Family health and the costs of long-term care and financial support for extended family have emerged as major concerns for high net worth investors and their families, with family health perceived as the biggest risk to family wealth, according to a new survey.
The survey, by U.S. Trust, polled 711 high net worth adults in the U.S. with more than $3 million in investable assets. It found that 47 percent of the respondents have created a financial plan to address long-term care needs that they and their spouse or partner might need, but only 18 percent have a financial plan that accounts for parents’ long-term care costs.
Only one-quarter (27 percent) of baby boomers and 16 percent of those who are over age 68 say they ever expected their parents might turn to them for financial assistance. Yet, one-third of Generation X and nearly half (46 percent) of Generation Y expect their parents or in-laws to rely on them for financial assistance at some point in their lives.
Sixty-three percent of wealthy people feel responsible for financially supporting their parents or in-laws if needed, even if it jeopardizes their own financial security, and 55 percent feel a responsibility to provide financial assistance for less financially fortunate siblings if they were to need it. Fifty-six percent of wealthy parents say they provide financial support to their adult children.
Nearly half (46 percent) of respondents have provided substantial financial support (not a loan) to adult family members other than their own spouse or partner. Two-thirds (69 percent) do not have a financial plan that accounts for the financial needs of any of these other adult family members.
The study found that the wealthy have a heightened sense of financial security and have shifted their investment priorities from asset protection to asset growth. Yet their well-documented aversion to risk still prevails. Lower risk trumps the pursuit of higher returns as a priority in managing their wealth. Despite this, investment risk is one of three broad areas, including family wealth and retirement planning, where U.S. Trust found a disconnect between goals and proactive wealth planning.
“The majority of people we surveyed grew up in middle-class families and created their own wealth,” said U.S. Trust president Keith Banks in a statement. “They don’t see themselves as wealthy, and many are unaware of risks and circumstances that grow increasingly complex as wealth accumulates. The wealthy have been disciplined about protecting their assets from market loss, but may have a false sense of financial security. They are not adequately planning for family health concerns or for the retirement that they want. We need to shift the conversation about wealth management to these important topics and expand their understanding of risk.”
Eighty-eight percent of people surveyed say they feel financially secure right now, and 48 percent feel even more financially secure today than they did five years ago. Those who don’t feel confident about their future financial security are more likely to be women, members of Generation X (adults aged 33 to 48) and households on the highest tier of the high net worth segment, all of whom share a primary concern about income in retirement.
Six in 10 (60 percent) high net worth investors say asset growth is a higher priority than asset preservation, a reversal of goals from a year ago when nearly six in 10 (58 percent) said that asset protection was more important. Yet, nearly two-thirds (63 percent) still say that reducing risk and achieving a lower rate of return is more important than pursuing higher returns by increasing risk.
A little over half (56 percent) of high net worth investors have a large amount of funds still sitting in cash accounts. Only 12 percent are content leaving their cash on the sidelines, yet few (16 percent) have immediate plans to move it. Two in five plan to gradually invest cash holdings over the next two years, and 35 percent have no plans to invest it.
Fifty-seven percent of respondents said that pursuing higher returns regardless of the tax impact is a higher priority than minimizing taxes. Only 34 percent feel very well-informed about the impact of recent tax law changes on the total return of their investment portfolio.
Only 37 percent of respondents, including 42 percent of men and 30 percent of women, feel very well-informed about how the tax law changes affect their income. And two in three respondents do not feel well-informed about strategies available to them to help minimize the impact of taxes on income, investments or their estate. Nearly seven in 10 (69 percent) of high net worth investors aren’t changing investment strategy in order to minimize taxes.
The majority of wealthy investors (86 percent) agreed that a long-term buy-and-hold approach still is the best growth strategy, with 35 percent strongly agreeing with this.
Sixty-two percent of high net worth households, including 52 percent of those still working, said they are very confident they will have sufficient income in retirement, in contrast to the rest of the U.S. population.
Six in 10 non-retirees have been calculating their retirement income by reviewing expected distributions from retirement savings accounts. Yet a large number have not adequately accounted for the impact of inflation (47 percent), taxes on their investment income (52 percent), life expectancy (56 percent), the cost of long-term care (62 percent), or any financial support that might be needed by their children (80 percent) or parents (82 percent).
Three-quarters of respondents have not adequately factored into their retirement planning any increase or decrease in real estate values. Yet 23 percent of retirees and 52 percent of non-retirees (including 39 percent of baby boomers) say primary residential real estate is important to funding their retirement.
Only one in three high net worth adults under the age of 49 envisions working beyond age 65. Meanwhile, six in 10 baby boomers, many already of retirement age, now have plans to work beyond age 65.
Once retired from their current occupation, 11 percent of respondents say they are likely to continue working full-time in a new endeavor and 41 percent expect to continue working on a part-time basis. More than half (54 percent) of the wealthy would like to spend time volunteering.
