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Wealth Preservation: 6 Steps to Secure Your Finances

Wealth Preservation Strategies

Planning for wealth preservation has always been important. However, today it is even more critical for one specific reason: the return of high inflation.

Rising inflation is already hitting Americans squarely in the pocketbooks. A new study by Nationwide revealed that 13% of baby boomers and Gen X consumers surveyed have recently postponed their retirement due to rising costs.

Inflation is not the only risk to your wealth, of course. But with rising cost pressures on daily necessities, suddenly, every retirement plan has far less margin for error. If you don’t effectively plan for it, inflation can magnify any mistake you make.

How to Incorporate Inflation into your Wealth Preservation Strategies

When planning for wealth preservation and retirement, most people plan around reaching a specific number. Then, they track their progress against that number. They see a balance growing over the years and think they are on track to achieve their goal.

But that number needs to be adjusted for inflation. So it will not be static; it will grow as long as inflation keeps rising. Many financial plans simply do not pay enough attention to this critical variable.

And when inflation remains high, your investment returns need to exceed that level just to break even. Otherwise, you’ll be going backward, getting farther away from your goal every year.

So what does that mean for your investment strategy? It means your baseline return is going to have to be higher.

That gets tricky because reaching for more return usually means taking more risk. As you are probably aware, that can backfire with the possibility of more significant losses.

Interested in what your risk tolerance is? If so, take our Investment Questionnaire and we’ll provide you with some guidance on how to best structure your portfolio – including some specific estimates of what rate of return you might want to target based on your risk tolerance.

Taxes: Another Threat to Wealth Preservation

With unabated government spending and climbing national debt, another hot spot for wealth preservation planning is future tax increases. A recent report by the OECD Secretary-General shows a growing worldwide focus on increasing tax rates, collection and enforcement. The report also noted that the US has a reasonable tax/GDP ratio relative to other peer nations, leaving a lot of room for adjustment to the upside.

With little focus on reducing the immense national debt, higher tax rates down the road are very likely.

But like with inflation, not all retirement plans do enough to factor this in. Many automated financial plans ignore this altogether and just incorporate a fixed tax rate.

That’s not surprising since many brokers and financial advisors don’t have any expertise in tax planning, so they actively avoid the subject. Usually, if you ask about ways to lower your taxes, they refer you back to your CPA.

Unfortunately, we find that most CPAs are focused on history and pay little attention to the future. Additionally, they are typically overburdened with tax preparation. They can be very good at determining what your tax burden is, but they often don’t have time to develop strategies to actually reduce your tax burden.

So that’s the bad news…let’s take a look at positive steps you can take today to mitigate these risk factors.

What Steps Should You Take for Wealth Preservation?

Based on our decades of helping people navigate similar risks, here are our thoughts on things you should do today to preserve your assets in the future.

1. Prioritize Tax Planning

Regular tax planning is a must if you are serious about wealth preservation. Ideally, schedule a tax planning session every year with a professional who can help you find strategies to reduce your taxes.

At our firm, that’s part of our regular service to clients since it is critical. Just make sure you are getting tax planning somewhere, as that can help you make sure you’re not paying more than you need to, now and in the future.

Tax planning should extend to your investments, too. Be sure you’re holding the appropriate investment types in your taxable and tax-advantaged accounts to achieve the highest after-tax returns.

This is especially important in this volatile economic climate. Tax-aware investing is one of the few ways to improve your returns without a corresponding increase in risk.

2. Incorporate Estate Planning Strategies 

Have you heard of the “three-generation rule”? According to research done by Roy Williams and Vic Preisser, 70% of affluent families lose their wealth by the second generation. Further, a stunning 90% lose their resources by the third generation.

That’s where your estate plan can play an important role in your wealth preservation strategies. Along with determining where your assets go, estate planning strategies can help you shelter assets, pass your wealth on tax-efficiently, and help future generations preserve it.

Estate planning can range from simple to highly complex. Some people can accomplish their goals with a simple straightforward will and the careful designation of beneficiaries. However, these simple strategies can only help you determine where an asset will end up. Be sure to avoid these common estate planning mistakes.

Most affluent and wealthy families need more complex strategies which incorporate trusts. While these structures involve upfront costs and ongoing maintenance, trusts can offer powerful tax strategies, either benefiting you now or benefiting your heirs later. Or both.

Trusts also allow you to control how your heirs spend your money after you’re gone. For example, you could set up a trust where funds could be set aside for heirs but only used to buy a home, pay for education, or fund retirement accounts. In that way, trusts can be a valuable tool in preserving your legacy over the long term.

Additionally, estate planning techniques can help protect your assets from creditors, future family divorces and other threats. If you’re a business owner, landlord or professional who operates in a high litigation business, you can use estate planning techniques to shield your assets. That way, you are a much less attractive litigation target, and you’ll have far less potential downside with assets out of easy reach.

