You spent years chasing the dollar, working as hard as you could to amass your fortune. But at a certain point, you have to think beyond mere accumulation in your stock accounts. The value of an investment will fluctuate over time as market trends change. This is why wealth preservation becomes a significant and necessary shift, especially in retirement.
How can you move your goals to align with this shift from wealth accumulation to preservation? These five tips will help smooth the path forward for a seamless transition.
1. Adjust Your Mindset from Saving to Spending
The perk of wealth accumulation is that the value in your bank accounts trends in one direction: up.
In retirement, the opposite will be true. After building your nest egg for so long, you will simply have to accept that the trend is going to permanently change. That bottom line number is going to go down, and that requires a real mindset shift for anyone in your position. You might be surprised to discover how difficult this may be.
At this stage, you might start to fear running out of money one day in the not-so-distant future. This is where a plan comes in, giving you increased confidence and security about your ability to weather the remainder of your retirement.
2. Shift Asset Allocation
The way you view the markets will also shift as you move into wealth preservation. While you are accumulating wealth, a market crash serves as a convenient and productive buying opportunity. But when you are withdrawing wealth, this same market crash can be absolutely devastating. So, what can you do to protect your investments?
It is especially important to have a cash bucket of safe assets that can cover your living expenses for 1 to 3 years. Having a “downturn” fund means you can avoid selling stocks in a downturn.
This is also the best time to assess your portfolio. Chances are, you will likely need to re-risk a large portion of your portfolio by shifting toward “safe” assets, or established, dividend-paying companies. This doesn’t need to (and likely shouldn’t) happen all at once. Always consult with a wealth advisor to balance how much and how quickly you need to make this shift. And don’t forget to take taxes into consideration.
3. Develop a Tax-Efficient Withdrawal Strategy
Withdrawals are just as important as investments. You should know which account to pull from first when the time comes. For example, most people want to draw from taxable accounts first to let tax-advantaged accounts grow longer. This strategy also allows you to manage tax brackets by strategically withdrawing from traditional IRAs before hitting higher marginal rates.
As you make your plan for withdrawals, make sure you plan around your RMDs. If you do not plan for taking your distributions, it may inadvertently push you into a higher tax bracket or deplete an account you would have rather preserved. It could also affect your medicare premiums.
Don’t forget that this is also a great time to start thinking about your philanthropic legacy. Giving to charities near and dear to you can be accompanied by tax benefits when you use the proper vehicle, like QCDs, charitable remainder trusts, and donor-advised funds.
4. Plan for Your Health and Long-Term Care
As you age, the odds are that you will make good use of your health insurance. Understand now what Medicare does and does not cover. This usually means you will need to plan for long-term care with LTC insurance or hybrid life insurance policies. If insurance is not practicable, then a long-term care spending plan needs to be devised. If there is no plan in place, the risk of a medical emergency depleting your accounts remains unchecked.
Health Savings Accounts and private insurance can also help offset some of these unforeseeable costs. It doesn’t mean you have to buy insurance; it just means you need to have a plan in place.
5. Solidify Your Estate and Legacy Plan
It is never too early to start thinking about your estate planning and how you will leave a legacy for the next generation. You may not want to think about your death–I will admit, it’s not fun– but setting the groundwork now will allow you to rest easily for years to come.
Estate planning provides protection for your assets and helps loved ones avoid probate, which can be time-consuming and expensive. When done properly, it can even help you in the here and now by reducing tax liability through the formation of charitable remainder trusts or some other tax-advantaged plan. The sooner a plan is made, the sooner you can reap those benefits.
The formation of a legacy plan should be approached with the perspective of financial, legal, and tax professionals. However, you can go far by setting your own goals, inventorying your assets and debts, and organizing your estate planning documents, such as a last will and testament, powers of attorney, and health care documents.
Whether you are a high-net-worth individual or not, planning for the inevitable is a good idea to give you peace of mind and provide for your family and loved ones.
Transition to Wealth Preservation with Magellan
Moving from wealth accumulation to wealth preservation requires a new mindset and approach to your finances. This shift is often best accompanied by a fresh set of professional eyes to ensure you make smart decisions that benefit you now and establish a legacy later.
Magellan provides the insight needed to make this transition effectively. We provide all the services you need under one roof, including financial, tax, estate, and legal planning, for an integrated plan that considers your every need.
Contact us today to schedule your consultation with an experienced member of our team!
For a comprehensive review of your personal situation, always consult with a tax or legal advisor.
This material provided by Kevin Meaders was written by Axle Eight, a non-affiliate of Magellan Planning Group.