Navigating the complexity of high-net-worth retirement is a concern that we at Pillar Wealth Management understand all too well. For over three decades, we’ve been managing assets for numerous families, gaining extensive experience and deep insights into the intricacies of retirement planning.
We realize that your apprehensions may begin to dissipate once you feel a sense of trust and comfort with your financial advisor. Opening up a conversation about your fears and seeking professional help is an excellent first step. Before you approach an advisor, however, it might be beneficial to compile a list of your worries and questions as a starting point.
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Decoding the Uncertainties Around High-Net-Worth Retirement
Retirement planning is an undeniable source of anxiety for all, including high-net-worth households. It might be a bit easier for wealthy families if they have chosen their wealth management firm judiciously, yet it continues to be a nagging concern. Accumulating retirement savings is particularly crucial for those in the highest income tax bracket, as it significantly impacts their future financial security.
But what does high-net-worth retirement planning entail? How do you transition from fretting over retirement to achieving a sense of tranquility, knowing you’re fully prepared and ready to relish life?
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Reality Check on Retirement
If we define retirement as the cessation of paid employment, the first step in retirement planning is to evaluate what transpires immediately after your last day at work. A retirement planner can offer guidance on investment strategies and financial planning advice to ensure a comfortable and fulfilling high-net-worth retirement.
Here's what typically occurs:
• Your income plummets to nil, unless you decide to receive Social Security (the timing of which requires careful thought) or have a pension.
• Major expenses, both anticipated and unanticipated, will no longer be replenished from your wages.
• Your financial dependency will wholly shift to your investment portfolio and savings unless you also possess income-generating real estate or other passive assets.
So, if you were previously allocating $30,000 per month for your lifestyle expenses while working, you'll now have to allocate that entirely from your investments and savings.
This is the harsh reality of high-net-worth retirement, which is why retirement stirs apprehension in many individuals, irrespective of their net worth. This isn't simply about FOMO (fear of missing out); it's more about FORO (fear of running out). It underlines why it's imperative to start securing your wealth.
The Only Five Elements You Can Control
Regardless of whether you possess $5 million, $10 million, $100 million, or $1 billion, everyone confronts the same reality: You have control over just five aspects related to your wealth.
At Pillar Wealth Management, we are acutely conscious of these five control areas, using them as levers to adjust your comprehensive portfolio plan. These serve as the foundation for your 100% customized investment plan. Assuming control over anything beyond these five elements can put your financial tranquility at risk. This is why even billionaires can go bankrupt.
So, pay heed and bear in mind that this is a comprehensive list. There are NO OTHER areas under your control concerning your finances.
How Much You Spend—Your Lifestyle
We touched on this earlier. Overspending is one reason why people exhaust their wealth. But you do have control over this. Expenditures like buying a beach condo in Florida or owning a fleet of cars aren't necessities.
Now, there's nothing inherently wrong with owning multiple cars or buying a beach condo. However, making such decisions without considering their alignment with your lifestyle dreams and goals can be a grave mistake. As you will soon see, your objectives are the single most vital part of this entire discourse.
How Much You Save
Savings aren't limited to your working years; they continue throughout retirement. This has to do with distributions. Most high-net-worth individuals prefer receiving a regular paycheck, even in retirement. Rather than collecting varying amounts from several different accounts, they prefer a single lump payment each month for simplicity's sake. We set this system up for all our clients.
The size of that payment influences your savings. You might be familiar with the 4% rule, which suggests that if you withdraw 4% of your assets per year, the gains should preserve your account throughout retirement.
Ignore this rule and any other rule that depends on consistent investment performance. Why? Because performance is never consistent.
Your Monthly Retirement Income Depends on Two Factors:
a. Your Goal-Driven Lifestyle
b. The Amount of Money You Possess
Not emotions. Not speculation about market trends. Not the opinions of others.
Interestingly, many high-net-worth families actually underspend out of fear. They keep themselves from living out their lifelong dreams. Anxiety holds them back, and they miss out, even when they finally have the means to fulfill their desires.
This is why anchoring your investment plan to your goals—and regularly updating it—is the most critical component of this whole discussion.
Later, we'll delve into how we create a plan that ensures financial security while allowing you to live out your highest aspirations.
Timing of Major Distributions (for big purchases)
Suppose you have six grandchildren and wish to give $250,000 each for their college tuition in the future. This is a major one-time distribution. But when should you make these gifts? How should you structure them? How can it be done without creating tax complications with the IRS? The decision has significant implications due to the volatility of the stock market.
An attentive wealth manager will devise a plan that incorporates this major expense into your future investments and retirement income, ensuring your lifestyle goals are unaffected.
