Reaching the $1 million mark in your investment portfolio is a significant milestone. It reflects years of diligent saving, investing, and navigating the market. However, achieving this level of wealth is just the beginning of a new phase—wealth preservation.

For high-net-worth individuals (HNWIs) and those approaching retirement, preserving and growing wealth becomes increasingly important. This blog provides general strategies for effective wealth preservation once your portfolio surpasses the $1 million threshold.

Understanding Your Financial Goals

Before considering any specific strategies, it's crucial to clarify your financial goals. Are you preparing for retirement? Do you want to pass wealth on to the next generation? Or are you looking to support philanthropic causes? These goals will impact your approach to wealth preservation.

• Retirement Planning: If retirement is on the horizon, consider how long your assets need to last and how much income you'll require. The U.S. Bureau of Labor Statistics reports that, on average, Americans need approximately 70-80% of their pre-retirement income to maintain their standard of living in retirement.
• Estate & Legacy Planning: If your goal is to leave a legacy, consider the implications for estate taxes. As of 2024, the federal estate tax exemption is $12.92 million per individual, but this figure is subject to change. Consult with an estate planning expert to navigate tax strategies and maximize what you pass on to heirs.
• Philanthropy: For those interested in charitable giving, strategies such as donor-advised funds or charitable trusts can provide potential tax benefits while supporting causes you care about.

1. Optimize Tax Efficiency

Tax efficiency can be crucial for helping preserve wealth. Implementing effective tax strategies can help you retain more of your income and investment returns, ultimately boosting your overall financial health. Here are several key strategies to consider:

Tax-Advantaged Accounts

• Maximizing Contributions to Retirement Accounts: Retirement accounts like IRAs (Individual Retirement Accounts) and 401(k)s can potentially offer significant tax benefits. Traditional IRAs and 401(k)s allow you to contribute pre-tax dollars, which can help reduce your taxable income for the year. The funds in these accounts grow tax-deferred, meaning you won't owe taxes on the investment gains until you withdraw the money, typically during retirement when you might be in a lower tax bracket. As of 2024, the annual contribution limit for 401(k)s is $23,000, and for IRAs, it is $7,000, with catch-up contributions available for individuals aged 50 and over.
• Roth IRAs and Backdoor Roth Conversions: Roth IRAs, on the other hand, can offer tax-free growth and withdrawals, provided certain conditions are met. Contributions to Roth IRAs are made with after-tax dollars, but qualified withdrawals, including earnings, are tax-free. For high-income earners who exceed Roth IRA income limits, a backdoor Roth conversion is an effective strategy. This involves contributing to a traditional IRA and then converting the funds to a Roth IRA. This conversion strategy allows you to bypass income restrictions and benefit from Roth IRA advantages, although taxes on the converted amount are due in the year of the conversion.

Tax-Loss Harvesting

• Offsetting Gains with Losses: Tax-loss harvesting is a strategy where you sell investments at a loss to offset capital gains from other investments. This can help reduce your taxable income and overall tax liability. For example, if you realized $10,000 in gains from selling some investments, and you incurred $5,000 in losses from other sales, you can use those losses to offset your gains, reducing the taxable amount to $5,000.
• Deducting Capital Losses: The IRS allows you to deduct up to $3,000 in capital losses per year against other income, such as wages or salaries. If your total capital losses exceed $3,000, you can carry over the excess losses to future years. This strategy not only helps reduce your current year’s tax liability but can also provide tax benefits in subsequent years. By carefully planning your sales and loss recognition, you can help optimize your tax position and potentially lower your overall tax burden.

Charitable Contributions

• Reducing Taxable Income Through Donations: Charitable contributions can provide substantial tax benefits. Donations to qualified charities are deductible from your taxable income, helping reduce the amount of income that is subject to tax. This strategy is especially beneficial for high-net-worth individuals looking to give back while also achieving tax savings.
• Using Donor-Advised Funds and Charitable Remainder Trusts: For substantial gifts, consider more strategic options such as donor-advised funds (DAFs) or charitable remainder trusts (CRTs). A DAF allows you to make a charitable contribution and receive an immediate tax deduction while distributing the funds to charities over time. CRTs, on the other hand, provide a charitable deduction upfront and allow you to receive income from the trust during your lifetime, with the remainder going to charity upon your death. Both options offer flexibility and can be tailored to meet your charitable giving goals while helping to maximize tax benefits.

