There is no gold-standard dollar amount one must save for retirement—high-net-worth individual or otherwise. Everyone has a distinct financial situation that may constitute a different target amount.
The SEC defines high-net-worth individuals (HNWIs) as anyone with $750,000 in investable assets or a net worth of $1.5 million. A broader definition of the HNWI includes anyone with over $1 million in investable assets (excluding real estate). However, some don’t designate anything under $5 million to be high-net-worth, while others raise the bar as high as $10 million. Once your available assets exceed $50 million, you enter into the ultra-high-net-worth category. But regardless of where in this ranking one falls, high-net-worth individuals looking to maintain their lifestyle in retirement must understand the fundamentals of high-net-worth retirement planning.
For the high-net-worth individual, retirement can prove a complex situation that generates many questions and concerns. How do I balance retirement income against potential medical expenses? Did I save enough during my working years? Am I getting the most out of my benefits? Most importantly, you want to maintain a certain standard of living. Or perhaps you’re looking forward to traveling the world. Maybe you’re watching your grandchildren grow up and want to contribute to their college funds. Whatever your goals, if you develop (and stick to) a smart retirement plan, you can maximize the potential to live your golden years on your terms, comfortably funded and financially secure.
1. How Do I Start My Retirement Plan?
For most individuals under 30, retirement is purely conceptual. It’s rarely on a younger person’s mind as they navigate the stresses of everyday life. Retirement planning often takes a back seat to more immediate expenses and economic ventures. However, the earlier you begin saving, the better. Even if it’s only a small portion each month or year, the compounding returns can grow your retirement nest egg while you attend to more pressing matters.
Establishing money-saving habits early makes retirement planning second nature for the HNWI. Contrary to popular belief, you don’t have to save every penny in your youth to generate an impressive portfolio later in life. Even reserving $10k/year in your 20s and 30s will have positive effects on your growing portfolio as your income increases. You could be saving and investing well over $10k every month through your 40s, 50s, and 60s.
Finally, setting high-net-worth retirement goals and understanding your living expenses helps build an easy-to-follow blueprint for any retirement strategy. Do you plan on touring the world or leading a simpler life? In either case, you’ll have to evaluate your expenses against your income. You’ll need to consider the estate expenses, outstanding loans, insurance, living expenses, entertainment, healthcare, and home repair costs you’ll have during retirement.
POLARIS PRO TIP: A Roth 401(k) can prove to be a beneficial investment for the young HWNI over the decades, due to its relationship with U.S. tax structures. Unlike the traditional 401(k), Roth funds are accrued with post-tax dollars, meaning investment earnings in the account also grow tax-free. Withdrawals and earnings won’t be taxed as long as you hold off on withdrawals until after turning 59½ and have maintained the account for a minimum of five years.
2. How Much Do I Save for Retirement?
There is no gold-standard dollar amount one must save for retirement—high-net-worth individual or otherwise. Everyone has a distinct financial situation that may constitute a different target amount. However, you can make some helpful calculations to determine how much money you should be saving based on your income and living expenses.
Anticipate Necessary Funds
Identify and add up all your income sources during your first year of retirement. Then, multiply that number by 25 years. The result is a rough estimate of how much you’ll need to live comfortably through retirement.
For example, if your income during your first year of retirement is $300k, you’re looking at $7.5 million for the full extent. If If you’ve already surpassed that amount, perfect! If you’re lagging, perhaps it’s time to meet with a wealth manager to get back on track.
The Four Percent Rule – If you already have a portfolio and want to know what you can safely take during your retirement, multiply it’s value by 4%. A $1 million portfolio can support $40,000 worth of withdrawals per year.
Seventy-Five Percent of Your Current Income
Another measurable metric is percentage of income—at minimum, 75%. Again, let’s say you’re making $300k/year. This means you would need at least $225k/year if you retired today. The extra 25% accounts for expenses you may no longer have during retirement (think perhaps estate expenses, loans, and retirement savings).
