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Today there’s an abundance of retirement planning advice available online and in the media.  The problem for high net worth individuals is that it’s often not appropriate for them, and rarely comes with a high net worth warning.

Here’s a list of Retirement Planning Differences for the wealthy to consider as they save and plan for the future.

1.  Retirement Income Planning.  Conventional wisdom states that everyone should put as much money as they can in tax-deferred retirement accounts, but for the wealthy that may be bad advice.  What many high-income earners don’t realize is that tax sheltering too much of their investment wealth before retirement often leads to a tax bomb in retirement.

The wealthy should be especially cautious with tax-deferred annuities. This product commonly creates two big surprises. The first is related to the top-line income tax hit on distributions, and the second is in estate planning – there may be no worse investment asset to pass to heirs than an annuity with tax-deferred accumulation.

Bottom line: Most wealthy pre-retirees need to carefully consider how to balance their savings between tax-deferred and taxable accounts.  Ideally, on the taxable side of the equation, a tax-efficient investment approach should be used. This account could possibly favor a passive strategy while the tax shelters (IRAs, 401k’s, etc.) could favor tactical and income.

2.  Integrated Plans.  It’s important for most everyone to integrate their retirement income plan with their estate plan, but for the wealthy, it’s a high priority necessity. There are numerous areas that require careful coordination, such as the tax timing of income, the timing of asset transfers, the type(s) of asset being held or distributed, liquidity considerations, how assets are legally registered, etc..

3.  Investment Management. There are numerous issues with this risk, but the most common and costly problem for high net worth investors is the purchase of expensive and chronically underperforming investment products. At best, this mistake is an expensive waste of money, but at worst it could threaten the longevity of a retirement income plan.

There’s a lot to avoid in this area, but a great starting point would be to not purchase some of the most common high net worth structured products.  They are hedge funds, private equity, and venture capital. The performance of these investments has been so distorted in the media and on Wall Street that it’s highly unusual for investors to know that, on average, each of these areas has consistently underperformed comparable market indexes while charging investors over twenty times the expense.

4.  Insurance Planning.  The insurance needs of high net worth individuals are significantly different than those with average net worth, and this is especially the case with asset protection.  It’s vital for high net worth individuals to have multi-million-dollar umbrella liability policies that cover their entire estate and activities.

The U.S. has never been more litigious than it is today, and if you have, or appear to have significant assets, you are an especially lucrative target.  Sometimes even the most cautious and conscientious people find themselves in a liability lawsuit through little or no-fault of their own.

An additional insurance difference for the wealthy is the possible need for permanent life insurance. For most people, term life insurance is usually the best option, but for the wealthy, a permanent life policy may be a useful tool to provide liquidity to offset estate expenses related to illiquid assets.

5.  Asset Transfers / Adult Children.  Another area that commonly presents additional risk to the wealthy is transferring business interests and / or providing too much financial support to adult children. Transferring a business is particularly risky since the vast majority (70%) of family business transfers fail within a decade.

In the past 15-years, providing adult children with a level of annual support that puts high net worth individuals at risk has ballooned into one of the more common risks for wealthy retirees.  Lending kids money to start a business venture is also a common issue that often results in wealthy retirees putting themselves at risk.

The reality for many children of wealthy parents is that they may not be able to attain the same standard of living they were raised with. This can be a difficult and emotional topic, but it’s important for high net worth individuals to recognize the risk and know the limits of their wealth and income plans.

Retirement Planning for the Wealthy

Regardless of differences in income and wealth, one thing that is identical for all retirees is the 50-50 chance of unexpectedly needing to alter one’s retirement lifestyle because of unforeseen financial problems.  In the end, accumulating significant assets going into retirement doesn’t assure success, and the universal problem in retirement is that mistakes are very difficult to recover from.

Nevertheless, with proper investment management and ongoing retirement income planning, high net worth retirees should never have to worry about doing anything other than living well.