Even though you may be a high-net-worth individual, you are still capable of making mistakes in retirement. But these mistakes may be different now that you have more disposable funds.
Below are five common mistakes that I have noticed high-net-worth individuals make in retirement:
1. Not changing asset allocation to meet your needs and goals.
As your estate gets larger, it is important to understand what your goals are and how those may have changed. Are you investing for yourself and your own needs? Are you investing with future generations in mind? Is your goal to add to your net worth or to simply protect what you have?
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Additionally, as your net worth increases, more investment options become available to you. You have access to certain alternative investments and funds that are available only to high-net-worth individuals.
It is important to find a trusted adviser to help guide you through these types of questions and to assist you in the construction of a portfolio that meets your needs and goals and continues to work with you as your goals change over time.
2. Failing to update estate documents to reflect current net worth and concerns.
As your net worth grows, your estate plan and documents should be modified to reflect that net worth. With the sunset provisions of the 2017 Tax Cuts and Jobs Act in sight, it is a reminder that your estate plans should be reviewed periodically.
If you have an estate that exceeds $25 million, you may want to speak with your adviser and attorney about what strategies you should be implementing before the estate tax is cut in half.
And as your estate grows, there are more concerns you may have or loftier goals that you want to accomplish with your estate plan. If you fail to update your estate documents to reflect your current net worth and goals, you may not be taking advantage of some tax-saving strategies.
Estate plans, like financial plans, are not something that you dip in bronze and put on a bookshelf. They are malleable and change as your life changes.
3. Underestimating health care costs.
With the recent rise in inflation, it’s hard to confidently predict how much items will cost in the future. If you are in your 60s, you may not be considering what the cost of health care will be when you’re 80, but it is a serious concern that needs to be evaluated. If you want to purchase an independent living space with graduated assistance options, the cost 20 years from now will be nothing like what it is today.
Maybe you are relying on long-term care (LTC) insurance to help fund those future costs. With LTC insurance becoming costlier, and with it being difficult to even qualify to use the insurance, people are relying more on the idea of self-insuring. But how much do you actually need?
It is important to understand what you want your retirement to look like and to start doing your research early and understand the costs. Then, you can put an inflation adjustment rider on those costs to get a good sense of what they may be.
If you underestimate those costs, your future may look different than what you expect. The funds you want to leave for your family may not be around. Your large estate may be susceptible to claims from health care providers seeking payment. It is important to understand these costs and plan accordingly.
4. Not having proper conversations with your family about your wishes.
It can be difficult to have conversations with your family about the end of your life and your concerns — but it can also be very rewarding. There is a fine line between spoiling your children and educating them about money and supporting their goals.
Education around smart investing and savings can pay dividends in the future and help set your children up for success. Education around your estate plan and explaining to them why you set up trusts can also be a good bonding moment vs a shock when you are dealing with the estate.
I had one client who, when he passed, had not had any meaningful conversations with his family about his estate. There was a lot of animosity toward him, even after his death, because of how the estate was structured and what was perceived to be unfair.
5. Not updating your insurance to reflect your current needs.
When you were a young family just starting off, you may have purchased life insurance to cover the cost of your kids’ expenses if something should happen to you before they were out of the house. Now, your children are older, and your net worth has grown. Do you still need that life insurance that is charging you a premium?
Perhaps you should ask two questions: Why did we originally purchase life insurance, and is there still a need?
It is OK to cash in on insurance policies that are no longer necessary or no longer serve a purpose. The opposite may be the case for your umbrella insurance. As your net worth gets larger, you want to make sure you are covering your risk if something should happen, so increasing your umbrella insurance might be a prudent plan.
The key thing to remember is that as life progresses, your financial plan should change to reflect your new goals and concerns. Have trusted advisers around you to guide you through what changes you may need to make and to educate you on the conversations you may want to have with your family.
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