Keeping It

WALL STREET JOURNAL personal finance columnist Jason Zweig recently made this observation: Getting rich isn’t the hard part, he said. “Staying rich is the hard part.”

On the surface, staying rich might seem easy. After all, you simply need to build a balanced portfolio and then withdraw from it at a reasonable rate. Sure, there are stories about lottery winners and professional athletes going broke. But you might assume that phenomenon—having a hard time staying rich—is limited to such extreme cases.

In my experience, however, it’s a challenge for everyone. That, I think, is because the skills and strategies required to retain wealth are different from those required to build it. What to do? Here are some of the approaches that I’ve seen work well.

Portfolio (Part I). When it comes to building a portfolio, most people think first about risk. That makes sense. But it’s important to recognize that there’s such a thing as being too conservative. You might, for example, feel that the ultimate “safe” portfolio would be one invested entirely in U.S. Treasury bonds. While that would certainly offer safety in one respect, it would also be enormously risky—because of the exposure to inflation. Consider that, in just the past 20 years, the dollar has lost about a third of its purchasing power—even though inflation has been historically low. Counterintuitive as it may seem, a key ingredient in maintaining wealth is taking sufficient risk.

Portfolio (Part II). Back in the fall of 2008, when the financial crisis hit, Harvard University found itself in a difficult position. With a large part of its endowment tied up in hedge funds and illiquid private equity investments, the university faced a cash crunch. It had to lay off hundreds of employees. To raise cash in a hurry, the school began selling investments at fire-sale prices. It was a disaster. None of us should make that same mistake. Even if it feels inefficient, keep plenty of cash and bonds, so you can weather a rainy day.

Budgeting. Mention the word “budgeting” and a lot of people recoil. But if your goal is to preserve wealth, especially after you stop working, I favor a form of budgeting. The approach I recommend is to set annual allocations for each of three major spending categories: general household expenses, charitable giving, and gifts to family.

For your household expenses, set up automated transfers from your investment account to your checking account. That’ll ensure that you stay on budget or, at least, highlight when you go over. For charitable giving, I often recommend donor-advised funds for their tax benefits. But they provide another benefit, which is that they make it easy to track contributions and donations on a year-to-date basis. What about gifts to family? Try to complete the gifts once a year—and all at once. In combination, these three strategies should help you stay on budget without the pain of a traditional budget.

Spending. The expression “penny wise, pound foolish” sounds elementary. But in recent decades, certain categories of expenses have dramatically exceeded others. Foremost among them: college tuition, which has risen at an egregious rate. As I’ve noted before, tuition represents the single biggest obstacle to many families’ financial security. Fortunately, it’s not mandatory to pay $80,000 a year. There’s now more data with which to make informed college choices. If you can contain big expenses like this, that might pack more punch than a lifetime of penny-pinching on everything else.

Creative solutions. Economists like to talk about the $20 bill theorem. It says that you never find money simply lying on the ground because somebody else would have already picked it up. By the same token, it may not seem worth the effort to look for ways to substantially cut your budget or increase your income. But both exist.

Consider my friend—let’s call him Jim—who has two children a year apart in age. Recognizing the way the college aid formula works, Jim convinced his older child to take a gap year after high school. The result: Both children went through college during the same four years, yielding Jim tens of thousands of dollars of additional aid.

Taxes (Part I). In retirement, taxes represent a double-edged sword. On the one hand, retirees have much more control over their tax rate. On the other hand, it requires a fair amount of diligence on an annual basis to exercise that control. What to do? Work with your accountant or advisor—or both—to develop a tax-smart “decumulation” plan for your annual withdrawals from savings.

Taxes (Part II). If you’re still working and have charitable intentions, a useful tax strategy is to front-load a donor-advised fund. Suppose your annual giving totals $5,000 a year. You could continue to give at that rate into retirement, but the value of the tax deduction will likely fall—and it may even be eliminated. An alternative: If you’re well-heeled, you might consider making one big contribution—say, $50,000 or $100,000—to a donor-advised fund in your last year on the job. That way, you’d get a huge deduction at a high tax rate. You could then dole out that sum in $5,000 annual increments during your retirement.

Insurance. Most of us understand the importance of life and disability insurance, but it’s good to review these periodically. During the first half of your career, you might need to bump up coverage levels periodically. In the second half, your accumulated savings might allow you to decrease coverage. Another insurance recommendation: Secure plenty of umbrella coverage.

Plan B (and C). In making a financial plan, I always find it useful to ask what levers would be available if things don’t go according to plan. Could you downsize or sell a second home? Liquidate a life insurance policy? Request more college financial aid from the bursar’s office? Secure a reverse mortgage? None of these is pleasant to think about. But I’ve found it’s easier to sleep at night if you know what financial levers are at your disposal.

Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam’s Daily Ideas email, follow him on Twitter @AdamMGrossman and check out his earlier articles.

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