Adjusting for Inflation
As the Covid-19 pandemic rages on, annual inflation rates have reached 20-year highs. With uncertainty on the horizon, high-net-worth individuals currently planning for retirement may benefit from overstating their needs. The annual inflation rate for goods and services as of December 2021 (the most recent set of available data at time of writing) is 7.0%. So, establish your current income, and then adjust for inflation over however many years until your retirement—if you plan to retire in 15 years, adjust for 15 years’ worth of inflationary pressures. The result will tell you how much you should consider actually saving.
The Federal Reserve has expressed concern that current inflation rates won’t decrease soon, going as far as to drop the word ‘transitory’ from the current discourse. In the past, ‘transitory’ has been used to suggest current inflation rates won’t leave a lasting impact on the economy. That no longer seems to be the case.
3. When Should I Claim Social Security?
There are several factors to consider in deciding when to claim Social Security benefits. However, the decision boils down to three primary variables: health, longevity, and lifestyle. In most circumstances, you’ll become eligible to start claiming Social Security at age 62. While it may be tempting to collect your monthly check early, there are several benefits to delaying your claims, at least until you reach full retirement age (FRA).
Your FRA is the age at which you’re eligible to receive full retirement benefits. Anybody born in or before 1954 has already reached their FRA. The FRA began at 66 years and two months for those born in 1955, increasing by two months each year until settling at 67 years old for anyone born in 1960 or later. To determine your FRA, consult this chart from the Social Security Administration (SSA).
If you choose to take Social Security benefits early (between 62 years and your FRA), you can expect upwards of a 30% reduction in payouts. However, if you choose to delay your claims, especially after your FRA, you’ll see an 8% increase to your benefits for each year you wait past 67 (up to age 70). Again, each situation is different, especially for HNWIs. So when should you claim your Social Security benefits?
If you’re looking to enjoy an early retirement, and your other assets and investments offset the 30% reduction, then claiming early might not be a bad decision. On the contrary, if you have enough to live comfortably while retiring early, you can also opt to delay your claims, taking advantage of full benefits after you turn 67.
For high-net-worth individuals, health is a major factor in deciding when to claim retirement benefits like Social Security. If you’re in good health and expect to exceed the average life expectancy, delaying your claims is probably the best option. According to the SSA, the average life expectancy for a 65-year-old male is 84 years while it’s 87 for females. If poor health or other medical conditions suggest you may not live past 84 / 87, early benefits ensure you get the most out of your social security.
4. How Can I Maximize My Social Security Benefits?
Getting the most out of your Social Security can also ease the ambiguities of retirement planning. Delaying your claims is the easiest way to maximize your benefits. Keep in mind HNWIs will have to pay taxes on their Social Security benefits (up to 85%), as their combined income likely exceeds the $34,000 taxation threshold. However, there are several other ways to increase your monthly checks.
For starters, make sure you work for at least 35 years. The SSA calculates your benefits using your 35 highest-earning years, so it’s crucial to remember that if you work less than 35 years, the SSA accounts for non-earning years in the calculation with zeros. If you’re 67 but only have 33 working years on record, consider delaying your retirement until you replace those zeros.
Increasing your yearly income has obvious benefits, but it also means more contributions to your Social Security. The first $142,800 of your annual income is subject to Social Security taxation. Consider a second source of income to increase your contributions if you’re hovering below that number.
Married couples may qualify for spousal benefits if: your spouse’s benefits are larger than your own entitlements OR you lack sufficient work history to claim SS benefits. Keep in mind your spousal benefit won’t exceed 50% of your spouse’s primary insurance account (PIA). And if you take early benefits, similar reductions apply. Before claiming spousal benefits, make sure you’d be earning more than what you’d gain from your own full benefits.
5. What Are the Benefits of Maxing Out My 401(k)?
Though the IRS limits how much can be contributed annually—at present the contribution limit is $19,500)—maxing out your 401(k) is a smart move. Those 50 and older can contribute an additional $6500 of ‘catch-up contributions.’ Simply put, the more money you contribute to your 401(k) during your working years, the more you’ll have available during retirement.
Those IRS limits only apply to individual contributions, meaning your employer can match contributions up to a certain percent as part of your employee benefits package. In 2021, the maximum employee-plus-employer 401(k) contribution limit was $58,000 (or $64,500 with a catch-up contribution).
