Just as drivers should when merging onto the highway or backing out of a parking spot, investors should be checking their blind spots when considering factors that can impact wealth accumulation.
After all, building a nest egg for future generations can take decades of hard work and discipline — but that wealth can erode quickly if investors aren’t keeping their eyes peeled for hazards along their financial journeys. One estimate indicates that a staggering 70% of families see their hard-earned wealth wiped out by the next generation, with 90% experiencing this pain by the third generation.
While cautionary tales of lavish and wasteful spending certainly exist, the reality is that wealth erosion often stems from the unexpected. To preserve their financial stability, investors should be focused on several key considerations: managing tax inefficiency, bridging insurance gaps and envisioning multiple market outcomes.
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Location, location, location
Investing isn’t dissimilar from real estate — location matters. A lot. The strategic placement of assets within a portfolio to optimize the impact of taxes is a critical consideration for investors aiming to preserve accumulated wealth. Overlooking asset location can prove to be detrimental, as tax drag has the insidious potential to decimate hard-earned gains.
A judicious asset location strategy seeks to mitigate this risk by carefully allocating holdings across taxable, pre-tax and tax-free buckets. When executed correctly, this approach can potentially bolster after-tax returns by a remarkable 5 to 30 basis points — a substantial advantage once compounding returns are factored in.
Investment selection undoubtedly plays a pivotal role in portfolio construction, but minimizing the corrosive impact of taxes on holdings is an equally crucial consideration for those intent on sustaining wealth across generations.
Ensure that you’re properly but not overly insured
Unexpected events tend to whittle away nest eggs more often than one or two poor financial decisions. It’s imperative to contemplate the potential ramifications of the unforeseen — whether that pertains to longevity, health or even unanticipated legal entanglements. Insurance can serve as a formidable bulwark, serving as a protective shield should uncertainties arise.
Insurance acts as a multifaceted tool — it can limit financial damage when adversity strikes and function as a strategic asset to augment portfolios. Products such as long-term care insurance, business insurance or even structured notes can help to diversify investments, introducing a degree of predictability while alleviating tax obligations. Ensuring that comprehensive coverage is meticulously tailored to the unique needs of a family can help to offer financial security across generations, but it’s prudent to avoid paying exorbitant premiums for policies that may have outlived their usefulness.
Imagine multiple market outcomes
One of the more costly mistakes clients can make concerning wealth preservation is failing to envision the possibility of multiple outcomes regarding the market’s direction.
Market volatility, headline noise and brash market prognostications can exert a powerful influence, compelling investors to make impulsive choices that might negatively impact their wealth. A sobering LendingTree study revealed that nearly 70% of Americans allow emotion to dictate their financial decision-making.
Markets by their very nature are dynamic — they can trend upward, downward or even sideways. It’s critical to stay the course when it comes to adhering to a financial plan and risk appetite, regardless of any imaginable market outcome. Managing assets based upon emotion is always a bad decision, because even seasoned financial professionals can’t time the market.
Another common pitfall that ensnares investors is an inordinate focus placed on individual stocks or holdings that comprise a mere fraction of their overall net worth. An investor’s time and attention are finite resources, far more valuable than any marginal outperformance resulting from these relatively insignificant positions.
Be vigilant
Preserving wealth across generations necessitates vigilance to potential blind spots that could curtail the growth of assets and prove costly over time. Successfully executing a thoughtful asset location strategy, securing appropriate insurance coverage and maintaining a disciplined perspective during market fluctuations can all help investors to safeguard their financial legacies.
Investors who can envision and avoid the aforementioned potential pitfalls may help prevent their hard-earned wealth from eroding over time — setting future generations up for financial success.
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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA .
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