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  • Mark Fonville, CFP®

9 Components of High Net Worth Retirement Planning


9 Components of High Net Worth Retirement Planning


Do you have a high net worth but aren’t sure how to make the most of it?

Are you worried about outliving your retirement savings or managing your wealth to create a lifetime of sustainable income while also keeping your taxes low?

You can breathe a sigh of relief because you’re in the right place.


At Covenant Wealth, we specialize in high-net-worth retirement planning and wealth management. Our approach to personal finance seeks to help pre-retirees find their financial footing before diving into this new season.


Whether retirement is still a few years away or you’re already enjoying your golden years, it’s important to have a plan to monitor and adapt as needed.

What are the key areas of focus for high net worth retirement planning? Let’s take a look.

But first, take a minute to download our free retirement planning checklists to help you get organized.


What is the purpose of retirement planning?

First, many high-net-worth people find it beneficial to entrust their plan with a financial advisor. Your financial planner can provide the guidance, support, and strategies you need to reach your goals.


Before we look at specific elements of a retirement plan, let's first think about the purpose of your retirement plan.

The broad purpose of retirement planning is to ensure you can live the life you want without worrying about running out of money.

The end result will look different from person to person, which means that how you approach certain elements of retirement planning might not be the same as your neighbor, best friend, or co-worker. As a high-net-worth individual, your needs are unique, and building a tailored retirement plan to suit them is the best way to reach your long-term goals.

Maybe you want to travel worldwide and therefore need to spend more than someone who doesn’t have significant travel ambitions. Or perhaps you have an underlying health condition, so you’ll need more comprehensive medical coverage (and likely higher expenses).

Everyone’s financial situation is different, and your retirement plan should reflect your personal circumstances.

What should a comprehensive retirement plan look like?


Regardless of how you envision living your life in retirement, these are the critical components of a high net worth retirement plan:


1. Your spending goals


If the purpose of a plan is to support your lifestyle, you need to translate that lifestyle into spending goals.

If you already track your budget, this part will be a little easier. If you don’t, start by thinking about what you spend in a typical month.

Account for the everyday living expenses like food, utilities, housing, insurance, taxes, etc., but don’t forget to include what you might spend on “non-essentials” that are a regular part of your life like weekend trips, tickets to shows or sporting events, and gifts for family.

The idea here isn’t to start by thinking about what you can do to trim your budget. That part can come next if it’s necessary.


2. Cash flow projections with appropriate inflation adjustments


Once you establish a benchmark for your annual funding needs, you need to project that into the future using reasonable assumptions for inflation.

Historically, inflation has averaged around 2.5% per year, but as you know, the scales are a bit off balance presently. You can use that as a starting point and may want to adjust depending on the main categories you spend on.


3. Tax reduction strategies in retirement


So here’s the thing: we really like tax planning at Covenant Wealth Advisors because so many of our clients are high-net-worth. Proactive tax planning is critical for high-net-worth individuals and families in retirement because it helps keep more of your hard-earned money working for you.

Many families aren’t quite sure how to manage their new tax situation in retirement, but we offer unique strategies that can help bring confidence and control back into this vital area of your financial life.

With proper tax management, you can stretch your retirement savings even further by actively considering ways to reduce taxes in retirement. The following few points will illustrate a few of these tax-savers!


4. Account drawdown strategy


A withdrawal strategy goes beyond considering how much you will withdraw from your retirement accounts. Conventional wisdom has pointed people toward taking roughly 4% from their accounts in the first year, and then increasing withdrawals at the rate of inflation — but your retirement plan shouldn’t be cookie-cutter conventional.


How you drawn down your accounts in retirement can have a major impact (good or bad) on your ability to maintain your preferred lifestyle.

A deliberate withdrawal strategy considers the amount of money to remove from each account and establishes a plan for how to do so effectively.


  • Will you take simple inflation-adjusted distributions each year?

  • Will you use a guardrail strategy?

  • What about the timing of withdrawals?

  • From which accounts will you withdraw first?

This decision is personal to you, and it depends on your income needs, tax bracket, income sources, and more. For example, taking money out of a Roth IRA is different than taking money out of a traditional IRA because one is taxed (traditional) and the other isn’t (Roth).

We can help you craft a dynamic withdrawal strategy that maximizes the longevity of your investments.


5. Roth conversions


As we alluded to above, qualified distributions on Roth accounts are tax-free in retirement. Building up this tax-free bucket gives high-net-worth retirees so much more flexibility, control, and options in their golden years.

But Roth accounts aren’t typically the norm for savings vehicles. Most people save in tax-deferred accounts, and when they remove the money (planned spending, RMDs, heirs), the IRS taxes it at their ordinary income tax rates. If you retire in a high tax bracket, that could mean paying more to Uncle Sam than you’d like.

By saving in both tax-deferred and after-tax accounts, you give yourself more options when it comes time to take the funds out in retirement. But here’s the thing: high-net-worth individuals often can’t directly contribute to Roth IRAs due to IRS-established income thresholds.

One way to get around this rule (legally) is to do a Roth conversion, where you “convert” funds from a traditional account into a Roth. Roth conversions can be huge tax-savers, especially for high-net-worth individuals in retirement.


6. Social security benefits planning


A fixed-income source critical to your retirement income plan is your Social Security benefits. And while they may not make up the majority of your retirement cash flow, they are a significant benefit to take advantage of.