At Pillar, we utilize a historically-backed model that forecasts how your investments are likely to perform in 1,000 different scenarios. If you plan to make a major purchase, we simply include it in the model and re-run the 1,000 scenarios.
Your Risk Tolerance
You do have control over your risk tolerance. An entirely risk-averse person might stash all their money in a low-yield 0.5% interest-earning account and spend judiciously. They know they won't lose in the stock market, but they may lose to inflation, especially after taxes. They also need to ensure they don't overspend or face unexpected calamities.
Most people recognize the necessity to accept a bit more risk. But determining how much more is a personal decision that impacts how your investments perform.
The Size of the Legacy You Wish to Leave
Whether it's your children, grandchildren, charities, or other beneficiaries, you have absolute control over how much money you wish to bequeath. This is a decision that lies entirely in your hands.
How Do You Make These Decisions?
So, those are the five things you can control concerning your finances. But how do you make these decisions? How do you ascertain how much to spend and save? How do you determine the amount you want to leave to your kids? How do you evaluate the level of risk you should take?
The questions we ask before creating your personalized investment plan aid in uncovering these answers. That's why investment management is more complex than merely understanding risk tolerance.
You cannot comprehend your risk tolerance until you've first examined your goals, dreams, hopes, and plans for the life you aspire to lead.
For example, do you want to embark on international adventures? Host grand celebrations? Invest in promising startups? Contribute to political causes? Establish a scholarship fund? Or do you wish to simplify, sell all but one of your properties, reduce travel expenses, and leave almost nothing to your children so they learn about financial struggle?
All these goals are valid and directly impact your portfolio, your wealth, and therefore, your investment management plan.
The “Goals Question”: The Most Significant Question of Your Life. Nothing else matters as much as this. Every other aspect related to investment management, tax minimization, and estate planning is contingent on what you hope to achieve in life.
For instance, let's assume your objective is to leave $5,000,000 each to your two children and $3,000,000 to a specific charity. This implies that when you pass away, you need to have at least $13 million left. If you have less, you've failed to meet your goal.
Our proprietary process empowers us to manage your investments such that at any given point, you'd be on track to have at least $13 million (adjusted to present-day value) left when you pass away.
You will know. And you will have data to back it up.
But there's another aspect to consider about goals.
Most financial advisors might make a passing mention of goals. They might even jot down a few of yours. But then, they will typically formulate a plan based on these goals, discuss it with you intermittently, file away your plan, and proceed to invest your portfolio.
Meanwhile, your goals just lie there, gathering dust.
Why is this problematic?
It's a substantial oversight for an advisor to invest your money without reviewing your goals every quarter or conducting a stress test (or 1,000 of them) on your plan. As market conditions fluctuate, your financial standing will also change. Your plan must remain connected to the current reality.
Suppose an entrepreneurial friend passes away unexpectedly, or their child is diagnosed with cancer, or any other incident occurs that prompts them to abandon their business plans.
Your portfolio situation has shifted. Now, you need to revisit your goals and remodel your plan as you contemplate what to do with this reserved cash. Your advisor should handle this seamlessly, understanding that goals and situations can alter frequently. They should have a straightforward process to help you remodel your plan. At Pillar, we have this process.
What if your mother develops dementia and requires expensive long-term care for at least a decade? We will need to think about these kinds of things, too. This could cost upwards of $700,000. Your goals will inevitably change.
What if the market crashes when you're 68, and the business you were about to sell halves its value or completely dissolves? Again, your goals will change.
These kinds of unpredictable events are outside your control, and your goals will morph as they happen. This is why some people deplete their funds. So, what can you control?
How Much You Spend – Your Lifestyle
How Much You Save
Timing of Major Distributions (for big purchases)
Your Risk Tolerance
The Size of the Legacy You Wish to Leave
So, how do you prevent running out of money? By aligning your investment plan with your life goals. Then, adjust one or more of the five elements under your control to ensure your ideal lifestyle and future objectives remain on track.
That's the strategy we employ to develop all our customized plans, which is why they differ greatly for each client. To the best of our knowledge, no other advisor utilizes a process remotely similar to ours when planning portfolios and managing investments.
Frequently Asked Questions
High-net-worth individuals should have sufficient funds to max out their employer retirement plan as well as an IRA, as well as plan for medical expenses and long-term care.
High-net-worth individuals should max out their retirement plans, be prepared for high-cost medical expenses and long-term care, and minimize taxes by controlling withdrawals.
To ensure a comfortable retirement, particularly for high-net-worth individuals, investment strategies are designed to maximize long-term growth and protection of assets.
Retirement planning for high-net-worth should incorporate charitable giving, which can greatly reduce the tax burden in retirement.
While saving for retirement, the client may choose to have a higher allocation toward equities, shifting to more conservative investments when nearing retirement.
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