Judging by the number of Americans who don’t invest, the stock market can be an intimidating topic. Wealthier individuals are much more likely to invest their savings, but even they face special investment challenges. Having a high net worth comes with its own set of considerations.
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1. Avoiding Fees
Opting for low-fee investment vehicles is retirement advice you hear quite a bit these days. Wealthy savers may find it particularly difficult to avoid fees. For one thing, individuals with high net worth are courted by financial advisors. For another, wealthy individuals may think that they can afford to pay fees. When you’re on a tight budget it’s easy to see why opting for low-fee retirement investments is so important. When you’re wealthy you may think, “What’s another percentage point off my investments?” This kind of thinking costs more over the long run.
2. Replacing Income
Being wealthy presents its own set of investment challenges and one of the biggest is simply replacing your income in retirement. For a middle-income saver, Social Security will replace a decent chunk of his or her income. But for someone who is used to income in the six figures, Social Security income will be a drop in the bucket. That means that wealthy people need to save more aggressively than their middle- and low-income counterparts.
3. Leaving an Inheritance
It’s natural for parents to want to leave behind an inheritance for their children. Wealthy savers may face greater investment challenges because the pressure on them to leave an inheritance is greater. Whether that pressure is self-imposed, absorbed from the culture at large or, in the worst-case scenario, imposed by heirs, it may lead wealthy individuals to take greater investment risks in pursuit of higher returns. The closer you get to retirement, though, the less risk you can afford in your portfolio. You’re better off taking care of your own needs and being honest with your heirs about their inheritance prospects.
4. Staying Tax-Smart
Because wealthy individuals pay a higher marginal tax rate they have more to gain from pursuing deductions and other tax-advantaged strategies. And as your investments grow, you’ll start worrying about capital gains taxes. That’s where strategies like tax loss harvesting can come in, offsetting your capital gains with tax losses. Depending on your net worth, you may also be worried about the estate tax. In short, deciding where to invest your money without taking taxes into consideration is a mistake wealthy savers can’t afford to make. That goes for putting money into your investments and for taking money out (decumulation). Spending down your investments in retirement requires more careful tax planning the wealthier you are.
5. Knowing When to Stop
High earners are used to climbing the income ladder and watching their net worth grow. With that mind-set, it can be hard to know when to stop. Surveys of ultra-high net worth individuals show that some wealthy people say they won’t feel secure until they’re worth a billion dollars or more! If you love working and you’re valued in your job, by all means continue working. But it’s worth sitting down with your financial documents (and your partner, if you have one) to consider when enough is enough.
Bottom Line
Wealthy investors who are used to a high level of spending have their work cut out for them when it comes to saving for retirement. It’s a lot easier to get to the point where your investments are generating $40,000 per year than $400,000. Assuming you don’t want to undergo a drastic lifestyle change in your post-work years, you’ll need to grow your investments steadily in the lead-up to retirement.
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