Wealth preservation is an essential part of comprehensive financial planning. As the average life span has lengthened in the United States over the last 70 years, people are living longer. As a result, retirees are very concerned with preserving wealth throughout what could be a 30- to 40-year retirement, or even longer. The rising costs of healthcare and long-term care are just one of the factors that make strategic wealth preservation tactics essential.
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People are also very concerned with wealth preservation to enable them to pass on their wealth to their children, grandchildren, other family members, and favorite charities. A robust estate plan will not only specify what beneficiaries will receive, but will be part of a financial plan that ensures the wealth will be preserved so they can receive it.
What are the best wealth preservation techniques? Here’s an overview of the top three.
Managing Retirement and Investment Portfolios
In a bull market, investors with a long time horizon may have been fully invested in stocks for both their retirement and investment portfolios, to pursue maximum capital appreciation. As they age, however, wealth preservation may become as important as capital appreciation, if not more so.
There are many different ways to manage portfolios for wealth preservation. An increasing percentage of the portfolios may be moved to asset classes that don’t display the fluctuations that stock markets do. Particularly recently, in the wake of COVID-19, stock markets have been dropping significantly, which may have made investors more aware of the erosion that can take place in stock portfolios.
This can be complicated, however, because cash instruments like certificates of deposits (CDs) and bonds currently exhibit historically low yields. They do, however, provide stability, so they can be a port in a storm for investors concerned with choppy stock markets.
One strategy is to diversify portfolios beyond stocks and bonds. Real estate investments, for example, can be beneficial in preserving wealth, although real estate prices, of course, also fluctuate. Some advisors may suggest that their clients move funds to stocks that historically fluctuate little and offer high yields, such as utilities and master limited partnerships (MLPs), as an alternative to the stability of cash instruments.
Risk mitigation should be part of any wealth preservation strategy. First, insurance should be part of any financial plan. All an investor’s assets need to be insured to protect against risk: home insurance, car insurance, and so forth.
Life insurance can be a method of providing for an investor’s family. Life insurance can also minimize taxes such as estate, gift, and income taxes.
Robust health insurance is a necessity in an era where healthcare costs are not only very high but rising steadily. Financial plans for retirees should include the probability of steep increases in healthcare costs over the retirement span. An uncovered serious illness could wipe out significant wealth.
It’s also a good idea to think about long-term care insurance. Long-term care is a potential drain on assets for several reasons. First, of course, the costs mount up. Second, though, long-term care is not covered under health insurance plans. If an individual winds up needing long-term care, they essentially must spend their assets unless they have long-term care insurance. The costs of long-term care premiums generally rise as one ages, so it’s a good idea to think about late-life care as early as possible.
One strategy for late in life care is to save funds in Roth Individual Retirement Accounts (IRAs) or convert some traditional accounts to Roth IRAs. Roth IRAs are particularly valuable late in life for two reasons. First, Roth IRAs are not subject to required minimum distribution (RMD) requirements. Traditional IRAs and 401(k)s, on the other hand, are. Investors must withdraw specific amounts from these accounts beginning at a certain age, and the amount is based on life expectancy tables. RMDs are designed to maximize the use of funds during one’s lifetime, not to save the funds!
If funds are in a Roth IRA, however, investors can keep them as long as they want, without worrying about RMDs or for that matter, ever withdrawing money from them. They can be a nest egg for illness, long-term care late in life, or other unforeseen events in retirement.
Second, Roth IRAs are not taxed when withdrawn in retirement, while withdrawals from traditional IRAs and 401(k)s are. In fact, you can keep Roth IRAs to be passed on to beneficiaries. Beneficiaries will reap tax advantages as well, as long as the Roth IRA has been open for at least five years.
Protecting Personal Assets
If you are a business owner, it’s very important to protect your personal assets from possible demands by creditors of the business and from possible litigation. If the business goes bankrupt or has creditors that can’t be satisfied and your personal assets are not separated from business assets, the creditors may be legally justified in seeking your personal assets. Similarly, if the business is subject to a legal suit and your personal assets are not separated, those assets may be subject to the suit.
Choosing a corporate structure may protect your personal assets from those of your business. S Corporations, C Corporations, and Limited Liability Partnerships (LLPs) all do this for officers, shareholders, and directors. Generally, any liability, from either creditors or plaintiffs, is restricted to the assets of your business under this structure.
You may also want to consider creating a trust for your assets, whether you’re a business owner or not. A trustee holds and manages the assets for your beneficiaries. An irrevocable trust transfers your assets to the trust’s beneficiaries. If you owe creditors or are sued, you no longer own the assets in an irrevocable trust, so you can’t be on the hook or sued for those assets.
Wealth preservation can be complicated. The CERTIFIED FINANCIAL PLANNER™ professionals at Financial Freedom Fee-Only Wealth Management can ensure that you are prudently saving for all your life goals as part of a balanced financial plan. Contact us today for a no-strings-attached complimentary consultation.