Financial Planning for High-Net-Worth Individuals

Financial planning can be helpful in many ways. It can help you save more, invest smartly, and find ways to increase your income sources. It is an integral part of any individual’s life, irrespective of factors like income, age, profession, etc. Financial planning adds discipline to your routine. It gives your goals a direction and helps you create relevant strategies to achieve them. Financial planning is also helpful in tracking errors and rectifying them quickly to avoid further damage. And, it encourages you to stay on track and not deviate from your chosen path in life. 

Evidently, financial planning is even more crucial for high-net-worth individuals. High-net-worth individuals are those who own liquid assets worth $1 million or more. Very high-net-worth individuals are those who own liquid assets worth at least $5 million and up to $30 million. Lastly, ultra-high-net-worth individuals own liquid assets of more than $30 million. If you fall in any of these wealth categories, you are a high-net-worth individual. If you are still not sure, you can use the formula, Net worth = (total assets – total liabilities). Keep in mind that these values are only for liquid assets and not physical assets. So, if you own a house for $3 million but only $50,000 in your bank and other investments, you would not be in the high-net-worth category. But if your investments and bank account are valued at more than $1 million, you would be a high-net-worth individual. 

Now that you have evaluated your net worth, the next step is to devise the right financial planning strategy for yourself. High estates can require more detailed attention and assessment. The more money you own, the more intricate the process of managing it. Therefore, high-net-worth financial planning is a must for individuals belonging to high-income groups. If you are a high-net-worth individual and wish to learn about wealth preservation, tax-saving strategies, and management of large estates; engage the services of a wealth advisor who can advise you on the same.

Keep reading to know more about the financial planning process for high-net-worth individuals and how it can benefit you:

1. Income and capital gains tax planning:

The tax system in the U.S is higher for higher-income groups. There are seven federal tax brackets in the country – 10%, 12%, 22%, 24%, 32%, 35% and 37%. These are taxed in an ascending order depending on the income. The more money you make, the higher tax you pay. This means that depending on your total earned income for the year, you may pay taxes as high as 37%. Hence, tax planning is an important part of any high-net-worth individual’s financial plan. Hiring reputable and experienced high-net-worth financial planners can benefit high-income groups and help them lower taxes. Financial planners employ different approaches to save tax. They ensure that you only pay for what is legally due and not a cent more. This helps you save money and use it to grow your wealth further. For instance, financial planners may recommend turning your traditional retirement accounts into Roth accounts to lower your tax burden. Roth accounts are not taxed in retirement, and therefore help reduce your future taxability. The professional may also recommend tax deductions, such as charitable donations. Further, if your capital gains tax is too high, the financial advisor may use tax-loss harvesting to offset your investment gains with investment losses. Tax-loss harvesting is a strategy that uses your investment losses incurred in a financial year to reduce the tax on your investment gains earned in the same year. 

High-net-worth financial advice is critical for very and ultra-high-net-worth individuals, too, as they have multiple income sources and very high inflows of cash. Moreover, the tax laws are constantly changing. In 1962, the highest tax rate in the country was 91.7%. And even though things may be different now, every new government can propose a new tax policy depending on the economic conditions in the country. For instance, President Joe Biden had proposed a tax rate of 39.6% for individuals with an annual income of $452,700 and more. The proposed income limit for married individuals filing jointly is $509,300 or more. This can result in a higher tax output for these income groups if the tax rate is approved and applied. President Biden also proposed to increase the capital gains tax from 20% to 39.6% for gains of $1,000,000 or more. For the longest time, various sections of the country have argued that the income tax burden is carried by the lower and middle-income groups. If this burden is shifted to the high-net-worth income category, financial planning will be the only way to navigate through these enormous tax liabilities. 

2. Retirement planning:

One of the biggest concerns that most people face in retirement is keeping the same standard of living as their pre-retirement days. Life can drastically change after retirement for a number of reasons. Health concerns can catch up. The limited pool of savings can run out if not appropriately planned. Old age can make it hard to earn money, take up a job, or start a new hustle. Therefore, financial planning for high-net-worth individuals is critical to ensure that your retirement is comfortable and as luxurious as before. A financial planner can help you plan your withdrawals in a manner that you do not exhaust your savings before time. High-net-worth individuals earn a significant chunk of their income from a business, investment returns, etc. These are volatile sources of money and can fluctuate due to external factors. A misguided venture capital investment or a sudden downturn in the market can impact your financial situation. Therefore, keeping a mix of different asset classes and diversified investment portfolios is crucial. Maintaining a steady rate of savings is also essential pre-retirement, especially if the professional life of the concerned individual is too narrow. For example, sportspersons may enjoy enormous wealth throughout their careers. But their careers can be short-lived. The same can be said for artists and businesspersons, too. A business may thrive today but wither away in front of the competition or evolved customer needs of tomorrow. The example of Nokia and its fall in front of Apple’s more customer-centric and innovative products can help you understand how the business world can be unpredictable. Wealth-creating opportunities can be fleeting, which is why it is essential to plan long-term and alter your retirement plan to suit your current needs and the changing market scenarios. Professional high-net-worth financial planning can be critical to ensuring a financially secure retirement. 