6. Why Consider IRAs?
Two of the simplest and most popular ways to save for retirement are traditional IRAs and Roth IRAs (individual retirement accounts). Both serve to protect and grow your retirement fund over time. The differences, however, lay in how they’re taxed. So what are the pros and cons of each when planning retirement?
Traditional IRA contributions can be deducted from your taxes each year if you meet certain criteria. You’ll only pay taxes on funds once they’re withdrawn from the account, as they count towards your annual income. Roth IRAs are funded with after-tax dollars, meaning the money won’t be taxed upon withdrawal. However, that depends on whether you’re withdrawing contributions or earnings.
HNWIs may be barred from Roth IRA contributions at times when they exceed the income limit for contributions. For the year 2022, those limitations are:
- Married (filing jointly) or qualified widow(er): Ineligible if your modified adjusted gross income is $214,000 or more.
- Single, head of household/married filing separately (and didn’t live with your spouse at any time that year): Ineligible if your modified adjusted gross income is $144,000 or more.
- Married filing separately (if you lived with your spouse during the year): Not eligible if your modified adjusted gross income is $10,000 or more.
Both retirement accounts have contribution limits set by the IRS. In 2021, you can only contribute up to $6,000 to a traditional or Roth IRA each year ($7,000 if you’re over 50).
Of course, for the high-net-worth individual, setting up an IRA or health savings account (discussed in the next section) may seem like more trouble than it’s worth as these retirement investment vehicles will not accrue enough money to serve as a solitary avenue for those looking to retire in comfort.
However, they can be a handy addition to a larger strategy. The point is, every little bit matters. Don’t ignore IRAs and HSAs simply because they may not yield not as much as other investments. By distributing your wealth across many assets and accounts and utilizing as many tax advantages as possible, you both protect yourself against unexpected circumstances and maximize your savings.
7. Should I Consider a Health Savings Account (HSA)?
Retirement age comes with inherent dips in overall health. According to the Fidelity Retiree Health Care Cost Estimate, the average couple should save $300,000 to cover healthcare costs in retirement. HNWIs on a High-Deductible Health Plan (HDHP) can take advantage of Health Savings Accounts (HSAs). HSAs act as a three-pronged tax haven: contributions and growth are tax-free, as are withdrawals, if they go toward medical expenses.
When planning your retirement as a high-net-worth individual, you can use your HSA to cover medical expenses while spending Social Security benefits, IRA funds, and other assets on living costs. Individuals can contribute up to $3,600 each year (or $7,200 for families), meaning HSAs won’t grow as quickly as IRAs. However, they do benefit from similar tax breaks, such as deducting contributions from that year’s income.
Finally, HSAs don’t have a use-it-or-lose-it stipulation, meaning the money rolls over year after year. This is especially helpful when changing jobs, as your new employer can continue making contributions to your HSA as part of your benefits package.
No matter your state in life currently, one thing assured for every individual is an increased need for medical attention later in life. An HSA allows you to save for that inevitability from now—and get a tax break while doing so.
Polaris Pro Tip: If you’re an HNWI thinking about retiring early, then it’s a smart move to contribute to an HSA because there’s going to be a time when you’re not yet able to qualify for Medicare or Medicaid and your medical expenses are going to be out of pocket. An HSA allows you to pay for those out-of-pocket medical expenses with pre-tax dollars until you’re old enough to qualify for coverage. And the HSA is literally the only account where the funds go in tax-free and come out tax-free (when used for medical expenses).
8. What Are Other Investment Strategies After Maxing Out My 401(k)?
So you’ve hit the ceiling for 401(k) contributions and are looking for more ways to set aside extra money for retirement. IRAs and HSAs are two viable options, but with limitations on the amount of money you can contribute, you may have investable funds remaining. Where else can you invest and contribute money when planning retirement as a high-net-worth individual?
- Real Estate: One investment that usually appreciates over the long haul is real estate. If you find yourself looking to invest some extra funds, consider buying property. Section 1031 provisions also allow you to defer federal taxes when rolling an investment over from one property to another. You can continue to move your investment between properties, without realizing gains for taxation until you choose to liquidate.
