Moneywise and Yahoo Finance LLC may earn commission or revenue through links in the content below.
If your net worth is between $500,000 and $5,000,000, you’re likely doing better than many Americans.
However, that doesn’t mean you’re among America’s ultra wealthy either. Most banks would define households with a few million to invest as “mass affluent,” while you need at least $30 million to be considered “ultra-high net worth,” according to Investopedia (1).
Simply put, your wealth places you in an awkward bracket: too rich for cookie-cutter retirement planning, while not rich enough for bespoke, white-glove service from an investment bank. If you’re entering retirement as part of this mass affluent cohort, here are some of the unique challenges you might face, as well as how to mitigate them effectively.
For the mass affluent, liquidity could be a key risk, especially if home equity or real estate is a significant part of your net worth.
Not being able to quickly or cheaply convert assets into cash can be a challenge if you’re ever faced with an emergency, and it can also alter some of the underlying assumptions about cash flows and withdrawals in your retirement plan.
This could be why a surprisingly high number of American millionaires (32%) told Northwestern Mutual they do not consider themselves “wealthy (2).” If you share this concern, consider steps to diversify your portfolio into more liquid assets, such as ETFs or bonds, to bolster your finances in retirement.
Life expectancy has been rising across the world in recent decades and that has created a new challenge for retirement planners.
At 65, a typical American man can expect to live another 18.2 years, according to the Organisation for Economic Co-operation and Development, while an average woman can expect to live roughly 20.7 years (3).
A longer lifespan means more time to enjoy retirement and spend time with your family, but it also means more time to experience inflation and a higher risk of health concerns.
At a steady 3% annual inflation rate, it takes nearly 23 years for prices to double. In other words, your $2 million nest egg could have half of today’s purchasing power if you retire at age 62 and pass away at 85.
Amplifying this issue is the fact that your health care needs are likely to rise as you get older, while health care costs across the country have outpaced general inflation in recent years, according to the Petersen-KFF Health System Tracker (4).
Simply put, underestimating longevity risk, inflation or health care costs could put you at risk of outliving your money, even if you’re a multi-millionaire.
Fortunately, there are several tools available to combat these risks, including Health Savings Accounts (HSAs) and Qualified Longevity Annuity Contracts (QLACs). These instruments can help you prepare for medical costs in a tax-optimized way, or secure income regardless of how long you live.
Read More: I’m almost 50 years old and don’t have retirement savings. Is it too late?
If these HSAs and QLACs sound too complicated, you could also consider working with a bespoke financial service like Range.
The platform also offers innovative tax and financial planning expertise — from tax segmentation analysis for real estate through their partner services to the backdoor Roth IRA contribution method. In short, managing a diverse portfolio of assets is the core of Range’s services.
Range also provides 0% AUM fees for advisory services using a flat-fee structure so you can preserve more of your wealth. By comparison, other services typically charge between 0.5% and 2% of your portfolio’s value.
Even better, you can book a complimentary demo with the Range team to see if they’re right for you and your portfolio.
Mass affluent retirees often assume their tax burden shrinks once they stop working, but in reality, it can get worse.
The culprit is the deferred tax liability sitting inside traditional IRAs and 401(k)s, accounts that were tax-advantaged going in but fully taxable coming out. The pressure starts at age 73, when required minimum distributions kick in.
For someone with $2 million in pretax accounts, first-year RMDs can exceed $78,000, taxed at ordinary rates regardless of whether the retiree needs the cash. As balances grow, so do mandatory withdrawals, and this often pushes retirees into higher tax brackets than they occupied while working.
The cascading effects are where RMDs can sting the most. Higher adjusted gross income triggers IRMAA surcharges on Medicare premiums (5), and can subject up to 85% of Social Security benefits to federal tax (6). Partial Roth conversions before age 73 can help, but the timing and amounts depend heavily on individual circumstances.
This is where professional guidance from Advisor.com might be able to help. Their comprehensive platform does all the heavy lifting for you to find vetted tax advisers or planning professionals.
How it works is simple: Just put in a bit of basic information about yourself, like you ZIP code, and what you’re looking. Then Advisor.com will comb their database for a match.
From here, you can book a free call with no obligation to hire so you can make sure you’re working with someone that you can trust.
Join 250,000+ readers and get Moneywise’s best stories and exclusive interviews first — clear insights curated and delivered weekly. Subscribe now.
We rely only on vetted sources and credible third-party reporting. For details, see our editorial ethics and guidelines.
Investopedia (1); Northwestern Mutual (2); The Organisation for Economic Co-operation and Development (3); Petersen-KFF Health System Tracker (4); Medicare Resources (5); IRS (6).
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
