BusinessWeek
Keeping Your Wealth Intact
Tuesday September 4, 8:08 am ET
By Karyn McCormack


By your mid-40s, you've worked for at least two decades and, with any luck, built a nice nest egg. Now, don't blow it.

"Around that time you should be shifting from accumulating assets to preserving assets," says Sue Stevens, director of financial planning at Morningstar (NasdaqGS:MORN - News) and president of financial planning firm Stevens Portfolio Design in Chicago.

One of the challenges for 45-to-55-year-olds is managing very large expenses such as college education and perhaps health care for an elderly parent -- that's why they're often called the Sandwich Generation. "Most people don't realize how much life is going to cost them," says Holly Isdale, head of Wealth Advisory Services at Lehman Brothers (NYSE:LEH - News) Investment Management in New York. In particular, many folks underestimate the cost of retirement, she says. You also need to get a handle on disability costs.

Once you've assessed future liabilities, Isdale recommends keeping your estate plan simple. She sees many people who choose exotic or complex strategies find that their accountant and attorney haven't coordinated with each other and accounts don't get placed in the proper trust. "An estate plan will fail if you haven't done the care and feeding needed," she says. "Pay attention to the details and deal with the little stuff."

Here are some tips from financial planners and experts to help you protect what you've worked so hard for over the years.

Streamline Your Investments

"At this age, oftentimes you get portfolio sprawl," says Christine Benz, director of mutual fund analysis at Morningstar in Chicago. In other words, you have many different investment and/or retirement accounts after working at various companies during your career.

If you have too many investments, you might be "overdiversified," Benz says. As a result, your returns may look like a broad market benchmark, but your costs could be higher. So if you own two large-cap value funds, determine which one is the best by measures such as lowest fees and longest tenured manager, and dump one of them.

Also, make sure you don't own too much of your employer's stock. This is common among senior executives in this age group. Don't own more than 5% to 10% in any one stock, Benz advises, because that introduces a lot of company-specific risk.

Act Your Age

Another trap is letting your portfolio ride without checking your asset allocation. "Make sure you're maturing your portfolio as you grow older," Benz says. To find an appropriate mix of the various types of stocks and bonds, she recommends using Morningstar's asset allocator tool (you'll need a premium subscription).

Embrace Bonds

Educate yourself about bonds, which provide safe and steady income. "One of the biggest stumbling blocks I see is people have become comfortable with stock funds, but are stymied by bond funds," Stevens says.

Start by gradually shifting 5% of your portfolio toward bonds. Once you have about 10% in bonds, work your way up to 30% or 35% in bonds by age 55 or so, Stevens recommends. "By doing that, you're putting money in another pile that you're going to protect," Stevens says. "That's one of the most important things people can do."

You can buy bonds without a fee by going to TreasuryDirect. Stevens thinks this is an ideal time to buy Treasury Inflation-Protected Securities (TIPS) and I Savings Bonds, given that inflation is low and is bound to rise over time.

Buy Long-Term Care Insurance

When you're in your early 50s, purchase long-term care insurance, which pays for nursing-home and home health-care expenses. Given that you're a lot healthier now than you will be in 10 or 15 years, your premiums will be a lot lower, says Mark Kenison, founder of Kenison Financial Services in Charlotte, N.C.

He recommends a policy with three years of benefits that covers $100 a day, or $3,000 a month, given that three years is the average stay in a nursing home. There's no reason to buy a lifetime policy that costs more, and you could be overbuying if you go with a five-year policy, Kenison says.

AARP has a long-term-care insurance policy that's very affordable, Stevens says. She also recommends a three-year policy -- and notes that the price will drop if you sign one with a longer waiting period of up to six months to receive the benefits. Medicare can cover a lot of immediate health-care costs until your policy kicks in, she adds.

Get Your Estate in Order

If you don't have estate documents by your mid-40s, get them. It can be as simple as a establishing a will if your assets are not huge, Stevens says.

A will controls the transfer of your assets when you die. The part of your assets controlled by your will is called your probate estate, explains Charles Aulino, director of financial planning at Glenmede Trust in Philadephia. Many people also establish a revocable living trust (see BusinessWeek.com, 6/18/07, "Estates: Keeping It All in the Family"). This lets you transfer assets out of your name, but you continue to have full use, benefit, and control while you're alive, Aulino says. Anything placed in this trust during your lifetime is removed from your probate estate. This can reduce some of the expenses and delays associated with probate estate settlement upon your death.

Dan Schrauth, a wealth adviser at JPMorgan Private Bank in San Francisco, notes that many people in California have a revocable trust because the probate process in that state can be very lengthy and expensive.

Another advantage of the revocable living trust is you can designate a trustee that can assume financial responsibilities for you if you become unable to manage your affairs.

You also need to set a durable power of attorney, which gives a trusted person the authority to sign documents on your behalf if you become mentally incompetent or die, or even if you revoke the power.

An advance medical directive, or living will, states whether you wish to use extraordinary medical treatment if you become extremely ill or injured. And a medical power of attorney document allows you to give someone the power to make specific decisions about your medical care if you are unable to do so.

Keep Wealth in Your Family

Make sure you have named a trusted family member as the beneficiary of your retirement plans so they can continue to see those assets accumulate tax-free.

To keep wealth in the family over multiple generations and avoid estate taxes, financial planners recommend setting up a dynasty trust (see BusinessWeek.com, 6/29/07, "How Trusts Work"). This is a good idea if your children don't need all their inheritance money, because it can benefit the next generation without being in your taxable estate, says Schrauth.

He notes that you must establish a dynasty trust in a state that permits perpetual trusts, such as Delaware or South Dakota. And with the proper planning, it's also possible to avoid state-level income tax on the accumulated income and gains, he says. "This is a very powerful estate-planning tool," Schrauth says.

Another way to minimize estate taxes and transfer wealth is to make gifts of cash or property to family members. Up to $12,000 per spouse a year can be gifted outright or put in a trust for their children without being subject to the gift tax (the limit over your lifetime is $1 million without being subject to the gift tax). Grandparents can also help pay for your children's education expenses. Tuition payments made directly to an education institution are not classified as taxable gifts, Schrauth says.

One last tip: While you're getting organized, create a "doomsday book" that lists all of your account numbers, phone numbers of institutions, and important documents such as your will. Keep it in a safe and easily accessible place for your family in case something happens to you.