Many times, when people evolve in their careers and become wealthy, the transition is gradual.
In fact, many people who achieve wealth don’t view themselves as wealthy. According to Northwestern Mutual’s 2024 Planning & Progress Study, not quite one-third (32 percent) of American millionaires consider themselves “wealthy.” Plus, almost half (48 percent) believe their financial plans need improvement.
As a result, some wealthy people fail to adjust their investments or risk protection in alignment with their elevated net worth.
If they do not work with a financial advisor, many wealthy people find themselves with the same insurance coverage they had when they were just beginning their careers — if they have any at all. And if they have investments, many times, they have not changed their asset allocation to meet their current needs and goals for the long term. Also unaware of how their newfound wealth can affect their tax liability, many fail to focus on tax management.
A high-net-worth individual (HNWI) is typically defined as someone with at least $1 million in liquid assets — cash or investments that can be converted to cash quickly. However, the U.S. Securities and Exchange Commission (SEC) sets slightly different thresholds for its Form ADV: $750,000 in investable assets or a net worth of $1.5 million.
Here are five mistakes we often see HNWIs making before they begin working with us. Please note that this list is in no way exhaustive; it’s just a small sample of common missteps. Also, each individual’s situation is different, so what might be a costly mistake for one person might not be for someone else. Likewise, what might be an effective strategy for one HNWI might not be appropriate for someone else. It’s important to work with your financial advisor to determine the best strategies for you and your situation.
Common HNWI mistake #1: Being underinsured and not having long-term care insurance
Being sufficiently protected from various risks is important for everyone, regardless of income. It can be more important for HNWIs, though, because they typically have more assets and more future income to protect against unexpected tragedies.
Work with your advisor to make sure you are insured at the right level for real risks. If your home is underinsured and it sustains damages that are more than your insurance coverage, you could be forced to dip into your investments to pay for repairs. However, by simply increasing your policy coverage to the appropriate level, you are transferring that risk to an insurance company.
Life insurance is another type of protection that many people fail to adjust once their income levels increase significantly. Life insurance insures your future earnings against your premature death. In addition to property and liability insurance, you should evaluate your need to insure future earning potential or large future expenses if you were to suddenly pass away.
Having sufficient life insurance in place can help your family maintain financial stability after you’re gone. Plus, some life insurance policies build cash value over time, which you could use to supplement your retirement income, pay off a mortgage or fund a child’s or grandchild’s education, for example. Another benefit of life insurance is that any death benefit that is paid to your beneficiaries is done so free of federal income tax.
You also want to make sure you have the appropriate coverage with your health insurance policy. If you plan to sign up for Medicare when you turn 65, work with your advisor to determine if you should maintain the same level of coverage you had before turning 65. Most people’s medical expenses rise with age. Those expenses can, again, force you to tap into your investment portfolio if you have insufficient medical insurance.
Long-term care (LTC) planning is an area many HNWIs fail to plan for properly. Anyone between the ages of 58 and 65 needs to have a plan in place, even if that plan is to self-insure or live with the risk. However, we advise transferring the risk of needing LTC to an insurance company.
Even if you can afford an extended stay in a high-end facility to receive 24/7 care without depleting your investment portfolio, there are some compelling reasons not to self-insure.
For one reason, it can ease the strain on your family if you or your spouse experience declining health. Your family members will be more likely to seek assistance for care much more quickly if there is an LTC insurance policy in place; they will view that care as already being paid for and available. Plus, statistics show that providing care to a loved one has major mental-health, physical and relational impact on loved ones. Owning a LTC insurance policy enables your loved ones to focus on what’s most important: their relationship with you.
Another reason to purchase LTC insurance is that, as a HNWI, you will not qualify for Medicaid coverage, which requires people to deplete most assets before receiving benefits. Even if you could afford to pay for high-quality care, wouldn’t you rather have an insurance company pay for it, giving you the ability to leave more of your assets to your children and/or to your favorite causes?
Common HNWI mistake #2: Not adjusting your asset allocation
Portfolio diversification is essential for high-net-worth portfolios. Our goal is to balance your risk and enhance your returns using a strategic mix of assets, geographic spread and sector allocations.
