You might be afraid about running out of money in retirement or not knowing how to manage your wealth to ensure a steady income while keeping your taxes low. It may seem not easy to plan for retirement savings, but it often comes down to being consistent and having a long-term view. You don’t need rocket science to have a great retirement. With a bit of help, you can set up retirement planning to save and invest your way there.
Whether you’re still a few years away from retirement or already living the good life, it’s essential to have a plan to keep an eye on and change as required. In fact, many of the steps that wealthy people take to plan for retirement can be taken by anyone, regardless of their income.
These are some of the best retirement planning tips that wealthy people use. Not everyone follows them, but they are usually easy to find.
What is the point of retirement planning for wealthy people?
First, a lot of wealthy people think it’s a good idea to discuss their plans to financial advisors. You can get the help, advice, and plans you need to reach your goals from your financial manager. But first, let’s talk about why you need a retirement plan.
Making retirement plans is a way to make sure you can live the life you want without thinking about needing more money. In other words, how you handle some parts of high-net-worth financial planning might differ from how your neighbor, best friend, or coworker does them. If you have a lot of money, you have specific needs. The best way to reach your long-term goals is to make a retirement savings plan that fits your needs.
You might have to spend more than someone who doesn’t have big trip plans because you want to see the whole world. Or maybe you already have a health problem, which means you’ll need more complete medical coverage, which will probably cost more.
Different people have different amounts of money, so your retirement planning strategies should be tailored to your specific needs.
What are some successful retirement planning strategies that wealthy people follow?
Apart from their workplace retirement plan, these are the most essential strategies included in a high-net-worth retirement plan for wealthy people:
1. Set goals for retirement savings
You need to turn your lifestyle into spending goals if the point of the plan is to support your way of life till your full retirement age.
If you keep track of your spending already, this part will go faster. If you don’t, consider how much you usually pay monthly.
You should include the costs of food, energy, housing, insurance, taxes, and other things you need to live. But don’t forget to have the money you might spend on “non-essentials” like weekend trips, tickets to shows or sports games, and gifts for family.
Here, it would be best if you didn’t start by thinking about how you can save money. If it needs to, that part can come next.
2. Start making cash flow projections alongside the necessary adjustments for inflation
Once you know how much money you need each year, considering inflation, you need to predict how much you will need in the future.
In the past, inflation has been about 2.5% per year on average, but as you know, things aren’t quite right right now. That’s an excellent place to start, but you might need to make changes based on the main things you spend your money on.
3. Invest the funds towards growth
Wealthy people invest their money to make it grow even more. Living below their means can help you save money.
Rich people don’t just save their money, in general. They put their savings into investments that will grow and often use tax-advantaged “wrappers” to keep the growth from being taxed. They always try to get more of their money to work, earn, and grow.
But that doesn’t mean rich people always look for the next big stock. Often, investing for growth just means regularly putting money into a diverse portfolio. This kind of investing grows over time, not all at once.
4. Look over your amount of contributions
Increasing the amount you put into your 401(k) every year is the easiest way to make it grow. Your money has more room to grow if you get as close to the annual contribution cap as possible. Suppose you can’t raise your contribution rate significantly right now. In that case, you might consider doing it in smaller amounts, like 1% to 2% each year.
If possible, by the time you turn 50, you should make the most money and be able to put the full amount into your 401(k) every year. If you want to save even more, you can make catch-up contributions up to the annual cap.
5. Look at how well your investments performed
For example, putting some of your pay into a 401(k) is only one way to build wealth. To reach your goals, you should also create a diversified investment portfolio that offers the right mix of risk and return. If you haven’t looked at your investments in a while, you might want to do so now to see which ones are doing well and which ones you want to sell.
6. Make sure you have sufficient liquidity
Wealthy people often plan for retirement while monitoring their cash flow needs. One thing they do is ensure they have enough cash. To avoid having to sell an asset because you need money quickly, it keeps you from doing that.
Rich people usually have a lot of cash on hand that they can use to invest in high-growth private equity, real estate, and other investments that don’t sell quickly. It means the money can’t be easily changed back into cash until a liquidity event happens, which usually takes a long time.
Rich people can put their money in highly liquid investments because they have enough liquid cash. Highly illiquid investments should not be considered by people who do not yet have enough money to use in an emergency.
7. Set up an account drawdown strategy
There is more to a withdrawal plan, considering how much money to take from your retirement accounts. People usually take out about 4% of their savings in the first year and then increase their withdrawals at the inflation rate. But your retirement plan shouldn’t be a cookie-cutter standard plan.
A planned withdrawal strategy determines how to get the retirement money out of each account and how much money needs to be taken out. This is a choice only you can make; it relies on your income needs, tax bracket, sources of income, and other factors. For instance, taking money out of a standard IRA is taxed, but not from a Roth IRA.
8. Choose the Roth conversion
When you retire, qualified withdrawals from Roth accounts are not taxed. Building this tax-free savings account for wealthy retirees gives them more freedom, control, and choices in their golden years.
