26/8/2023. Retirement. The long-awaited golden years where all the hard work (and smart investing) is supposed to pay off. But for high net worth individuals (HNWIs), reaching retirement isn't as simple as hanging up the jacket and booking a cruise. The unique challenges and considerations that accompany substantial wealth make the transition more nuanced.
From my perspective as a wealth manager, yes everyone wants to save and invest well during their working career; but once we retire, the huge range of chosen lifetyles and priorities really underlines that everyone is different.
Here's some of the main concerns and priorities for HNWIs. And it's not all about picking the best golf courses (a subject I know absolutely nothing about!).
1. Protecting Wealth from Market Volatility
Hitting the Bumps of the Market
Much like trying to stop the car just before you hear the bump, navigating market volatility as you approach retirement is all about planning and anticipation, and less about timely reaction. With a significant portfolio, market downturns can be unsettling.
Morever, it's important to understand 'sequence of returns risk' - the effect of a major downturn early in retirement is more dangerous than the same downturn a few years later, even if average growth rate is similar in both scenarios.
Action Point: Ensure you have a properly diversified portfolio. We all know spreading investments across various asset classes will reduce the impact of any single market downturn, but for HNWIs a genuine focus on broad diversification is helpful, and may include a selection of alternative and private investments.
2. Estate and Succession Planning
Leaving a Legacy, Not a Tax Bill
Sometimes HNWIs can be more worried about how their wealth will impact their heirs than enjoying it themselves. Good estate planning sets the mind at ease, and provides the comfort of leaving behind a legacy - not a tax nightmare.
If you are an international citizen, where you choose to live will have an impact. If you have UK domicile (a tax term, which is not the same as residence), maybe think about options to mitigate future inheritance tax.
Action Point: Engage in thorough estate planning. More than just updating wills, think about establishing trusts, and consider tax implications in the different jurisdictions where you hold assets overseas.
3. Sustainable Income Streams
Ensuring the Golden Goose Keeps Laying
Having a lot saved up is great, but ensuring it provides a sustainable income during retirement is essential. You want to ensure your lifestyle doesn't take a hit.
Action Point: Real estate investments offer regular income, but risk illiquidity in emergencies and can be tax-unfriendly. Think about a tilt towards dividend-paying stocks within your portfolio, and of course bonds and fixed income investments.
4. Health and Longevity Risks
Living Longer, But at What Cost?
Modern medicine is fantastic; we're living longer. But with longevity comes increased health costs, and for HNWIs, standard health insurance might not cover luxury treatments or international care.
Action Point: Look into premium health and long-term care insurance. Ensure you're covered for the best treatments, wherever they might be.
5. Philanthropic Endeavors
Making a Difference, the Millionaire Way
Many HNWIs view retirement as an opportunity to give back. But where to start?
Action Point: Think about your philanthropic goals. Whether establishing a foundation or donating to existing causes, how will you ensure your money makes the impact you desire (or continues to, in the case of some of my clients already involved with charities)?
6. Inflation Concerns
When Your Millions Buy Less
Inflation is the silent wealth eroder. Over time, even a small inflation rate can significantly reduce purchasing power. During our working life, inflation may not be so noticeable because our income rises over time also. But once retired, protecting our living standard requires factoring in inflation.
Action Point: Assess your portfolio returns and projections in light of prevailing inflation rates, and consider assets that provide a degree of inflation protection, such as real estate, certain commodities and precious metals, and quality blue-chip stocks.
7. Navigating Complex Tax Environments
Keeping More of Your Hard-Earned Money
Global investments mean global tax implications. It's not about evasion; it's about smart, legal optimisation.
Action Point: Consult with a tax professional familiar with international tax law. Much like wills and estate planning, professional fees for good advice taken now will pay dividends in the future.
8. Managing Family Expectations
When Everyone Knows You're Wealthy
There's often pressure (sometimes unspoken) on HNWIs from family members regarding wealth distribution.
In a real situation, I assisted a wealthy client with a rather younger wife, to set up a trust for the benefit of their children. The trust fully provided for the wife's lifetime income needs but did not allow capital access. This was at her own request - allowing her to defend against future pressure from family and her local culture once she was widowed.
Action Point: Engage in open family discussions about wealth. Consider setting up family trusts with clear distribution rules.
9. Reinvesting in New Ventures
Because Retirement Doesn't Mean Boredom
Many HNWIs look to reinvest in new ventures during retirement, not so much for the money, but for interest and intellectual stimulation, and also sometimes the thrill. It's not for everyone, but for a HNWI who's been a workaholic all their life and with few hobbies, investing can be a wonderful way to get enthused about something (notwithstanding my own biased viewpoint!).
Action Point: Look for passion projects or industries you're interested in. Remember, don't invest in what you don't understand; better yet, learn to understand what you didn't before!
10. Maintaining Privacy and Security
Keeping Your Wealth and Life Discreet
In the digital age, the privacy of HNWIs is increasingly under threat, with media exposure creating increased risk of fraud, cyber-attacks, or worse. Don't skip over this item - the risk is real.
If you've made significant money from any kind of corporate activity, your name is 'out there' and the bad guys are constantly looking for easy targets. Be less easy. And a city that's safe for back-packers may be less so for luxury travellers.
Action Point: Invest in personal and digital security measures. This might mean anything from a security assessment of your residences, review of digital security measures, safekeeping arrangements for important documents and passcodes, or even a discreet personal security detail when traveling to some of your bucket-list (but risky) locations.
In conclusion, retirement for HNWIs isn't just about relaxing and reaping your rewards from years of hard work. It's about strategic planning, ensuring that wealth lasts, and that the legacy left behind is one of impact and value.
So, as you ponder over the next exotic vacation spot or which golf club to join, do take a moment to consider these essential priorities. Your future retired self will thank you. And if you ever get puzzled navigating this complex world, remember, there are experts out there to assist.
Photo credit: Asad Photo Maldives