Note: This post originally appeared on www.INGUARD.com.
There are now 10.1 million millionaires in the U.S., up from 9.6 million in 2013. At the current rate, nearly 500,000 people will become millionaires this year, ushering them into what is often considered the threshold for high net worth individuals (HNWI).
Whether you are a HNWI or simply in a high tax bracket, wealth management brings its share of challenges and risks. Risk management is essential to protect and grow your personal wealth.
A proactive risk management strategy is built on a two-pronged approach of wealth creation and wealth preservation. Wealth creation is focused on strategically building assets to meet your financial goals. While wealth preservation protects your ability create wealth by accounting for unforeseen circumstances, so you can avoid having to dip into what you've worked so hard to create.
When you develop a risk management strategy, you should consider every angle of your current lifestyle, including your financial health, physical assets, insurance and other programs in place to maintain it. Here are three steps to consider when creating a proactive risk management strategy:
1. Generate passive income. Wealth creation is based on the establishment of passive income through investment in real estate, stocks, mutual funds and more. Developing a diversified and appropriate portfolio for your income, age and lifestyle is essential to long-term passive income.
2. Create tax-efficient wealth. It is important to build a portfolio that provides the most favorable returns combined with low tax rates. Municipal bonds, growth stocks, Roth Individual Retirement Arrangements (Roth IRAs), and tax-exempt mutual funds are typically advantageous for higher tax brackets. Also, if you invest in private company stock, consider an 83(b) election (this will help you save a lot of money on taxes when it comes time to cash out).
Do your research on tax-free investing, or partner with a consultant who can help you navigate tax law.
3. Cover your unique personal risks. Protect your long-term ability to generate wealth through appropriate life and disability insurance policies. You may also want to consider an income protection policy to help provide for yourself and your loved ones.
Having the "deepest pockets" can also be a disadvantage when it comes down to accidents and instances of liability. You may wish to work with a risk management consultant to identify any personal or professional liabilities, and create a custom risk management plan for your life.
As you develop your own risk management strategy, it is important to keep your financial circumstances and goals in mind, as well as your dependents, and your age. To ensure your plan maintains an adequate level of protection, schedule a review to reassess your strategy regularly as your needs change.
For additional risk management tips for high net worth individuals, download our free ebook: "Risk Management for the Rich & Famous."
Image Credit: OTA Photos via Flickr