You’ve officially joined the millionaire’s club. This is a major achievement, as most people dream about it, but you actually made it happen.
Now that you have serious money in the bank, it’s time to figure out what you’ll do with it. As a finally savvy person, you want to protect your assets, while also enjoying the fortune you worked so hard to earn.
Much of this multi-step process is different for everyone, but some moves should be made by every new millionaire. Here’s a look at six actions you’ll want to take as soon as possible.
Increase Your Liability Coverage
The last thing you want is to get sued and lose some of your hard-earned money, so Chris Diodato, CFA, CMT, CFP, founder and lead financial planner at Wellth Financial Planning, said you need to enhance your liability coverage using home, auto and umbrella insurance.
“A millionaire’s assets can be a target for lawsuits, so it’s important to make sure you have enough liability insurance,” he said. “Depending on the state you reside in, different assets may be exempt from creditors, so you only need liability insurance for the amount of non-exempt assets you have.”
For example, he said creditors can’t go after the value of your home equity and retirement accounts and/or pensions in the state of Florida. Therefore, if you have a home worth $500,000 with no mortgage, an IRA worth $100,000 and a regular brokerage account worth $400,000, he said you would only need to purchase $400,000 in liability insurance.
Evaluate Old Life Insurance Policies
“Many people first purchase life insurance when they start a family in the event an income-earner dies prematurely,” Diodato said. “The insurance is purchased to help pay the costs of child-rearing and different liabilities, such as mortgages and car loans.”
However, he said you may no longer require the same coverage.
“By the time someone becomes a millionaire, they might have saved up enough to pay these expenses without the need for insurance,” he said. “Therefore, it may make sense to self-insure and cancel out old whole life and term policies.”
Create an Estate Plan
“It is imperative to note in advance how you would want your assets disbursed upon an untimely passing,” Diodato said. “Therefore, a last will and testament is a necessity.”
He mentioned that there are several ways to customize your estate plan to meet your needs.
“If someone wants to really optimize their estate, assigning beneficiaries and transfer-on-death designations on bank and investment accounts is an easy way to let assets pass to heirs and avoid probate — and likely thousands of dollars in legal fees,” he continued. “While drafting your will, it may also be worthwhile to consider whether a living will, durable power of attorney and healthcare power of attorney would be appropriate for you.”
Focusing on Savings With a Tax Benefit
You have the means to put your money in a variety of savings vehicles, but Ariadne Horstman, CFP, RLP at Tamarind Financial, recommended focusing on those that provide a tax benefit, such as retirement accounts and 529 plans.
“Contributing to a retirement fund offers tax advantages while also preparing you better for retirement,” she said. “Contributing to a child’s 529 education fund allows you to save and invest in advance for their education while the funds grow tax free and are not taxed if used for higher education.”
Invest in a Donor Advised Fund
If you’re charitably inclined, Horstman said you might want to put some money in a Donor Advised Fund — for gifting in the near future or later. She advised taking a tax deduction now, especially if this is a high-income period of your life.
“Putting money into a DAF allows you to take a tax deduction in the year contributed, but allows the funds to grow and be gifted later, if desired,” she said. “If you have highly appreciated stock, you can contribute that and take a deduction in that year — some conditions apply — and not pay tax selling stock that has gained in value.”
Create a Comprehensive Financial Plan
Getting started, to allocate your money wisely, Horstman suggested looking at your needs and wants. For example, would you need or like to buy a house and would you use this money for a down payment?
She said to also think about any other important goals you have — i.e., taking a sabbatical, changing jobs, helping a relative, going back to school or traveling for an extended period of time.
“It all depends on the goals of the person in question and what they want to achieve,” she said. “I would suggest doing a comprehensive financial life plan to find out where they are in life, and where they want to go and how can this money help them get there.”
To achieve this, she said you need to make a strategic plan taking into account your goals and dreams. From there, you’ll be ready to optimize the use of your first million.
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