2. Utilize Cash Reserves

Having an adequate cash reserve is a crucial aspect of wealth preservation. Cash reserves can potentially offer a financial safety net that provides liquidity, helping you to cover unexpected expenses without needing to disrupt or liquidate long-term investments. This strategy can be essential for maintaining financial stability and helping ensure that your long-term investment strategy remains intact, even during times of financial uncertainty.

Determining the Right Amount of Cash Reserves

• General Guidelines: A common rule of thumb is to maintain cash reserves equivalent to six to twelve months of living expenses. This range is designed to provide a buffer for most financial emergencies. For example, if your monthly living expenses amount to $5,000, you should aim to have between $30,000 and $60,000 in cash reserves. This helps ensure that you can cover essential expenses and maintain your standard of living during unexpected events.
• Personalization Based on Circumstances: The ideal amount of cash reserves can vary based on individual circumstances, such as job stability, income sources, and personal risk tolerance. For individuals with fluctuating incomes or those in industries prone to volatility, a higher cash reserve may be prudent. Conversely, those with stable incomes and multiple income streams may find a lower reserve adequate.
• Considerations for Retirees: For retirees, maintaining cash reserves can be even more critical. As reported by the Employee Benefit Research Institute (EBRI), retirees face unique challenges, including healthcare costs and longevity risk. Having a sufficient cash reserve can help manage these expenses without having to draw from investment accounts, which could be adversely affected by market conditions.

Where to Hold Cash Reserves

• Cash and Cash Equivalents: Consider keeping cash reserves in highly liquid, low-risk accounts such as savings accounts, money market accounts, or short-term certificates of deposit (CDs). These options provide easy access to funds while helping minimize the risk of loss. Money market accounts, for instance, often offer higher interest rates than traditional savings accounts and are a suitable place for cash reserves.
• Avoiding High-Risk Investments: While it may be tempting to invest cash reserves in higher-yield options like stocks or real estate, it is essential to prioritize liquidity and safety. Investments with higher potential returns often come with higher risks and cash reserves are meant to provide stability and immediate access to funds.
• Regular Review and Adjustment: Cash reserves should be reviewed periodically to help ensure they align with your current financial situation and goals. Changes in income, expenses, or financial goals may necessitate adjustments to your cash reserve amount. For instance, if your monthly expenses increase or if you experience a significant change in income, it may be necessary to adjust your cash reserves accordingly.

3. Diversify Your Investments

Diversification remains a cornerstone of wealth preservation. By spreading your investments across various asset classes, industries, and geographic regions, you help reduce the risk of significant losses due to market volatility or sector-specific downturns. Diversification helps ensure that your portfolio is not overly reliant on a single asset or market trend, aiming to balance risk and reward over time. While traditional diversification includes stocks, bonds, and real estate, high-net-worth individuals (HNWIs) should consider broadening their diversification strategy to incorporate the following elements:

• Alternative Investments: Incorporating alternative investments into your portfolio can help enhance diversification and potentially increase returns. Alternative investments include assets such as private equity, hedge funds, commodities, real assets, and venture capital. These assets tend to have a lower correlation with traditional markets, meaning they may perform differently than stocks or bonds during market fluctuations. According to the 2023 Global Hedge Fund Report, hedge funds and other alternative assets can offer opportunities for higher returns, especially in times of market uncertainty. However, it’s important to note that these investments often come with increased risks, such as reduced liquidity and higher fees, and may not be suitable for every investor. Nonetheless, for those seeking diversification beyond traditional markets, alternatives can provide a compelling option for wealth preservation.
• Geographic Diversification: Geographic diversification allows you to spread your investments across multiple regions, reducing the impact of any one country's economic downturn. For example, if the U.S. market experiences a recession, investments in international markets could help buffer your portfolio from losses. The International Monetary Fund (IMF) projects that emerging markets will grow at a faster rate than developed economies over the next decade. Countries like India, Brazil, and China are experiencing rapid economic development, which could present attractive investment opportunities for long-term growth. Investing in a mix of both developed and emerging markets may help you achieve greater global diversification, helping reduce the risk that any single region's challenges will negatively affect your portfolio.
• Sector Diversification: Another key aspect of diversification is spreading your investments across multiple sectors. Sector diversification helps ensure that your portfolio is not overly exposed to the performance of a single industry. For instance, while technology stocks have performed exceptionally well in recent years, the sector is prone to volatility due to regulatory changes, innovation cycles, and market competition. A well-diversified portfolio should include a balance of sectors such as healthcare, consumer goods, financial services, energy, and utilities. Each sector tends to perform differently based on economic conditions, so investing in a broad range of industries can help mitigate the impact of downturns in any one area. For example, healthcare and utilities are considered more defensive sectors, as they often remain stable during economic downturns, while technology and consumer discretionary sectors tend to perform better during periods of economic growth.

