The Special Financial Planning Needs of Millionaires

Do millionaires have special financial planning needs? Yes. Large amounts may be placed in many more types of investments and accounts than those of folks with lesser discretionary income, and these can be complicated to manage. 

Millionaires also often require planning to avoid costly mistakes, such as paying more in taxes than necessary or placing investments in accounts with unnecessarily high fees. 

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But it’s not only issues surrounding high net worth (HNW) that make financial planning for millionaires important. Millionaires need to perform all the activities found in standard comprehensive financial plans too. These include creating and monitoring monthly and quarterly statements of income and expenditures, managing investments, retirement funds, and educational savings, containing risk and creating an estate plan, all in accordance with personal goals. 

Here’s a list of the special financial planning needs of millionaires:


1. Create and maintain statements of expenses and income (aka a budget)

Creating and maintaining statements of expenses and income every month, quarter and year is fundamental to financial planning. 

Some financial advisors refer to these statements as a budget, which may strike the ears as a term not often associated with HNW individuals like millionaires. But all it means is having a relatively constant snapshot of whether you are living within your means or not. If millionaires spend more money than they have coming in, their assets will erode to the point where they are no longer millionaires.


2. Align financial planning with goals

All financial plans need alignment with individual goals. Articulation of one’s goals is another bedrock of financial planning. When do you want to retire? What communities do you want to own real estate in? How much do you want to bequeath to your children, and when? Do you want to invest in start-ups or established businesses? Do you want to start a charitable foundation? 

All of these are potentially very doable goals for millionaires, but their full realization needs planning.


3. Choose a range of investments

HNW individuals invest both their regular investments and retirement funds in a far greater range of vehicles than folks with more average net worth. These include stocks, bonds and other cash instruments, of course, but also (for example) real estate, precious metals, private equity, hedge funds, start-ups and other stage businesses, precious metals and more.

It’s prudent to discuss the risk-reward of each vehicle and your portfolio allocations with a financial advisor.


4. Establish prudent monitoring of portfolio performance

Portfolios should be monitored at least every month, quarter and year, for several reasons. Any under- or overperformance needs to be reviewed. Asset allocations need to be reviewed, and portfolios may need rebalancing.


5. Minimize taxes

Taxes on millionaires’ investments, retirement funds and other assets need to be minimized. It’s prudent to involve a range of professionals here, including a financial planner, but also potentially an accountant and legal advice.

This includes, of course, standard tax-advantaged strategies open to everyone, such as placing retirement funds in individual retirement accounts (IRAs) and defined contribution plans such as 401(k)s. 

But because of the large amounts potentially involved, millionaires may need more defined strategies on how to manage these tax-advantaged accounts. At 59 ½, for example, people can begin to withdraw retirement funds without the 10 percent tax penalty levied before that age. But they must begin taking required minimum distributions (RMDs) when required (age 70 ½ for those born before July 1, 1949 and 72 for those born on July 1, 1949 or later). RMDs held in traditional accounts are taxed at the existing rate when they are withdrawn, which can be substantial for wealthy people.

But in the window between 59 ½ and the age when RMDs become mandatory, people can also withdraw funds and exercise tax-saving strategies, such as converting a certain percentage to Roth accounts. Doing so over a span of years can minimize the tax burden due. 

In addition, the less money held in tax-advantaged traditional retirement accounts when RMDs roll around, the less tax will become due.


6. Manage investment fees

Investment fees can vary widely. Because fees charged by funds are usually in the smaller percentages, it’s tempting to ignore them. But in fact, the difference between, say, 2 percent and 3 percent on a portfolio of $1 million totals $10,000 every year. Over a decade, in other words, a higher investment fee can cost HNW individuals $100,000. 

Discuss all investment fees with your financial advisor candidly.


7. Manage risk

Risk management is another foundational stone in a comprehensive financial plan. It usually consists of managing potential risks to assets via insurance.

But it’s important to not overlook less frequently discussed areas of risk. Health care costs, for instance, are steep and rising. It’s not unusual for treatment of even a common medical condition to cost thousands or even millions of dollars out of pocket. 

As a result, it’s very important to consistently carry health insurance for all family members. Don’t think a HNW insulates you from medical cost risk. It won’t.


8. Obtain powers of attorney

Comprehensive estate planning includes powers of attorney, both for finances and for medical decisions. Powers of attorney give designated individuals the right to handle your affairs should you become ill or incapacitated and thus unable to handle them yourself.

A financial power of attorney gives the individual the right to pay bills, manage your accounts and other financial tasks. A medical power of attorney gives them the right to decide on care and make end-of-life decisions.


9. Make a will or establish a trust

Only around 40 percent of all Americans have made a will. For millionaires, a will is imperative. Without one, your assets could be tied up for months and even years without your family being able to use them, as intestate wills go through probate.

In addition, of course, millionaires have a high level of assets. A will is a method of ensuring that your assets go to the individuals and institutions you want to have them.

Trusts are a method of managing assets according to the wishes of those setting up the trust. They can be used to make assets available at a certain age for children, for example, or to minimize inheritance taxes as funds are transferred between generations.

Managing HNW portfolios presents both opportunities and challenges. At Financial Freedom Fee-Only Wealth Management, we have over 30 years of experience working with high-net-worth individuals and couples. We are a fee-only, fiduciary, wealth management firm dedicated to helping our clients protect, grow, and maximize their wealth.

Contact us today for a complimentary consultation, and find out if we are the right fit for your needs.

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Filed Under: retirement planning