Estate planning strategies often incorporate life insurance to help you shelter assets and provide some insurance protection at the same time. Certain tax laws provide favorable treatment of these instruments, making them ideal candidates for long-term estate planning.

Finally, this planning can help you minimize estate taxes to pass on your wealth more tax-efficiently.

The key to all these strategies is properly determining what level of protection you need. The costs and ongoing work required to maintain a trust need to be weighed with the expected benefits. But done right, estate planning can be used to help preserve wealth across generations. At First Financial Consulting, we spend significant time on this to help our clients find the right strategies.

3. Don’t Ignore Insurance Planning

Another critical component of wealth preservation is risk management. Some questions that must be asked in your financial planning:

  • What happens to your family if you die?
  • What happens if you get disabled and cannot work or run your business?
  • What happens if your business or house burns down?
  • What happens if you get hit with a large lawsuit?

Fortunately, insurance can help us with many of these risks. But we need to get the right insurance. Too many times, working with an insurance agent may mean you spend more than you need. Or you are sold a complex, expensive product when an inexpensive policy would have accomplished your goal. Thankfully, we’ve got you covered. Our informative guide on Life Insurance gives you advice on how to sidestep the top 15 costly errors we see people make.

You should also make sure that your insurance strategy makes sense. In some areas, such as long-term care insurance, dramatically rising premiums have made that product impractical for many people. In those cases, other financial planning strategies can often help you achieve that goal much more cost-effectively.

4. Diversify Your Investments Based on Today’s Risks

Concentration is often a needed strategy you can use to build wealth. The opposite, diversification, is needed to help preserve wealth. By adequately diversifying, you can spread your money across assets that move in different directions. So if there’s a stock market drop, some of your other assets won’t react the same way. That can smooth out the ups and downs in your portfolio.

Today, you need to be careful, however. That’s because many old “rules of thumb” don’t necessarily apply anymore. For example, bonds used to move independently of stocks. They also previously offered higher yields that provided an effective cushion to your nest egg. With today’s low interest rates, bonds often act more like stocks and can sometimes be nearly as volatile.

Because of that, you may need to look at alternative assets to help you balance out your portfolio and provide stable income. So instead of using only registered investments, that might mean adding real estate, commodities, or other holdings in your asset allocation.

So a diversified portfolio needs to be carefully tailored to your needs and not just some rule of thumb that might have worked in previous decades.

5. Make Sure Your Financial Plan is Sustainable

The next step in wealth preservation is to build a sustainable financial plan…one that you can actually adhere to.

The structure of the plan needs to fit you both emotionally and financially. That’s because most people are naturally risk-tolerant when the market is going up, then get more conservative after the market drops. That means you’re emotionally tempted to buy high and sell low. Most investors ruin their financial plans with emotional decisions driven by the market.

You need a plan suited to your true emotional tolerances to balance what you want to earn with what you can actually afford to lose. If not, you may abandon the plan at the worst possible time.

A good financial advisor will work with you to stress test your plan to determine if you’re comfortable with that asset allocation. How will you feel if your portfolio drops 10%? 20%? Time should be spent exploring these possibilities to make sure you really would be okay with these scenarios. If not, an adjusted plan would be better if it is a better match emotionally.

That’s where cookie-cutter financial plans often do more harm than good. This is important because you’ll often visit a financial advisor, and they’ll plug your numbers into a software program. Out will pop a financial plan that sounds fine in theory. But these cookie-cutter plans are not customized to you. And unfortunately, you may not find out until years down the road, when it is too late to do much about it.

To get a plan that you can rely on, you need a comprehensive financial plan tailored to your entire financial and emotional life, not just your investments.

6. Choose the Right Financial Planner to Help You Prepare

As you can see, wealth preservation requires more than just investment management. There’s much more to the equation. And if you don’t have all of the financial, tax and estate planning to go with it, investment management can only get you so far.

That’s why you want more than just an investment advisory firm; you need to work with a financial advisor who holistically addresses your entire financial life. By doing that, you can strive to minimize your taxes, protect your assets and achieve your goals.

Here are a few tips to make sure you pick the right financial advisor or wealth management firm:

  • Only work with those professionals who agree to act as your legal fiduciary all of the time, not part of the time. That means they are required to put your interests first.
  • Seek completely independent advisors that have no ties to product companies. That’s the only way to ensure you get truly objective advice.
  • Experience matters. Find out how long the firm has been helping people achieve their goals and navigate changing market conditions.

Creating Wealth Preservation Strategies is What We Do

As you can see, wealth preservation today is complex. However, with the right investment philosophy and proper financial planning across the spectrum of taxes, estate planning, and insurance, you can minimize uncertainty and live with confidence. We at First Financial Consulting have a long history of helping our clients achieve their financial goals. This is no different when it comes to building wealth preservation strategies – both now and for the future. We’d love to chat with you about any questions or concerns that you have.

Schedule A Complimentary Consultation

626-844-4630