The report, “Insights on Wealth and Worth,” found that the transfer of wealth and values is important in high net worth households, and that attitudes and behaviors about money, work and charitable giving begin to take shape early in life within the home. This year’s survey found that generational gaps in attitudes about leaving an inheritance have narrowed and that work ethic and the transfer of financial skills and knowledge have the greatest influence on the next generation.
Only one-quarter of all survey respondents attribute the majority of their wealth to an inheritance. Those who have inherited wealth are more likely to want to leave an inheritance themselves. Seventy-seven percent of people who inherited the majority of their wealth, and 63 percent of those who earned it, consider it an important goal to leave a financial inheritance to the next generation.
Two in three Baby Boomers do not expect to receive an inheritance; 57 percent of adults under the age of 32 do expect an inheritance. Sixty-four percent of Baby Boomers, compared to 78 percent of adults younger than age 32 and 72 percent of those over age 68, think it’s important to leave an inheritance.
Only two in five wealthy parents (42 percent) agree strongly that their children are/will be well-prepared to handle their inheritance. Few wealthy parents believe their children will be mature enough to handle their wealth before the age of 25. Just 39 percent of parents whose children already are age 25 or older have fully disclosed their wealth to children, while 53 percent have disclosed just a little and 8 percent have disclosed nothing at all. The two most common reasons for not disclosing wealth to children are (1) overall aversion to the topic, having been taught never to discuss wealth with anyone; and (2) parents’ concern that disclosing information about family wealth will negatively affect their children’s work ethic.
Eighty-eight percent of parents agreed that their children would benefit from discussions with a financial professional. One in three (31 percent) respondents received formal financial training themselves from a professional advisor. Yet only 16 percent of parents have provided, or have plans to provide, their children with access to formal financial skills training.
Two-thirds of wealthy parents say they would rather have their children grow up to be charitable than to be wealthy.
Eighty-nine percent of wealthy parents believe their children appreciate the value of a dollar and the privileges of growing up in a family with good fortune. However, half of parents (51 percent), particularly those with young children, think their children feel entitled to a lifestyle that was worked hard for, and 47 percent worry that, by growing up without knowing what it’s like to go without, their children may not attain the same level of success. When it comes to estate planning, U.S. Trust found that, while the basics, such as a written will, are in place, comprehensive planning is incomplete. Survey respondents cited the top three goals of estate planning as (1) ensuring the needs of a spouse are met; (2) minimizing estate taxes; and (3) minimizing the administrative burden of settling one’s estate.
Despite awareness of the importance of estate planning, the survey found that nearly three-quarters (72 percent) of respondents do not have a comprehensive estate plan, including 84 percent of those under the age of 49, and 65 percent age 49 or older.
Approximately one-half (55 percent) have never established a trust of any kind, primarily for two reasons: procrastination and the mistaken notion that outlining wishes in one’s will precludes the need for a trust.
Six in 10 respondents have named, or intend to name, their spouse or partner as executor of their estate. Only 32 percent of people consider the financial knowledge and skills of the person they name as their executor. Having sufficient legal and financial knowledge was cited as the top difficulty in serving as an executor by those who already have served, particularly by women.
Two-thirds (67 percent) of respondents say they have organized their personal, financial, medical and legal records and information in one place, but nearly half (46 percent) have not informed the executor of their estate about how to access the records. Fifty-five percent of respondents say they have organized passwords for accessing digital records or accounts, but 63 percent have not specified their wishes authorizing access to the passwords or to any online assets.
The survey found a desire to use wealth in a way that reflects personal goals, passions and tangible assets. In addition to leaving too much cash on the sidelines, the survey also found a limited understanding of innovative, risk-based approaches to portfolio construction and insufficient planning to protect some of these non-financial assets.
Sixty-five percent of wealthy households surveyed own investments in some type of tangible asset, ranging from real estate to oil and gas properties to farmland, a trend particularly evident among younger investors. One-third (35 percent) of investors under the age of 32 say that tangible investments are important to their overall wealth strategy given the current tax, political and economic environment.
Six in 10 wealthy individuals feel that they can have some influence on society by how they invest, and 45 percent agree that it’s a way to express their social, political and environmental values. Nearly half (46 percent) of respondents feel so strongly about the impact of their investment decisions that they would be willing to accept a lower return from investments in companies that have a greater positive impact. Forty-four percent would be willing to take on higher risk.
One-half (51 percent) of those surveyed, including 65 percent of women and 67 percent of investors under age 49, think it is important to consider the impact of investment decisions on society and the environment. Yet only one in four investors has reviewed their investment portfolio to evaluate its impact on these concerns.
Six in 10 (59 percent) high net worth individuals dedicate a portion of their wealth to the collection of valuable assets such as such as fine art, watches and jewelry, antiques, fine wines and rare coins and books or classic and high-performance cars. The majority say they collect primarily for enjoyment and the intrinsic value of the collection, versus expecting a return, which may explain why so few have taken steps to protect their collections as they might other financial assets. Only about half of those with collections have insurance. Only 19 percent of collectors have discussed or outlined their wishes for the collection with future heirs.
Additional survey findings can be found at www.ustrust.com/survey.
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