For anyone who anticipates retiring one day, planning is critical. This means saving throughout your career, calculating your future Social Security benefits and anticipating your expenses in retirement. But retirement planning for high-net-worth individuals can be even more complex. These people, who have at least $1 million in cash or investable assets, have a lot to think about when it comes to planning for retirement.
Below, we break down how you should plan for your golden years if you’re considered a high-net-worth individual and the steps you can take to maximize this time of your life. Beyond these strategies, consider enlisting a financial advisor to tailor a retirement plan that’s right for you.
What is Considered a High Net Worth in Retirement?
A high-net-worth individual or HNWI is generally anyone with at least $1 million in cash or assets that can be easily converted into cash, including stocks, bonds, mutual fund shares and other investments. The U.S. Securities and Exchange Commission (SEC) uses a slightly different definition of a HNWI for its Form ADV documentation. The SEC considers anyone with $750,000 in investable assets or $1.5 million in net worth to qualify as one.
Not only does being a HNWI mean you have considerable wealth, it also means financial institutions will extend exclusive services to you, including access to specialized investment accounts and financial advisors who cater specifically to the needs of the wealthy.
Now on to steps you may consider taking as you plan for retirement as a HNWI.
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Calculate How Much You Need to Save
Retirement means that you’ll no longer receive a regular paycheck for full-time work. As a result, you’ll need to have a significant sum of money saved to cover your expenses and fund your lifestyle.
But how much? Everyone’s answer to this question will be different. It depends on a number of variables, including your fixed monthly expenses, discretionary spending, where you live, streams of retirement income and life expectancy. This shouldn’t be an arbitrary number, though. You’ll need to have a good estimate of your monthly/annual income needs in order to calculate just how large of a nest egg you’ll need to build.
However, spending in retirement often doesn’t remain static. Researchers at the Center for Retirement Research at Boston College found that household consumption falls each year by an average of 0.75-0.80% for retirees, reaching double digits 20 years into retirement. Then again, wealthier retirees typically don’t reduce their spending as much as others, the study found. Of the retirees sampled in the CRR study, the wealthiest reduced their consumption by only 0.35% per year, while those in the middle and bottom brackets required more dramatic declines in consumption, spending 0.8% and 1% less per year, respectively. As a HNWI, you may anticipate your annual spending falling by just 10% over the course of a 25-year retirement.
After calculating your monthly expenses and projecting your post-retirement consumption rates, you’ll also need to have a sense of how long you may live. This may feel uncomfortable, and even a bit morbid to think of how much life you have left to live, but how many years of retirement you need to fund is a vital part of the equation. The good news is that it’s relatively easy to estimate using the Social Security Administration’s Life Expectancy Calculator. This online tool offers a life expectancy estimate based on your current age and future ages.
Taking consumption trends, life expectancy and your individual spending habits into account, you should be able to calculate an accurate savings goal.
Max Out Your Retirement Accounts
Whether you’ve begun seriously planning for retirement or not, contributing to a retirement account is a must. As a high-net-worth individual who presumably earns a substantial income, you should max out your employer-sponsored plan, as well as an IRA. Even if your income precludes you from deducting these contributions from your paycheck, your investment earnings will still grow tax free.
In 2022, the IRS allows individuals to contribute up to $20,500 to a 401(k) and $6,000 to an IRA. People ages 50 and over can contribute an extra $6,500 to their 401(k) and $1,000 to their IRA.
As mentioned above, you won’t be able to deduct your IRA contributions from your income in 2022 if you already have access to a workplace retirement plan, file single and make over $78,000. Married couples who file jointly cannot deduct IRA contributions if their combined income exceeds $214,000 and one person has access to a workplace retirement plan. However, a non-deductible IRA can still be an effective way to save for retirement, especially when paired with a maxed-out 401(k).
Plan for Medical Expenses and Long-Term Care
Beyond housing, travel and the other typical expenses that you’ll incur in retirement, health care and long-term care are two vital areas that you must also consider.
Researchers from the Employee Benefit Research Institute recently calculated the savings that different retirees need to cover the cost of various medical expenses: Medicare Parts B and D premiums, Part B deductibles, Medigap Plan G premiums and out-of-pocket spending on prescription drugs. The EBRI study concluded that a married couple in the 90th percentile of prescription drug needs must save $361,000 to maintain a 90% chance of having enough money to cover their medical bills in retirement. However, people who spend less on prescription drugs can get by with less. A 65-year-old man with median prescription drug expenses and $114,000 in savings has a 75% chance of having enough for medical expenses throughout retirement. The same applies to a woman with $131,000 in savings.
The findings of the EBRI analysis not only quantify medical expenses in retirement, but also underline the importance of saving for these eventual costs. Contributing to a health savings account (HSA) is one way to do so in a tax-efficient manner. While HSAs are only available to people enrolled in high deductible health plans, these savings tools can not only help you save for medical expenses, but also serve as long-term savings vehicles for retirement. That’s because you can typically invest a portion of your HSA balance in mutual funds, stocks and other assets. And here’s the catch: you won’t be taxed on your investment gains!
Unlike contributions made to flexible savings accounts, an HSA balance carries over from year to year and never lapses, meaning you can build a large balance and use it to pay for the medical care you may need in retirement.
As a high-net-worth individual, you should consider making the maximum contribution to an HSA, if you have access to one. In 2022, the IRS allows individuals to contribute up to $3,650 ($7,300 for families).