3. Estate and multigenerational wealth planning:

High-net-worth individuals can generally generate enough income to last their future generations or at least give them a good head start in life. However, the success of their children and grandchildren lies in the individual’s estate planning to a large degree. Estate planning is the process of ensuring that a person’s estate reaches its rightful heirs after them. This can include creating a will, setting up revocable and irrevocable trusts, building health directives, appointing legal guardians, leaving power of attorneys, and more. Estate planning is a legal process and requires professional high-net-worth financial planners to make sure that the will is not later contested in court and is able to avoid the costly and time-intensive process of probate. Estate planning can offer you peace of mind and surety that your wealth will be used optimally by your heirs. It gives a sense of power to the estate owner as you can limit or direct the use of your money through your will and trust. Above all, it removes any ambiguities later and protects your hard-earned money from creditors. One of the issues with estate planning is that most people leave it to the last minute. However, given the enormous value of estates, high-net-worth individuals can benefit more by getting to it early in life. 

In addition to planning your estate, high-net-worth individuals also have to ensure that their future generations are able to use their wealth after them rationally. For instance, in the case of a business, succession planning is primarily essential. If you have more than one child, the proper selection to carry forward your legacy can determine the future of your business. Knowing which of your children are interested in taking on your business is also necessary. Not all children may show interest in your company. The ones who do can be coached and mentored for a few years before you retire. This can help you understand their caliber and also give them enough time to understand the job. Likewise, if you own multiple real estate properties like a vacation home, a farmhouse, a beach house, etc., the distribution of each according to your children’s wishes and their liking is vital to avoid family feuds later.

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Financial planning tips for high-net-worth individuals

Here are some financial planning tips that can help high-net-worth individuals:

1. Start early:

With great power comes great responsibility. The more wealth you have, the harder it can be to manage it. Income tax, estate tax, state tax, property tax, investment returns, debt, etc., can present themselves as intimidating numbers on a piece of paper. Putting these together and understanding your financial health can be cumbersome. However, the sooner you take charge of your finances, the better it can be for your financial health. Starting early puts you in a better position and helps you plan for the future with greater efficiency. Some people may feel like they do not need high-net-worth financial advice as they have enough to last them a lifetime, but preserving wealth is as vital as creating it. 

2. Hire a professional:

High-net-worth financial planners can offer several benefits to high-income groups. Managing vast amounts of money requires due diligence and relevant professional expertise. Therefore, consider hiring an advisor with certifications like Chartered Financial Consultant (ChFC), Certified Private Wealth Advisor (CPWA), Certified Financial Planner (CFP), Certified Investment Management Analyst (CIMA), and more. Depending on the value of your estate, you can also hire banks or wealth management firms. Fiduciaries can also be a good choice as these professionals have a legal duty to work in the financial interest of their clients. So they are bound by law to put your goals above their own personal bias or interest. No matter who you choose, make sure to run a background check. You can consult friends and family for feedback and then hire someone who meets your criteria. Make sure the professional’s investment style and approach match with you and pick someone you are comfortable with, as these associations can be long. 

3. Prepare your children for the future through financial discipline:

In order to create generational wealth, you must bring your children on board and prepare them for what they have in store. Many a time, children born into privilege take their fortune for granted. Such an attitude can be bad for the estate as well as the child’s future after you. Teaching your children the importance of money from a young age can ensure that they value your hard work. This can help them build a better relationship with money and allow them to learn financial discipline and good habits that can help in their lives, regardless of where they go or what they do. 

To summarize

High-net-worth financial planning is a must for high-income groups for wealth preservation. It can help you manage your money well, invest in suitable instruments, lower your tax, plan your retirement and succession, and leave a sizable legacy behind for your future generations. However, hiring professional high-net-worth financial planners is crucial to ensure that you get the best advice and guidance and avoid mistakes that can set you back. This way, you can live a comfortable life that is free from any worry, financial hardships, or stress. You can contact a financial advisor in your area for high-net-worth vs. ultra-high-net-worth financial planning. 

If you are looking for help with respect to high-net-worth financial planning, use WiserAdvisor’s free advisor match service to find highly qualified and vetted wealth advisors who can guide you on the same. Answer a few questions about yourself and get matched with 1-3 wealth advisors that are suited to meet your financial requirements.

For further information on the most suitable financial planning strategies for your high-net-worth financial needs, visit Dash Investments or email me directly at dash@dashinvestments.com.