Over the last few years, a paradigm shift has been observed among the segment of ultra-high net worth individuals. The number of people who had traditional family wealth has plunged, while more people with new money are emerging. If you are also one of them, then read our guide to protect your hard-earned money and learn more about wealth management Arizona.
The reason behind this paradigm is simple: booming economic expansion in the last few decades and the rise of lucrative business activities are driving the change. This ultra-high net worth segment is made of company owners, managers, and representatives of different professions like architects, doctors, and lawyers.What makes these people stand out is that they accumulated their fortune by themselves in a single generation.
This evolving split of the ultra-high net worth individuals into “old money” and “new money” brings inevitable consequences to the spotlight.These new additions in the ultra-high net worth echelon have a different attitude towards wealth, willingnessto obtain advice, and risk propensity. This also means that their approach to retirement varies too. They don’t just go for the straightforward, simple products. Instead, they like to ask more about the complex products and have shown a clear aversion to cookie-cutter retirement plans.
Instead, they have found relief witha modern fiduciary like Pillar Wealth Management. Many clients with at least $25 million of assets reached out to us and asked us to ensure that their new money could help them with retirement. A lot of them were too cautious about their money due to fear. We made them realize that wealth management Arizona doesn’t have to be so hard. Our experience and expertise in assisting investors with $5 to $500 million in liquid assets comes in handy.
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What Mistakes to Avoid for Wealth Management Arizona?
While carrying out in-depth discussions with ultra-high net worth individuals, we often came across the same set of mistakes, which is why they were unable to take advantage of their hefty investments. Some of these include the following:
1. Lacking Control Over Investment
Despite having ample money, rich people lack control over their retirement investments, negligence that can cost a lotonce they retire and draw out funds. The goal is to build a portfolio that can offer the best possible returns with minimal risk, addressing the fluctuations of varied financial markets. Reading our guide can help you to improve portfolio performance.
As an investor, how much do you know about your retirement assets? Do you know the expected return? What about the risk? Is it too much or too little? Getting someone like Pillar Wealth Management can ease your nerves. They can hear about your objectives or goals and come up with a plan that can meet their long-term retirement targets. Click here to schedule a conversation with us.
2. Ignoring Tax Diversification
How can you gauge tax impact on your retirement goals? Should you pay taxes now or later? Many retirees find out after drawing their withdrawals that their taxes are onthe higher side. This happens due to a reason: the money withdrawn from their retirement account falls into the category of federal taxable income –since they are from the ultra-high net worth segment,taxes are on the higher side. The 401(k)s and IRAs can only save taxes in the contribution period. When they withdraw in the retirement years, hefty sums await them.
A wealth manager can introduce tax-efficient solutions that ensure you get to utilize an effective stream of tax-free income during your retirement.
3. Sticking to Conventional Strategies
Retirement options aren’t limited to 401(k)s and IRAs. When it comes to retirement planning, there are endless possibilities for ultra-high net worth individuals. For instance, you might choose alternative investment optionsto earn the following benefits:
- Tax-Free Withdrawals – These investments can help with tax-free growth and ensure that you don’t have to pay taxes on withdrawals.
- Flexibility – Alternative investments can assist the ultra-high net worth individuals in taking out funds freely.
4. Misunderstanding Longevity
Studies show that people have started to live longer. An investor who expected to live up to 75 may end up making up to 90. As a result, it is entirely possible that their savings may run out. On the contrary, if you plan for 90 and live till 75, you can get optimal comfort and can also have enough to pass on.
To make sure you don’t make any more mistakes, read our guide to under critical shifts that can maximize your portfolio growth.
Your Age Matters – Weathering Inflation
Your current age and retirement age set the initial groundwork for an effective retirement strategy. Your portfolio can withstand more risk if your retirement is far away. If you have made it big at a younger age and have at least 25 years until retirement, it puts you in an ideal position to play with the riskier investments, such as stocks. Although volatility is expected to rock the financial market, historical analysis shows stocks outperforming bonds and other securities over a longer period. The word ‘long’ here refers to at least ten years. This is also why stocks are a good option for pre-retirement planning.
Inflation may seem inconsequential at first, but as a retiree, you should be wary – it can be more damaging than you think. For instance, an inflation rate of 3% seems non-threatening, but it can reduce the value of your savings by almost 50% over 25 years. Before you choose an investment vehicle for your retirement, consider having returns that can outgrow inflation so, your purchasing power remains intact once you retire. Make compounding your friend. It may not seem much, but it can offer terrific value over a long period.