Social Security creates a solid base of income that is inflation-adjusted, not dependent on the market, and guaranteed to pay for the rest of your life.

In general, many people start collecting benefits at three pivotal times:

  • Early at 62 (by collecting early, you permanently reduce your benefit by about 30%)

  • On-time at full retirement age (here, you’re eligible for 100% of your benefits)

  • Late at 70 (you accrue delayed retirement credits and can boost your monthly check by 25%)

High-net-worth retirement planning can help you review the pros and cons of each option and consider other elements like spousal and survivor benefits.

It’s also important to consider other fixed income securities like an annuity, pension, cash, and more.


7. Tax-managed investing


Tax-advantaged retirement accounts (401k, traditional IRA, etc.) are outstanding, but contribution limits mean you probably have significant savings in taxable accounts (brokerage) as well.

It’s essential to be mindful of how this type of investment account is taxed. For brokerage accounts, you’ll have to pay capital gains tax (long or short, depending on how long you held the asset) when you sell. In that case, you can consider investing in tax-advantaged securities like tax-free municipal bonds or managing the investment plan to minimize short-term gains and interest.


We can also help you think about the taxable nature of real estate investing. Many high-net-worth individuals and families have real estate as part of their investment portfolios, making it important to properly manage the capital gains.

Oftentimes we find that new clients have too much money concentrated in just a handful of individual stocks. Clients often know this is a problem, but they don’t know how to sell out of the positions without taking a big tax hit.

A proper tax plan, equipped with tax-efficient practices, can help you unwind these positions and get the proceeds invested into more diversified investment holdings.

8. Healthcare in retirement


Health care is a significant component of any retirement plan. Fidelity estimates that healthcare will take up about 15% of someone’s retirement budget. You’ll have to consider Medicare premiums, out-of-pocket costs, long-term care, and more. No matter how you look at it, health care expenses will be a major part of your retirement budget.

But it doesn’t have to be scary!

The core of your healthcare plan will likely be Medicare. As with Social Security, you need to make sure you choose the right Medicare coverage. Don’t rely on rules of thumb or go with a particular plan just because your friend did. Analyze the coverage options and consider your own needs, resources, and lifestyle.

It’s also important to actively save for your future healthcare costs. One way to do this is by investing in a health savings account (HSA). You can save in these valuable, tax-friendly accounts if you’re enrolled in a high-deductible health plan.


9. Stress test your plan with Monte Carlo analysis.


Now you have all the pieces of your retirement plan, it’s time to put them together!

Ask yourself, how well does your plan hold up when tested against future probabilities?

To help answer this question, we can run a Monte Carlo simulation. Since we can’t know for sure what investment returns/stock market performance will be going forward, we need to test our plans against a range of possible outcomes.

Doing so gives confidence and financial security in the plan and identifies areas of weakness to address now before they become a significant problem and possibly derail retirement.

For example, Monte Carlo can help you determine if $2 million, $5 million, or $10 million is enough to retire with a high degree of confidence. We wrote a comprehensive case study on the topic here.

In addition to ensuring your nest egg will be in strong supply throughout retirement, there are some additional risk management elements to consider like

  • Insurance policy needs (life insurance, long-term care insurance, etc.)

  • Risk tolerance heading into retirement. If this changes, it may impact your investment strategy.

  • Investment fees (now could be a good time to consider a rollover).

and additional liabilities.

Bonus: Estate Planning


A high-net-worth retirement plan wouldn’t be complete without a thoughtful and thorough estate plan. Your advisor can play a big role in helping you craft an estate plan that maximizes your assets and honors your legacy.

They can help you analyze,

  • The wealth transfer process (like using a trust to protect your wealth)

  • The pros and cons of using individual retirement accounts (IRAs) as an inheritance plan.

  • Your beneficiaries

  • Properly titling your assets and accounts

  • Tax considerations

  • Cultivating a robust, lasting legacy

And more!


High-net-worth financial planning and retirement planning at Covenant

Each retirement is different, so each plan needs to be different.

Regardless of the detail, any retirement plan needs to account for these components to be as effective as possible. Otherwise, you risk throwing hundreds of thousands of dollars away in taxes and poor returns. Even worse, retirement could end up being full of anxiety and concern.

We’ve tailored our financial services to best accommodate high-net-worth pre-retirees and retirees every day to ensure they don’t miss a step, and we would be happy to speak with you. Secure your spot on our calendar today!

Don't forget to download your free retirement checklists and start preparing for your retirement plan.


 

About Mark Fonville, CFP®


Mark is a personal financial advisor and the President of Covenant Wealth Advisors. He provides retirement income planning for individuals age 50 plus who have over $1 million in investments.


Forbes nominated Mark as a Best-In-State Wealth Advisor and he has been featured in the New York Times, Barron's, Forbes, and Kiplinger Magazine.


Schedule a call.

 

Disclosures

Covenant Wealth Advisors is a registered investment advisor with offices in Richmond and Williamsburg, VA. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital.

The views and opinions expressed in this content are as of the date of the posting, are subject to change based on market and other conditions. This content contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.

Please note that nothing in this content should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax, or legal advice. If you would like accounting, tax, or legal advice, you should consult with your own accountants or attorneys regarding your individual circumstances and needs. No advice may be rendered by Covenant Wealth Advisors unless a client service agreement is in place

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