It is not enough to build and grow your wealth. You also need to preserve it. Wealth preservation means safeguarding the wealth you have accumulated so that you do not lose it. Furthermore, for parents or those who have heirs, wealth preservation also involves ensuring that it can be transferred to the next generation as intact as possible.
Note that you can lose wealth in different ways. These include too aggressive and unreasonable investment strategies and activities, unforeseen expenses such as medical expenses due to critical illnesses and the financial impacts of disasters, and tax obligations. This article lists and described the different strategies for preserving your wealth.
5 Key Wealth Preservation Strategies: How To Preserve Your Wealth
Preserving wealth requires a different discipline than creating and growing it. It involves general decisions and actions aimed at minimizing or managing risks, as well as specific investment decisions centered on ensuring that your wealth remains as intact. Take note of the following key wealth preservation strategies:
1. Get Adequate and Comprehensive Insurance Coverages
Insurance is a risk management tool. For example, when you get car insurance, you manage the financial risk that comes from unforeseen damages to your vehicle. Your insurance will pay for repairs and even replacement so that you would not incur out-of-pocket expenses. The same is true for other forms of non-life insurance policies such as fire insurance and house insurance, as well as travel insurance among others.
Getting life insurance is also a major strategy for preserving your wealth. An insurance policy that comes with a death benefit allows your beneficiaries to have substantial money to pay estate taxes or tax obligations that come from transferring your wealth to your heirs. The same policy can also be an effective tool for creating generational wealth.
Other more specific life insurance products protect both policyholders and insured individuals from unexpected occurrences that require large sums of money.
Remember that you are an individual with the potential to generate income. You are your best asset. Several incidents can result in a temporary or permanent loss of your income-generating potential while others can force you to use up all of your life savings or liquidate the assets you have accumulated throughout the years.
For example, disability insurance can provide a lump sum or regular income in the event you are unable to perform work due to a disability. Health insurance, as well as other related products such as critical illness and long-term care insurance, can provide needed cash to pay for medical expenses and give you a better chance of recovery.
Insurance acts as a safety net that gives you cash benefits so that you would not have to use your savings and other assets in case of unforeseen expenses. Hence, it is essential to get insurance policies even before you start building your wealth through investments. Some also prioritize getting insurance first before building their savings.
However, keep in mind that it is not enough to get insurance plans. There are different insurance products with different uses. Make sure that your policies have adequate coverage.
2. Review Your Investment Strategies and Portfolio Regularly
Our financial goals and objectives change in each life stage. The same is true for our risk profile. For example, individuals in their 20s and 30s have the privilege to invest in high-risk and high-return assets and securities become time is on their side. Those who are in their 50s and above do not have the same luxury as their younger counterparts.
Unmarried and single individuals do not have heavier responsibilities apart from ensuring their financial well-being. They can take a higher level of risk if they have little to lose. Those who are starting or have their own families should prioritize the financial security of their spouse and children in case of their untimely demise.
It is critical for you to review your overall financial strategy, especially your investment strategies, as well as your investment portfolio regularly as you go through each life stage or whenever a major life event transpires. Both your strategies and portfolio should be adjusted in accordance with your evolving goals and objectives, as well as your risk profile.
For those who have accumulated a considerable amount of wealth, especially those who are in their 50s and above, it is suitable to have a balanced portfolio.
A balanced portfolio includes investments in high-to-moderate risk investments in assets, securities, and other vehicles, as well as low-risk vehicles. High-risk investments allow individuals to still grow their wealth further while low-risk investments provide a certain level of returns while keeping the investment as intact as possible.
Those who are in their retirement years and have enough funds to cover their expenses in their entire lifetime may also opt for a more conservative approach to investing, especially if their goal is to pass on their accumulated wealth to their heirs. These include retaining investments in stable and investing in low-risk vehicles such as money markets and bonds.
Some might also opt to channel their investments on vehicles that provide guaranteed payouts. Certain life insurance plans and mutual funds provide regular income while keeping the original invested amount either intact or as intact as possible.
Keep in mind that it is essential to implement an investment strategy that protects your wealth across all life stages and major life events.
4. Manage and Minimize or Reduce All Possible Tax Obligations
Wealth management includes tax management. Taxation can undermine your wealth. Some investment strategies have notable tax implications. Remember that you will be taxed as long as you generate income. Even transferring your wealth can be taxed either through estate tax or donation tax. Taxation happens whenever assets move.
Active investing and trading incur capital gains tax whenever the investment earns. Remember that capital gains tax is a tax on the profits you have earned when you sell something that has increased in value. Accumulated taxes from frequent buying-and-selling activities can be substantial. This is a disadvantage of active investing and trading.
