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Top Three Financial Concerns of Investors

By Timothy Hewitt

Top Three Financial Concerns of Investors

Attaining greater financial success doesn't always bring peace of mind. Here's how to address common financial concerns that even the wealthy worry about.

It stands to reason that your financial concerns would slip away as your wealth increases, right? Yet a new Spectrum Group study of mass affluent, millionaire and ultra-high-net-worth individuals finds that wealth doesn't necessarily put an end to worry. In fact, many in these groups have specific concerns about healthcare expenses, as well as their ability to preserve wealth for themselves and their families.

Consider the millionaire group in the study, which comprises clients with a net worth of $1 million to $5 million. Among this group, 75% put the cost of health care chief among their personal concerns. What's more, 43% are concerned about maintaining their current financial situation, and 45% worry about the financial situation of their children and grandchildren.

However, working closely with a financial advisor can help clients build a plan that addresses these concerns. Here's a look at strategies the Wiley Group uses to help bring clients some peace of mind.

Health care planning

The average 65-year-old couple retiring in 2018 will need $280,000 to cover health care expenses[1]
What's more, retirees on Medicare can easily spend $5,500 annually in out-of-pocket health care costs[2]
So it's no wonder clients are concerned about having enough to meet this need. To address these healthcare concerns we work with our clients to budget out of pocket costs, understand their health insurance options, plan for long term care events and model these assumptions in their financial plans.

Covering annual costs: We recommend planning for the cost of health care separately from living expenses. That way, you can be sure your health care is covered, and investments can be adjusted for rising medical costs and inflation. To help individuals retiring prior to age 65 establish a budget for health insurance we review health insurance options, discuss their health history, and determine the number of family members that will need to be covered. Once a client reaches Medicare age we use a guideline of $6,000 per person to cover annual out-of-pocket medical expenses. We adjust this figure based on past health conditions, retiree medical benefits, HSA balances and a few other factors.

Long-term care insurance: An unexpected health care event in which you lose the ability to perform activities of daily living can derail your financial plan. Someone turning 65 today has almost a 70% chance of needing some version of long-term care. Our goal is to start the conversation by understanding our client's concerns and past experiences with long-term care. Some clients prefer to receive care in their homes while others prefer the specialized care offered by a facility. Once we have an idea of the preferred level of care we can discuss their options to self-insure, purchase a traditional long term care policy or a hybrid long term care product that has a life insurance component. We then model the preferred scenario into their financial plans to help ensure that they remain on track to achieve their goals.

Wealth preservation

One of the keys to preserving wealth is an efficient tax strategy that incorporates personal taxes, investment planning and retirement withdrawals. 

Understanding personal taxes: To understand how taxes affect your retirement we build a roadmap by reviewing your past tax returns and then model proforma tax returns for each year of retirement. This process helps us determine:

  • the impact of changes to the tax code
  • the eventual sunset of the Tax Cuts and Jobs Act, if you will be affected by AMT
  • the ability to itemize your deductions
  • the taxable amount of your Social Security benefit
  • the potential benefits of converting to a Roth IRA

 

We partner with your accountant to ensure we are coordinating our efforts to minimize your taxes.

Tax efficient investing: Strategically locating assets in different types of accounts can help maximize your after-tax return. Generally we place investments that produce higher levels of income such as taxable bonds, dividend paying stocks, and REITs in tax-deferred vehicles such as IRAs. We also consider the placement of more tax efficient investments like municipal bonds and stock index funds in taxable accounts. Another way to minimize taxes is to employ Exchange Traded Funds which can have lower turnover than their mutual fund counterparts, typically leading to less capital gains exposure being produced. Lastly we can utilize tax loss harvesting or other carry forward losses to offset capital gains and help to keep our clients in a lower tax bracket.

Savvy withdrawals: The order in which you withdraw from your retirement investment accounts can have a big impact on your tax bill. For example, it may make sense to first spend from taxable accounts that are subject to the lower capital gains rate before tapping IRA savings, which are subject to ordinary income tax. This order can change for the individual based on the size of their taxable, tax-deferred and tax-free accounts. It makes sense to work with an advisor that can create a long term strategy to maximize your spending, create a healthy amount of guaranteed income, and minimize your tax liability.

Multigenerational and estate planning

As with health care and tax planning, we meet you to understand how you wish to pass wealth on to future generations. For example, do you want assets to first go to a spouse and then to children? Are your children in different tax brackets? Do you want to keep your assets in your family? Is creditor protection important to you? What are your charitable intents?

Once we understand your goals, we can help you determine if your wishes can be achieved with simple estate planning documents or if you will need trusts and other more complex planning. We work to educate our clients on the benefits of estate planning, how trusts operate, the responsibility of trustees, and the powers of appointment. We also perform an analysis to show how your estate will pass to heirs, how much might be owed in taxes and probate, and the potential benefits of Irrevocable Life Insurance Trusts, Charitable Remainder Trusts and other types of trust planning. We work closely with your  estate attorneys to ensure that your legacy goals are properly planned.

[1] Fidelity, "How to plan for rising health care costs," April 18, 2018.

[1] T. Rowe Price, "Retirement health care costs," May 24, 2018.