How Do You Create Lasting Wealth?
For most people, steady, ongoing careers and climbing the corporate ladder is the foundation of their wealth. Career success and a good salary, or building and growing your own business, is the means to a lifestyle you enjoy now and the promise of a stable financial future.
For others, an inheritance, a windfall from an investment or employee stock, selling a business, or perhaps an inheritance from a wealthy uncle you never knew. But is it enough to create lasting wealth, no matter how high your salary, your business success, or how big the windfall is? How about generational wealth?
If your goal is to have enough to live the lifestyle you want and pass down wealth to provide ongoing security for your family, what do you need to consider besides money?
Black swan events happen, markets go through extended downturns, and unexpected life or job issues can derail plans.
That’s where financial planning and comprehensive wealth management comes in. We break down some of the things you must consider on the journey to lasting wealth.
Start by Creating Your Definition of Wealth
Rather than focusing on a number, try defining wealth as a lifestyle. This gets you closer to understanding what you need and when you need it. Once you know your goals and values, you can build a financial plan that balances your lifestyle now with the goals you want to achieve. Working and saving until retirement at age 65 was the norm for older generations. Younger generations may have different or multiple goals and want to achieve them sooner.
• Early retirement
• One spouse stops working
• Start a business
• Buy a second home
• Pay off all debt and be able to self-fund kids’ college
Make Informed Choices
The word that resonates most strongly with investors today is flexibility. Whatever the individual definition of wealth is, it often starts with a desire to have more control over time and work.
Understanding the trade-offs can help you make decisions that are right for you.
For example, if retiring early is the goal, a common approach is to sacrifice lifestyle and time in the short term to reduce expenses, increase savings, and maximize income through work. There’s even a name for this – the FIRE (Financial Independence, Retire Early) movement. However, there’s a limit to how long you can make sacrifices and continue to feel satisfied with your life. Instead, there are several “levers” you can pull to create a better balance:
• Extend your retirement age
• Re-evaluate risk in your investment portfolio
• Reduce high-interest debt and shift to lower-interest debt
• Optimize tax efficiency
This is just one example, and there’s no one correct answer. However, being thoughtful about your goals, exploring different scenarios, and considering potential benefits from the financial planning toolkit can put you on a path to maximize your financial independence and flexibility.
Expand Your Options
Investing as early and consistently as possible is the first step to lasting wealth. Ensuring that you are maxing out tax-advantaged retirement savings, Roth IRAs, and taking advantage of health savings accounts and 529 plans can put money to work and reduce your short and long-term tax burden.
Expanding beyond employer-provided retirement plan options by creating a taxable but tax-efficient pool of assets may help bridge the gap between early retirement and traditional retirement ages. In addition, placing dollars into a taxable account can help you diversify your portfolio, refine your risk profile, and potentially enhance your long-term portfolio returns.
For more sophisticated and eligible investors, private equity and private debt can diversify an overall investment strategy. But careful and thoughtful consideration should be given as these types of investments carry higher risks and potentially higher returns and are less liquid than daily traded mutual funds and exchange-traded funds (ETFs).
In addition, many individuals are prioritizing sustainable investing, which focuses on investing in companies that prioritize social responsibility and environmental sustainability. As a result, crafting and customizing a globally diversified portfolio around your values is easier than ever.
Control Your Risk
Ensuring that you have lasting wealth means protecting it. A thorough review of all your insurance coverages considering risk exposure and potential liability is critical. Depending on your lifestyle and at what stage of life you are in, you will want to ensure you have sufficient coverages in the following areas:
• Homeowners, auto, and personal liability insurance
• Life insurance for families with minor children
• Personal disability insurance for high-earning professionals
• Long-term care insurance for those that cannot self-insure
• Adequate business and cybersecurity insurance for business owners
Start Estate Planning Now
Ensuring that your wealth can provide for your family for decades to come is something you should do proactively. A good estate plan is both thoughtful and efficient. It ensures that your wishes are carried out and preserves as much of your estate as possible for your dependents, not Uncle Sam. For many families, a revocable trust can simplify the transfer of assets, keep your estate private, and be customized in ways a will cannot while not relinquishing control of your assets. In addition, trusts can help protect your children’s inheritance from creditors and potential divorce or give structure to a child needing help with decision-making after your death.
Additionally, philanthropy, charitable giving, and family gifting strategies can be critical in your estate and tax planning. A qualified advisor can help you understand how much you can give now and provide a customized plan with the best tools to help you achieve your short and long-term giving goals while increasing tax efficiency.
Last (but most important!), Tax Planning
Annual tax planning is critical to minimizing your tax exposure now and down the road when you are financially independent. Creating tax-free, taxable, and tax-deferred buckets will allow you the flexibility to take control of your taxes in retirement.
Columbus Street performs a thorough review of your taxes annually, and well before the tax filing deadline so you are informed and can act on tax planning or additional retirement savings opportunities.
Taxes are an overlay in every wealth management decision we help our clients make; understanding the trade-offs and tax implications of where every dollar of your income and wealth is diverted is critical in customizing a plan tailored to your goals and values.
Achieving lasting wealth requires more than savings and asset growth; it requires understanding your goals and values and the trade-offs of maximizing income versus maximizing your time and freedom away from the office. In addition, incorporating the ever-changing wealth management tools into your situation can help grow and protect your wealth for future generations.
Columbus Street Financial Planning is leveling the playing field by combining investment management and financial planning into one flat-fee wealth management service. As a fiduciary, our clients come first in every decision and aspect of our radically transparent relationship.
Client and advisor relationships should be built on time and complexity rather than the size of your portfolio.
Focus on your dreams, not decimals.
Want to learn more? Schedule a call with us today.
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