But Roth accounts aren’t usually the best way to save money. Most people save money in tax-deferred accounts. When they take the money out, the IRS taxes it at their regular income tax rates. If your tax rate is high when you leave, you might have to pay more to Uncle Sam than you’d like.
You have more choices when it comes time to take the money out in retirement if you save in both tax-deferred and after-tax accounts. However, people with high incomes often can’t give directly to Roth IRAs because of limits set by the IRS.
A legal way to get around this rule is to “convert” money from a regular account to a Roth account. People with a lot of money or a high net worth can save a lot on taxes by converting their traditional IRA to a Roth IRA.
9. Make a plan for getting social security benefits
Your Social Security benefits are a set source of income that is important to your retirement income plan. Even if they don’t make up most of your retirement income, they are still a significant benefit that you should use.
Social Security gives you a steady stream of income that is not affected by inflation, doesn’t depend on the market, and will keep paying for your life.
10. Include health care in retirement planning
Taking care of your health and managing medical expenses are the integral part of any retirement plan. According to Fidelity, healthcare costs consume about 15% of a retiree’s income. You’ll need to consider Medicare payments, out-of-pocket costs, long-term medical care, etc. You will have to spend a lot of money on health care in retirement, no matter how you look at it.
Medicare is going to be the main part of your health care plan. Like Social Security, you must ensure your Medicare plan is sufficient. Do not follow general rules or a specific plan just because your friend did. Look at the different types of coverage and think about your wants, budget, and lifestyle.
Also, investing your funds into a health savings account (HSA) is one way to do this. If your health plan is highly deductible, you can save money in these useful, tax-friendly funds.
11. Consider your taxes
Investing for growth often comes with tax consequences. Wealthy people usually try to find ways to lower their tax bills when planning retirement. They do this by structuring their investment accounts to minimize their tax bills. For example, if you earn dividends in a taxable account, that could mean you have to pay taxes every year. This is different from keeping stocks that don’t pay dividends to put off paying taxes.
Due to contribution limits and high net worth, wealthy investors often put their money into tax-advantaged retirement accounts like 401ks, standard IRAs, etc. This means you likely also have a lot of money saved in taxable accounts (brokerage).
You could invest in securities that will help you save on taxes, such as tax-free local bonds, or manage the investment plan to make short-term gains and fulfill your financial goals.
When rich people have more money than they need from investments that make money, they can put it into investments that will grow and won’t raise their taxable income. This lets them spend more tax-efficiently on investments that will make them money. Since they don’t need any more money, they can treat their extra assets as an accumulation portfolio, which means that no money is going out of it. This is better for their taxes than a distribution portfolio, meaning income is regularly removed from the portfolio.
12. Follow the rules and stay disciplined
People might like to think that rich people have a secret recipe, but most of the time, it’s just about doing the basics. There is only one way to get rich: disciplined enough to follow the basic rules of wealth building.
That includes things like not spending more than their current income, opting for debt relief options to get out of high-interest debts, paying as little tax as possible, having enough cash on hand for emergencies, saving and investing as much of your extra money as you can, putting your money into asset classes that will grow and can beat inflation, not selling under fear when markets are bad, and not investing too much when markets are good.
13. Spend wisely
Being rich doesn’t mean an individual must spend much money frequently. By definition, people lose income when they spend more than they earn, even if their assets grow. Rich people usually know how to handle their finances and live within their means. That doesn’t mean they don’t spend money, but they don’t spend as much as they could most of the time.
Rich people are often aggressive savers who are always looking to add to the money they have spent. They even try to save more than their spouse’s combined income.
14. Try to reduce fees
401(k) plans may require a lot of fees, some of which you can change and others can’t. You can choose how much you pay for mutual funds and exchange-traded funds (ETFs). You can save money on fees and keep more returns if you choose funds with lower expense rates.
15. Draft a Will or set up a trust
Rich people not only think about how to save and invest money for retirement or how to build their nest egg. They also think about what will happen to their assets after they die. That’s where planning your wealth comes in. Estate planning is the official process of deciding how the assets will be split up after you die.
If you have a lot of money, you probably need more than just a simple Will. Setting up a trust may help you keep your assets safe from creditors, lower the taxes your estate has to pay, and let you control how your assets are given to your beneficiaries. A trust can also help your beneficiaries escape probate. This process can take a long time, and the legal fees that come with it may eat away at a person’s inheritance.
It will depend on your needs and what kind of trust you choose to build. Even though there are many kinds of trusts, they all need a manager whom you may depend on. You may also be the trustee of a revocable trust as the grantor. If you make an irrevocable trust, you must choose someone else to be your trustee. All trusts must also name beneficiaries or the people who will get money or other things from the trust.
Most of the time, putting up a trust is more complicated than writing a simple Will. So, working with an estate planning lawyer or financial advisor specializing in estate planning can be helpful.
Lyle Solomon has considerable litigation experience, substantial hands-on knowledge, and expertise in legal analysis and writing. Since 2003, he has been a member of the State Bar of California. 1998, he graduated from the University of the Pacific’s McGeorge School of Law in Sacramento, California. He is now a principal attorney for the Oak View Law Group in Los Altos, California.