Baby boomers currently hold 50% of the total wealth in the U.S., with over $78 trillion in assets. While, certainly, not every member of this generation is rich, those who have achieved great wealth live by a set of rules and behaviors that helped them to reach and maintain their status.
They Practice Charitable Giving
While it may seem counterintuitive to give away money when trying to maintain wealth, high-net-worth baby boomers often give to charity regularly for the tax advantages.
“Many people that give to charity do so on an annual basis, so if you have an unusually high level of income, it can make sense to bunch donations you’d normally make over several years into a single year when they’ll reduce your taxes the most,” said Jeremy Bohne, founder and financial advisor at Paceline Wealth Management.
“For large donations, it can make sense to create a donor-advised fund account to comfortably complete your gift for tax purposes before year-end, while giving you time to grow what you’ve contributed by investing it, and then later distributing it to a cause of your choice so you don’t feel rushed to make a decision.”
They Utilize Tax-Loss Harvesting
The wealthy may be more prone to major investing losses, and while this is never a good thing, they are sure to utilize the tax advantages that can come from this.
“If you have investments that have experienced a loss, sometimes it can make sense to harvest losses for tax purposes,” Bohne said. “Just keep in mind that the goal is to avoid loss-making investments, so it tends to be focused on investments that were recently made during a year when markets are down.”
They Make Tax-Efficient Investments
Because taxes can take a significant chunk out of your wealth, high-net-worth boomers are careful to make tax-efficient investments.
“When people have accumulated a large amount of money, their taxable investment accounts tend to be their largest. That’s because excess cash flows of high-earning households greatly exceed 401(k) contribution limits, so most of their investments aren’t tax-advantaged,” Bohne said.
Boomers in a high tax bracket may take advantage of opportunities to invest in tax-free investments such as municipal bonds.
They Max Out Their Employee Benefits
Wealthy baby boomers who are still working take advantage of catchup contributions and contribute the maximum amount to their 401(k) plans each year.
“Maximizing 401(k) contributions can be very helpful while you’re in a high tax bracket,” Bohne said. “This way, when you eventually make withdrawals, you’ll likely be taxed at a lower rate in retirement.”
They also contribute as much as possible to health savings accounts (HSAs).
“Contributing to a health savings account [provides them with] tax-free dollars to use for medical expenses now and in retirement,” said Tylor Willis, SVP, managing partner and wealth advisor at UMB Bank.
They Don’t Keep Too Much Money in Cash
Wealthy boomers invest their money rather than stash it in savings.
“Cash on hand should be well organized with a specific purpose, such as monthly budgeting, an emergency fund or large purchases that you’re planning to complete. For anything else, it should be invested in a way that is compatible with when and how it will be used,” Bohne said.
They Let Their Money Work For Them
Wealthy boomers don’t make rash decisions based on swings in the market.
“An investment strategy is crucial to the success of baby boomers,” Willis said. “However, in this strategy, baby boomers know they need to be patient, have a long-term plan and not react to the daily peaks and valleys of the stock market.”
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