An elderly couple is enjoying their retirement.
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If your net worth is between $500,000 and $5,000,000, you’re probably doing better than many Americans.
However, this does not mean that you are among America’s ultra-wealthy. According to Investopedia (1), most banks will define families with a few million investments as “collectively affluent,” while you’ll need at least $30 million to be considered “ultra-high net worth.”
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Simply put, your wealth puts you in an odd class: too rich for a cookie-cutter retirement plan, while not rich enough for special, white-glove service from an investment bank. If you’re entering retirement as part of this largely affluent group, here are some of the unique challenges you may face, along with how to effectively mitigate them.
liquidity
For the massively affluent, liquidity can be a major risk, especially if home equity or real estate is a significant portion of your net worth.
If you ever face an emergency, not being able to convert assets into cash quickly or cheaply can be a challenge, and it may also change some of the underlying assumptions about cash flow and withdrawals in your retirement plan.
That’s why a surprisingly large number of American millionaires (32%) told Northwestern Mutual that they do not consider themselves “rich (2).” If you share this concern, consider steps to diversify your portfolio into more liquid assets like ETFs or bonds to strengthen your finances in retirement.
longevity risk
Life expectancy has been increasing around the world in recent decades and this has created a new challenge for retirement planners.
According to the Organization for Economic Co-operation and Development, at age 65, a typical American man can expect to live another 18.2 years, while an average woman can expect to live about 20.7 years (3).
Longer lifespans mean more time to enjoy retirement and spend time with your family, but it also means more time to experience higher risks of inflation and health concerns.
At a steady 3% annual inflation rate, it takes about 23 years for prices to double. In other words, if you retire at age 62 and pass away at age 85, your $2 million nest egg could have half the purchasing power of today.
Exacerbating the issue is the fact that as you age, your health care needs are likely to increase, while health care costs nationwide have exceeded normal inflation in recent years, according to the Peterson-KFF Health System Tracker (4).
Simply put, underestimating longevity risk, inflation or health care costs can put you at risk of outliving your money, even if you’re a multi-millionaire.
Fortunately, there are several tools available to address these risks, including health savings accounts (HSAs) and qualified longevity annuity contracts (QLACs). These tools can help you prepare for medical costs in a tax-optimized way, or secure income regardless of how long you live.
Read more: 5 Essential Steps You Need to Take After Saving $50,000
If these HSAs and QLACs seem too complicated, you may also consider working with a specialized financial service Category.
The platform also offers innovative tax and financial planning expertise – from tax apportionment analysis for real estate to a backdoor Roth IRA contribution method through their partner services. In short, the management of a diverse portfolio of assets is the core of the range’s services.
Also offers range 0% AUM fee for advisory services Using a flat-fee structure so you can keep more of your assets safe. By comparison, other services typically charge between 0.5% to 2% of your portfolio’s value.
Even better, you can Book a complimentary demo with the Range Team Check it out to see if they’re right for you and your portfolio.
tax planning
Largely affluent retirees often assume that their tax burden will reduce after they stop working, but in reality, it may be worse.
The culprit is the deferred tax liability that existed inside traditional IRAs and 401(k)s, accounts that were tax-advantaged but were fully taxable when taken out. The pressure starts at age 73, when required minimum distributions begin.
For someone with $2 million in pretax accounts, first-year RMDs could exceed $78,000, taxed at ordinary rates regardless of whether the retiree needs the cash. As balances grow, so do mandatory withdrawals, and this often pushes retirees into a higher tax bracket than when they were working.
Cascading effects are where RMDs can sting the most. Higher adjusted gross income triggers the IRMAA surcharge on Medicare premiums (5), and up to 85% of Social Security benefits may be subject to federal tax (6). A partial Roth conversion before age 73 may help, but the timing and amount depend greatly on individual circumstances.
This is where professional guidance comes from advisor.com Might be able to help. Their comprehensive platform helps you find vetted tax advisors or planning professionals.
How it works is simple: just put in some basic information about yourself, like your zip code, and what you’re looking for. Then Advisor.com will check their database for matches.
From here, you can Book free calls without rental obligation So you can be sure that you are working with someone you can trust.
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We only rely on verified sources and reliable third-party reporting. For details, see our Editorial ethics and guidelines.
Investopedia (1); Northwestern Mutual (2); Organisation for Economic Cooperation and Development (3); Peterson-KFF Health System Tracker (4); Medicare Resources (5); IRS (6).
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.