If you are older, then your portfolio should target the preservation of capital. This approach prioritizes the highest allocation to securities like bonds. Although the returns are on the lower side, these investment vehicles are safer – you don’t have to worry about volatility. If you plan to retire soon, then inflation can be taken out of the equation as well. After all, a man in the late 50s who plans to retire at 65 will not worry much about a rise in the cost of living, compared to a younger CEO at 30 who is more than three decades away from retirement.
Savings for Ultra-High Net Worth Individuals
Many things change after you rise up the income ladder. Once fixated on paying bills, you are now mostly thinking about investing your earnings wisely and retire early.
A plain old savings account was good when you needed a little cash for emergencies, but now your goals have changed. Building a retirement nest egg needs a wide range of approaches,requiring a combination of both growth-oriented investments, such as bonds and stocks, as well as the traditional savings accounts.
The national interest rate on a savings account is 0.06%, but a smartfinancial advisor can ensure that you can get a better deal. Soon you will note that your accumulated savings turn from hundreds into the thousands. Read ourguide to learn more about choosing the right financial advisor.
Mutual funds are efficient for early-stage investors for diversifying their bond and stock investments, but as your investment capital rises, you might have to contemplate the possibility of a separately-managed account. In this way, you can work with more customization and can look into individualized tax strategies.
Venture Capital Trusts
From being pigeon-holed into a niche asset, venture capital trusts (VCTs) are enjoying a boom in demand among the affluent investors.
VCTs are a key part of pre-retirement planning because they are tax-efficient. VCTs are kind of like investment trusts, but their target is young, small, and usually unlisted companies. Of course, there an increased risk in this form of investment, but VCT brings up a tempting 30% income tax relief on the amount invested. In addition, dividends payouts are free too.
It’s worth noting that for the last decade, the best performing VCTs have at least doubled investors’ money. Hence, they can turn out to be quite lucrative for your retirement ambitions. However, your savings largely depend on your choice of the VCT, which means that you need a reliable VCT manager to put your money in the right companies.
If you already have a diversified portfolio, allocating some of it to a VCT can be a smart way of exposing yourself to a riskier asset class with the objective of earning higher than average returns for your retirement. To learn more about how to build such a portfolio, we recommend ordering a free hardcover copy of our book – The Art of Protecting Ultra-High Net Worth Portfolios and Estates – Strategies For Families Worth $25 Million To $500 Million.
Note: You must hold the VCT for five years to enjoy the tax benefits.
Get Tax Breaks
Although having a higher income bodes well for a comfortable retirement, it can make you lose different types of tax-advantaged retirement savings. A higher monthly income can prevent you from making a contribution to Roth IRA.
As of 2020, Roth IRA contributions can’t exceed a modified adjusted gross income (MAGI) of $139,000 for a single filer. Married couples can go as high as $206,000.A Roth IRA allows you to enjoy tax-free distributions in retirement. They can end up being extremely useful if you end up in a high tax bracket once you retire. Luckily, ultra-high net worth individuals can opt for a solution, a backdoor Roth IRA.
Backdoor Roth IRA
A backdoor Roth IRA is the same as a Roth IRA conversion; it converts traditional IRA assets into Roth IRA assets. First, you make contributions to a non-deductible IRA. We are talking about the conventional IRA in which contributions are not eligible for deductions due to the filing status, saver’s income, and the employer’s retirement plan.
After the non-deductible IRA gets funded, the next step is to convert that IRA to a Roth. To do this, you can either open a new Roth account or use an existing one. The easiest method to perform the conversion is to choose the trustee-to-trustee transfer. The financial institution holds your non-deductible IRA contributions and moves them to the institution that is holding your Roth IRA.
Note: You have to report the conversion on the IRS 8606 while filing taxes.
The conversion’s completion changes things. Now, the Roth IRA distribution rules apply to the money in your Roth IRA. This means that you can withdraw earnings from your investments after retirement, and the best part is that you don’t have to pay any tax on them!
Additionally, the Roth IRA isn’t affected by the required minimum distribution rules. With a conventional IRA, you have to either take minimum distributions from your account at 72 or get charged with a hefty tax penalty.
Connect With Pillar Wealth Management Arizona and Enjoy a Dream Retirement
Want to explore wealth management Arizona ?
Pillar Wealth Management is a fiduciary advisory firm that has forged a strong reputation by helping ultra-high net worth individuals with $5 million to $500 million in liquid assets. By now, you know how tricky retirement planning can be, and we are here to make sure that you don’t make a false step. Since our wealth managers have over 60 years of experience in wealth management, you can trust us to build a retirement strategy that meets your goals, increases earnings, and make sure that you can live happily after retiring.
To explore ultra-high net worth retirement services, click here to schedule a free consultation.
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