- Private Equity: If approached correctly, private equity can also prove a windfall for investors. Depending on the future success of your acquisition and restructuring, this avenue can pay dividends down the line.
- Alternative Investments: Don’t forget to rule out other investment options. Private debt, callable yield notes, accelerated notes.
These are just a few of many strategies you can pursue once you have maximized gains from more traditional avenues. Be sure to confer with a trusted financial advisor, like the team at Polaris Wealth, about these options before investing!
9. How Can I Minimize Taxes in Retirement?
You’ll still pay taxes well into your retirement. Other than tax-advantaged retirement accounts and investments like HSAs, Roth IRAs, annuities, and life insurance, there are ways to mitigate how much you’re paying, especially for HNWIs.
- Partial In-Service Roll-Overs are little-known strategies one can use to move funds between their 401(k) and IRA. Typically, money in an employer-sponsored 401(k) is unavailable until you turn 59½ or leave that employer. This type of roll-over lets you diversify your traditional investment beyond what your company-sponsored retirement plan allows.
- Donor-Advised Funds are like charitable investment accounts. They allow you to deduct current and future year donations from your gross income for the current year (mind, it will also lower your objective net worth). However, you don’t have to donate all the money that year. Instead, you can donate and invest it as you please.
10. What Should I Know About Required Minimum Distributions (RMDs)?
Required minimum distributions (RMDs) are the minimum withdrawals you must make from almost all of your tax-deferred retirement accounts each year after turning 72. Many of your retirement accounts allow for tax-free growth while deferring taxes until you begin making withdrawals in retirement. RMDs ensure the government collects the tax revenue it’s been waiting on. RMDs must be made by December 31st each year after turning 72.
Retirement plans affected by RMDs include:
- Traditional IRA
- SEP IRA
- SIMPLE IRA
- 401(k)
- 403(b)
- 457(b)
Your RMD is calculated by taking the total balance of your tax-deferred retirement account and dividing it by your distribution period as determined by the IRS. For example: let’s say you’re 71 years old with $250,000 in your 401(k). According to the IRS, your distribution period is 26.5. This means your RMD for that year, for that account, is about $9500. ($250,000 / 26.5 = $9,433) For HNWIs, RMDs from tax-deferred retirement accounts in the millions can spike their retirement taxes. Consult with a wealth manager to determine how to lower your taxes when making RMDs.
One important consideration is that not taking your yearly RMD has costly penalties. You’ll pay a 50% excise tax on the amount that is not withdrawn before the required date. For example, if you’re required to withdraw $10,000 this year but only take out $5,000, you’ll be charged 50% of the remaining $5,000, an extra $2500 in excise taxes.
Here are a few strategies HNWIs can employ when it comes to RMDs and protecting their financial future:
- Charitable Donations from an IRA count towards your RMDs. If you’re required RMD is $10,000, but you donate $5,000 to charity, you’ll only be required to take and pay taxes on the other $5,000.
- Convert to a Roth IRA, since you aren’t required to take RMDs from Roth IRA accounts. You will have to pay taxes on the money exchanged between both accounts, but doing it strategically and over time may lessen the tax burden in the long run. Then, you’re free to withdraw as much tax-free money as you desire from your Roth IRA.
- Qualified Longevity Annuity Contracts (QLACs) can defer your RMDs until 85, as long as the annuity complies with IRS standards. If you don’t need the income generated from your RMDs, QLACs are a way to defer payments, and guarantee monthly payments until death.
Begin Planning Today
High-net-worth individuals should seek the counsel of skilled and knowledgeable wealth managers to ensure the security of their both retirement funds as well as their financial future more broadly. The experts at Polaris Wealth Advisory Group can help answer your questions about tax-advantaged accounts, savings strategies, and Social Security benefits, and chart a course that maximizes your retirement funds.
Reach out today to begin securing your financial future with Polaris Wealth.
This website is solely for informational purposes. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Polaris Wealth Advisory Group unless an investment management agreement is in place.
