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Estate Planning

How to Protect Your Wealth from 4 Key Risks

By August 17, 2022No Comments

One of the great rewards of financial success is having confidence that you can fund big, fulfilling plans, like buying a vacation house, having a comfortable retirement, supporting people and causes you care about and leaving a meaningful legacy. But risks to your wealth can pull the rug out from under your plans. We’ll cover those risks and what you can do to combat them so you can keep your wealth plan on track.

The following 4 risks could derail your goals:

  1. High Inflation
  2. Withdrawing From Retirement Accounts in a Down Market
  3. Investing Too Cautiously
  4. Rising Health Care Costs

1. High Inflation

High rates of inflation can shrink the value of your cash and other assets with alarming speed. If the recent rate around 9% 1 were to persist for five years, it would reduce the purchasing power of $100 to just $62.40. Even inflation of 3%, the long-term historical average, halves buying power in 23 years.

Wealthy families can more easily absorb pricier gas, groceries and other day-to-day expenses as long as they’re earning income. But inflation can force them to live more modestly than desired in retirement. More deleterious to their long-term goals may be inflation’s impact on their investments. For instance, inflation, along with the rising interest rates that it typically triggers, drives down the value of fixed-rate bonds, which are often used as a low-risk way to preserve wealth and generate income.

Inflation can also drive down stocks’ prices, especially stocks with fast-growing sales but low current earnings. On the other hand, the stocks of certain types of companies, such as those with the power to raise prices, may perform better during periods of rising inflation. Investors tend to flock to such stocks during inflationary times, driving up share prices. It’s important that an investment portfolio be positioned to account for inflation so that the value of the holdings increases enough to offset rising prices.

2. Withdrawing From Retirement Accounts in a Down Market

As you start to withdraw money from your retirement accounts, you could experience sequence of return risk. This refers to the markets generating a sequence of negative returns over several years at the same time you begin to take withdrawals. This risk means you may not have enough savings to last throughout your retirement. Should you find yourself in this position, take a closer look at your cash flow and see where you could reduce discretionary spending until the market levels out.

3. Investing Too Cautiously

As you age and near retirement, your portfolio allocation should become more balanced in terms of including equities for growth and bonds for capital preservation. The danger lies in tilting your portfolio too far to the conservative side. Whether you’ve been spooked by market corrections or just have a low tolerance for risk, you still need a growth component in your portfolio to help combat inflation, as mentioned above. Growth doesn’t mean taking unnecessary risks; it just means developing a strategy to balance growth and asset preservation to help ensure you can still reach your goals.

4. Rising Health Care Costs

It’s human nature to believe that we’ll live out our lives in relatively good health. But effective planning takes statistical probabilities into account. At age 65, the average American has a nearly 70% chance of requiring long-term care, and 20% will need such care for more than five years.2 Long-term care isn’t cheap: In 2021, the annual median cost of a private room in a nursing home was $108,408.3 And that doesn’t take into account the cost of medical care after accidents or for acute illnesses. Failing to plan for potential health care expenses could seriously undermine the ability of your family to achieve its financial goals.

Preparation, the Antidote to Risk

Significant wealth is usually created slowly and painstakingly. But it can be eroded quickly by risks inside and outside the investment markets. The good news is that comprehensive planning has proven very effective in helping individuals and families preserve their wealth so that they can achieve their goals. Your AdvicePeriod wealth advisor can identify short- and long-term risks to your assets and recommend solutions to preserve and grow your wealth throughout your lifetime.

1United States Inflation Rate, Trading Economics
2 “How Much Care Will You Need?”
3 Cost of Care Survey, Genworth

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