As your net worth increases, more investment options become available to you. You begin to gain access to certain alternative investments and funds that are available only to HNWIs.
The 2023 High-Net-Worth Asset Allocation Report report from Long Angle reveals how HNWIs had their assets allocated in different categories of net worth. Those with under $5 million in investments tended to diversify their portfolios across public equities, fixed income and real estate, with a cautious approach to alternatives. Those with $5 million to $25 million in investments tended to increase their allocation toward private equities, with a slight decrease in real estate investment. And those with more than $25 million in investments significantly favored private equities. This reflects their advanced wealth accumulation and a strategic focus on asset consolidation and legacy building.
Asset allocation is important for every investor, but especially for HNWIs. We want to align your asset allocation with your investment horizon, risk tolerance and financial objectives. Here at FORM Wealth, we keep a close eye on your investments and recommend adjustments when appropriate — so you can worry about other things.
Common HNWI mistake #3: Failing to update estate documents
We see a lot of HNWIs who haven’t reviewed their estate documents in years. Often, people signed these important documents when they were first married or after their first child was born, and they haven’t touched those documents since.
We will work with your estate attorney to make sure your estate plan aligns with your current situation and wishes. Having up-to-date documents can minimize potential legal complications. If there have been significant changes in your assets, family dynamics, legal landscape and/or tax laws, your old documents could be out-of-date. This could lead to improper distribution of wealth, an increased tax burden and/or family disputes. We will also work with your CPA and/or tax attorney to optimize tax-planning strategies within your estate plan..
HNWIs often have diverse assets, including investments, businesses, real estate and trusts. It requires careful planning to ensure proper distribution and tax optimization. Also, estate tax laws often change. This can impact how much of your wealth you can pass on to heirs and your tax liability. We also want to make sure the beneficiaries on your documents are up-to-date. You might be surprised to know how many people leave significant assets to ex-spouses, simply because they did not update their estate-plan documents!
Common HNWI mistake #4: Not considering Roth converstions between retirement and RMD age
A Roth conversion can be a good idea between the time you retire and the time you reach the age at which you are required to make required minimum distributions (RMDs). A Roth conversion can help you avoid RMDs and their associated taxes. Also, it can help you manage your taxable income in retirement. As of 2024, there are no RMDs on Roth IRAs, so your contributions can grow tax-free. Also, your beneficiaries can inherit the money in your Roth IRA tax-free. Completing a Roth conversion before you start receiving Social Security benefits can help you save money.
Again, everyone’s situation is different, so please work with your advisor to determine if a Roth conversion might be appropriate for you. There are some situations in which a Roth conversion might not be ideal — for example, if you aren’t sure what your tax situation will be in retirement, if you will be in a lower tax bracket in retirement or if you plan to relocate to a state with no or lower state income tax.
In 2024, you can contribute up to $7,000 to your IRAs if you are under the age of 50 or $8,000 if you are age 50 or older.
Common HNWI mistake #5: Not letting your family know your final wishes
We realize it can be uncomfortable to have certain conversations with family members, including those regarding money and mortality. One of the hardest decisions people make in the estate-planning process is how much, and when, to tell their children about their final wishes. However, failing to have these difficult situations with your family while you are able to do so can result in uncertainty, guilt, stress and other negative emotions when you or your spouse passes away.
Leaving a well-designed plan behind — and communicating it with your family members — is one of the best gifts you can give them. Once you have your estate plan completed, we recommend scheduling a family meeting. This will give your family members time to think of questions to ask so they understand the details of your plan. You’ll want to discuss whom you’ve chosen to be the executor and trustee of your estate, how you want your assets to be distributed, any charities you want to support with a legacy gift and other important topics.
We can facilitate this meeting for you and your family if you like. Having a knowledgeable but impartial third party present to field questions can make the process much easier.
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If you are a high-net-worth individual, you have no doubt worked extremely hard to get where you are, and we want you to stay there! We can show you some wealth-preservation strategies you might not be aware of, and we will monitor your portfolio regularly to make sure you are in the best possible financial situation at all times. We partner with our HNWI clients not only to continue growing their wealth but also to protect and preserve those assets.