4. Incorporate Life Insurance 

Life insurance can play a significant role in wealth preservation, particularly for high-net-worth individuals (HNWIs). Beyond providing financial security for your loved ones, life insurance can be a powerful tool to address estate taxes, help ensure the continuation of your financial legacy, and even serve as a vehicle for charitable giving. For those with significant assets, life insurance offers flexibility in managing wealth transfer and estate planning needs, while also potentially helping to preserve the overall value of your estate.

Choosing the Right Policy for Your Needs:

There are several types of life insurance policies available, each offering different benefits based on your financial goals and wealth preservation strategy:

• Term Life Insurance: This is the most straightforward type of life insurance, providing coverage for a specific period, such as 10, 20, or 30 years. It’s often the most affordable option, but it does not build cash value. Term life insurance is ideal for individuals looking for temporary coverage to help protect their families during their working years or while they still have significant financial obligations.

• Whole Life Insurance: Whole life insurance provides coverage for your entire lifetime, as long as premiums are paid. In addition to the death benefit, whole-life policies accumulate cash value over time, which can be borrowed against or withdrawn during your lifetime. This cash value component makes whole life insurance a potential tool for wealth accumulation and long-term financial planning.
• Universal Life Insurance: Universal life insurance offers more flexibility than whole life insurance, allowing you to adjust your premiums and death benefits over time. It also helps build cash value, but the investment component is typically tied to market performance. Universal life insurance is well-suited for individuals looking for both lifelong protection and the ability to adapt their policy as their financial needs evolve.

Choosing the right type of life insurance depends on your personal financial situation, estate planning needs, and overall wealth preservation strategy. Working with a wealth preservation manager who understands the nuances of life insurance can help you identify the most effective policy to meet your goals.

5. Have an Estate Plan

Estate planning is more than just drafting a will—it's a comprehensive strategy for managing your assets and helping ensure your wealth is distributed according to your wishes. For high-net-worth individuals (HNWIs), estate planning is a critical component of wealth preservation, helping to safeguard your assets, minimize taxes, and provide for your heirs and loved ones. It’s about creating a detailed plan that reflects your values, legacy, and long-term financial goals.

Key Components of an Effective Estate Plan

A well-crafted estate plan should include several key elements to help ensure that your wealth is managed and transferred seamlessly upon your passing:

• Will: The foundation of any estate plan is a will, which outlines how your assets should be distributed after your death. A will helps ensure that your wishes are legally documented and reduces the risk of disputes among beneficiaries.
• Power of Attorney: A power of attorney (POA) designates a trusted individual to manage your financial affairs if you become incapacitated. This helps ensure that your investments, bills, and other financial matters are handled without the need for court intervention.
• Healthcare Directives: A healthcare directive, or living will, specifies your preferences for medical care if you’re unable to make decisions for yourself. Paired with a healthcare power of attorney, this document helps ensure your healthcare choices are honored.
• Trusts: For HNWIs, establishing one or more trusts can be an essential estate planning tool. Trusts provide flexibility and control over how and when your assets are distributed. They can also help minimize estate taxes and protect your assets from probate or creditors. Types of trusts include revocable living trusts, irrevocable trusts, and charitable trusts, each serving a specific purpose based on your estate planning goals.

Final Thoughts 

Reaching a $1 million portfolio is a commendable achievement, but preserving and growing that wealth requires a strategic approach. 

Preserving wealth requires thoughtful planning, diversified strategies, and a comprehensive approach to managing your financial future. Whether you're preparing for retirement, planning your estate, or protecting assets for future generations, partnering with professionals who understand your goals can make all the difference.

At NJM Wealth Preservation Strategies, we offer guidance rooted in decades of experience, helping clients explore strategies that fit their unique circumstances. Our team is dedicated to providing personalized financial solutions designed to help you achieve long-term financial security. 

Contact us today to learn how we can assist in developing a customized plan for preserving and protecting your wealth.

Disclaimer

This blog is intended for educational purposes only and does not constitute financial, investment, tax, or legal advice. The strategies and information provided are general in nature and may not be appropriate for every individual.