But your personal care needs in retirement may go beyond traditional health care. The EBRI analysis did not take into account long-term care, like homemaker services and home health aides. Medicare generally does not cover these services, which can be costly and severely eat into your retirement savings. For example, the national median cost of homemaker services in 2021 was $4,957 per month, while the median monthly cost of an assisted living facility was $4,500, according to Genworth. Meanwhile, the monthly cost of a private room at a nursing home exceeded $9,000.
The good news is that not everyone will require this type of care. CRR data indicates that around 17% of retirees won’t need any long-term care. However, the flip side is that approximately a quarter of retirees will have severe needs, with the remaining people needing either minimal or moderate care.
Long-term care insurance can help blunt the financial blow that these important expenses can deal to retirees. Then again, you may be able to absorb the cost of long-term care without insurance, depending on your level of wealth.
Minimize Your Tax Liability
Optimizing your tax strategy is an important element of an effective retirement plan, and can include everything from delaying your 401(k) withdrawals to moving to a more tax-friendly state. Minimizing your tax liability means having more money to spend in retirement or to leave to loved ones.
One strategy for doing so is converting your traditional IRA into a Roth account. While 401(k)s and traditional IRAs are subject to required minimum distributions (RMDs), Roth IRAs are not. However, since the IRS bars individuals who earn more than $144,000 ($214,000 for couples who file jointly) from contributing to a Roth IRA in 2022, you’ll need to convert your traditional IRA into a Roth account using a backdoor Roth conversion. While you’ll pay income taxes on the money in the year you complete the conversion, the maneuver will mean you won’t have to start withdrawing the money at age 72 with RMDs. As a result, your money can stay invested for as long as you like. In fact, you can simply pass the account on to beneficiaries as part of your estate.
However, it should be noted that the backdoor Roth conversion has recently been the target of Democrats’ legislative plans. President Joe Biden’s Build Back Better plan sought to close this legal loophole, but the massive $1.75 trillion spending bill stalled in Congress. It’s possible that the plan, and the provision ending backdoor Roth conversions, could be resurrected at some point.
For a retiree with a traditional IRA or 401(k), a qualified charitable distribution (QCD) can be a particularly effective way to avoid paying taxes on your RMDs. Instead of making the required annual withdrawals from your IRA, you can donate the money to charitable organizations using a QCD. This can be especially useful for retirees who already make charitable donations. Rather than donating money that’s already been taxed, a QCD allows you to send pretax dollars to an eligible charity while satisfying your RMD obligations. However, it should be noted that QCDs are not available within 401(k) and 403(b) plans. You’ll need to roll over assets from these accounts into a traditional IRA to complete a QCD.
For high-net-worth individuals who live in high-tax areas, you may want to consider relocating to a state that does not tax income. Florida, for example, is a haven for retirees since it does not tax wages, retirement income or Social Security. In addition to Florida, the following states either have no state income tax, do not tax retirement income or offer significant tax deduction on retirement income:
Create an Estate Plan
While most of our focus has been on saving and preserving money for retirement, it’s also important to consider what happens to your assets when you’re gone. That’s where estate planning enters the equation. Estate planning is the process of officially arranging how your assets and property will be distributed upon your death.
As a high-net-worth individual, your financial situation will likely require more than just a standard will. Setting up a trust can protect your assets from creditors, reduce your estate’s tax liability and enable you to place restrictions or conditions for how your assets are passed to beneficiaries. A trust can also help your beneficiaries avoid probate, a legal proceeding by which a deceased person’s will is validated by a court. This process can be lengthy and the legal fees required for it can chip away at a decedent’s estate.
The type of trust you choose to establish will depend on your specific needs. For example, a charitable trust can be created specifically for the purpose of charitable giving. An A/B or bypass trust, on the other hand, allows a married couple to split their assets between two trusts and avoid estate taxes.
While there are many different types of trusts, they all must name a trustee who will oversee the trust for you. As the grantor (the person creating the trust), you may also serve as the trustee if the trust is revocable. However, if you create an irrevocable trust (one that cannot be changed once it’s created), you’ll need to appoint someone else as your trustee. All trusts also must name beneficiaries, the people who are in line to receive assets or property from the trust.
The process of setting up a trust is generally more involved than writing a simple will. As a result, working with an estate planning attorney or financial advisor who specializes in estate planning can be helpful.
Planning for retirement can be a complicated and extensive process. And if you’re fortunate enough to have a high net worth, you’ll want to spend even more time planning for this important period of your life. An effective high-net-worth retirement plan includes calculating the savings you’ll need to support your lifestyle, optimizing your tax strategy, planning for medical care and long-term care, maxing out your retirement accounts and creating an estate plan that protects your assets.
Retirement Planning Tips
Sometimes it just pays to have a professional in your corner. A fiduciary financial advisor can help you plan for the future and act in your best interests. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
It’s important to gauge your progress from time to time. SmartAsset’s retirement calculator can help you determine whether you’re on track to hit your savings goals by estimating how much money you’ll have by the time you’re ready to retire.
While annuities are sometimes maligned for being complex and expensive, they can offer a guaranteed stream of income in retirement and superior peace of mind. The SECURE Act of 2019 made it easier for the sponsors of 401(k)s and other retirement plans to offer annuities as investments. This has led to a steady stream of financial institutions rolling out annuity products that are embedded in 401(k)s.
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