Holding period matters when determining capital gains tax. Long-term investments have lower tax rates. Passive investing is ideal for wealth preservation.
Interests can also be taxed. The United States treats most earnings from interests as ordinary income subject to income tax. These include interests on deposit accounts and certificates of deposits, dividends on credit unions and cooperative banks, interests on loans you make to others, and interests on insurance dividends and annuity contracts.
Those who hold qualified interest-earning assets and securities must pay tax on the annual accrual on these investments. The total tax obligation is calculated at the yield to maturity at the date of issuance. However, not all interests are treated as income. State and municipal bonds in the U.S. are exempted from federal income tax.
Your heirs can also be obligated to pay estate tax upon your demise. In the United States, a federal estate tax is levied on estates amounting to a particular amount. The amount was $11.7 million in 2021 and $12.06 million in 2022. Most multimillionaires set up a life insurance policy for the specific purpose of covering estate tax.
Some individuals in their 60s and 70s also opt to move their accumulated retirement fund or wealth into a trust. Doing so allows them to grow and preserve their wealth while potentially minimizing their income and estate taxes. Others implement various gifting strategies either to minimize their tax obligations or pass their wealth to their heirs gradually.
Remember that it is important to become aware of all tax obligations to implement tax-saving measures and avoid incurring tax-related penalties.
4. Prepare a Hassle-Free Wealth Transfer Strategy for Your Heirs
Your wealth can be your legacy to your family or organizations and causes you support. However, receiving wealth can be a strenuous process for your heirs and beneficiaries, particularly if you failed at including legacy planning in your overall strategy. You also have to ensure that your wealth remains as intact as possible.
Legacy planning or wealth transfer strategy should also be an important part of your overall strategies for preserving your wealth. Remember that unwise investment decisions can erode the value of the assets you have accumulated over the year and taxes can have a significant impact on the amount of investments you have built and grown.
For starters, you need to know what assets you have and where you have them. Doing so entails keeping copies of all documents pertinent to your investments such as certificates of deposits, agreements or contracts with pooled fund managers, land titles, and stock and bond certificates, insurance policies, among others.
Keep all these documents in a file and make them readily accessible to relevant individuals such as your heirs and beneficiaries or lawyers and advisors.
Preparing a will is also important to avoid conflicts among your heirs and beneficiaries. This document should explain in detail how you wish your wealth to be distributed. Having this important document ensures that your wealth goes to rightful individuals or organizations or remains preserved and productive for future generations.
You can also name your beneficiaries in certain financial products. For example, life insurance products serve as an easier tool for you to both generate generational wealth and name the recipients of insurance proceeds. You can also opt to elect beneficiaries on your bank accounts, other savings plans, and retirement funds.
If you own a business, it is also critical to plan how you want your organization passed on, especially if something unexpected happens to you. You can include this in your will. You may also consider purchasing a life insurance policy to fund your business in case of your demise and have a buy-sell agreement among your partners via a life insurance policy.
Note that you can also begin transferring your wealth to your heirs or beneficiaries in a gradual manner either using tax-minimizing gifting strategies.
5. Get Expert Help from Advisors, Trustees, and Executors
There are several benefits to having a financial advisor. These include helping you make informed decisions about your finances and providing you with relevant guidance following your financial goals and objectives. A competent advisor provides you with objective recommendations and fact-based insights.
However, choosing one can be complicated because there are different classifications of financial advisors. Each has its specialization. For starters, there are those who specialize in portfolio management. Some are accredited to sell financial products such as life insurance policies, bank-related products, and pooled fund products.
Other advisors specialize in tax management and estate planning. These professionals typically have credentials and backgrounds in accounting and law.
Those who are looking to come up with strategies for wealth preservation can opt to choose different financial advisors along their different life stages or as their financial goals and objectives evolve. Individuals who are new to investing can benefit from having a generalist who can help them develop their goals and objectives.
However, for those who are seeking to grow their wealth further and are willing to take higher risks, portfolio managers might be suitable. These professionals specialize in making investment decisions and carrying out investment activities on behalf of their clients. They are trained to develop and implement investment strategies.
Individuals who are looking to preserve their wealth to keep it intact either throughout their lifetime or when passed through their heirs and beneficiaries while allowing some room for growth will benefit from multi-disciplinary advisors who specialize in financial planning, portfolio management, tax management, and estate planning.
Some accounts provide dedicated services to individual clients. There are also lawyers who work as financial advisors providing services related to tax and estate.