your specific situation, your goals and the various tools available to help you achieve those goals. You should look for an experienced fiduciary fee-only advisor. These fiduciaries are both ethically and legally obligated to work in your best interest, and that’s critical. Here’s a list of questions to ask a financial advisor about retirement to help you find the right advisor for your unique situation.
Adjusting Your Retirement Plan Over Time
Retirement planning is an ongoing process – it’s not a one-and-one deal. It requires regular, but not necessarily lengthy, reviews and adjustments based on shifting goals, financial situations, and tax obligations. Financial advisors typically aid in this process, making it easier to determine new plans of action as life changes.
5 High Net Worth Retirement Planning Best Practices
There are a few rules of thumb to keep in mind when designing a HNW retirement plan:
- Prioritize retirement planning as early as possible.
- Seek professional guidance regarding taxes, estate laws, and investment opportunities.
- Outline your long-term financial and retirement goals.
- Determine your risk tolerance and risk capacity.
- Review your plan at least once a year.
Next Steps
Retirement planning for HNWI is critical to growing your wealth and peace of mind for yourself and your loved ones. A comprehensive retirement plan covers everything from your long-term goals to managing your estate once you’re gone – and ensuring that every cent only moves on your terms.
Professional guidance with a tailored retirement plan can help you reach those goals with less stress and free up time for activities you actually enjoy. But choose the right advisor; don’t just settle for anyone who claims to be an advisor. Use the link below to schedule your complimentary consultation today.
Greg Welborn is a Principal at First Financial Consulting. He has more than 35 years’ experience in providing 100% objective advice, always focusing on the client’s best interests.
Greg Welborn is a Principal at First Financial Consulting. He has more than 35 years’ experience in providing 100% objective advice, always focusing on the client’s best interests.
