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The Best Ways to Protect Your Wealth at Every Stage

When you’re young and entering the workforce for the first time, you don’t have a lot to lose. After all, you don’t need to worry about shielding wealth when you live paycheck-to-paycheck, you don’t own a home, and you have only begun contributing to a retirement plan.

But this dynamic tends to change over the years, and that’s especially true if you’re a good steward of your income. If you save and invest instead of burning through every dollar you earn, you’ll eventually begin to build up a stash of assets that you’ll likely want to preserve. And the more your income, your savings, and your net worth grow, the more concerned you’ll become. 

The Best Ways to Protect Yourself As You Grow Wealth

The thing is, the strategies you’ll use to protect your assets can vary a lot depending on where you are in your journey. You may care about entirely different issues when you reach a net worth of $500,000 than you do when your wealth grows to $1 million or more.

Fortunately, there are a variety of products, habits and techniques you can use to preserve and protect your wealth at every stage. Let’s take a look at the steps you should consider as you work toward the financial future and retirement you really want. 

Net Worth of $500,000+

When you achieve a net worth of $500,000, you have plenty to celebrate — and plenty to protect. Your retirement savings are likely beginning to grow right along with your income at this point, and you may even own a home. But, how do you ensure you can maintain the wealth you have managed to grow so far?

First off, you should make sure you have basic homeowners insurance (or renters insurance) and auto insurance coverage with high liability limits. If you own a home with a mortgage or have children in the family, you’ll also want to buy basic term life insurance coverage worth at least 10x your household income. 

Note that, when it comes to the money you have in a savings account, each depositor has protection from the Federal Deposit Insurance Corporation (FDIC) up to mandated imits. Specifically, the FDIC offers insurance for checking accounts, savings accounts, money market accounts and more with limits of up to $250,000 per depositor and per insured institution. 

Net Worth of $1 Million+

Once you have built up a net worth of $1 million or more, you have the potential to grow wealth even faster due to the power of compounding. You’ve probably heard that “the first million is the hardest,” and it’s true, yet the path to wealth gets easier from here. 

Once you reach this threshold, you’ll want to preserve and protect your wealth with an umbrella insurance policy as a starting point. With excess liability coverage from an umbrella policy, you’ll have protection if someone decides to sue you. This coverage provides more protection above the limits of your homeowners or auto insurance policies.

In terms of savings, you may want to move some money. That’s because, as I mentioned already, you get $250,000 in FDIC insurance per depositor, per institution. If you have $500,000 in savings, for example, you could open another high-yield savings account and have the full amount insured. The downside is that it's a hassle to manage money at multiple institutions.

At this point in your journey, you should also note that employer-sponsored retirement accounts like 401(k)s and pension plans have some protection due to the Employee Retirement Income Security Act of 1974, or ERISA. Thanks to ERISA, these types of plans have unlimited protection in the event of legal liability or even bankruptcy, as do 403(b) plans and 457 plans in most cases. 

On the other hand, IRA accounts (including traditional IRAs and Roth IRAs) are also protected through the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). Thanks to the BAPCPA, these accounts are protected from bankruptcy up to $1,362,800 through the three-year period that ends on April 1, 2022. 

Net Worth of $2.5 Million+

Once your net worth is $2.5 million or more, you can rest assured that you’ve done quite a few things right. Your investment accounts are likely growing at a steady pace, and you’re building equity in your home and other assets you own. 

At this point, you may want to consider starting a business and transferring assets accordingly. The reality is that, like it or not, most experts believe that you cannot become truly “wealthy” if you’re only working for someone else. With your own business, you have the potential to build more wealth and grow your assets while you sleep, and of course to take advantage of various benefits in the tax code for business owners. 

Other moves you can make when you reach this level of wealth include buying more liability coverage in an umbrella insurance policy, and potentially more life insurance to protect your family in the event of your untimely death. Whole life insurance can even make sense at this point in your journey since this type of coverage allows you to build cash value you can borrow against, and to score dividends that are not taxable. Whole life insurance can also be used to pass on wealth to your beneficiaries on a tax-free basis. 

Net Worth of $5 Million+

Once your assets have grown to the $5 million + range, you have “made it” in a financial sense. But now is not the time to be complacent. If you truly want to protect your wealth, you’ll want to be diligent about using the legal processes available to you.

For example, setting up a trust can help you shield assets for your protection, and for potential tax savings. There are two main types of trusts to consider —revocable and irrevocable. An irrevocable trust is typically set up for estate and tax reasons, and to seamlessly transfer wealth to the next generation. However, you give up ownership of assets with this type of trust, which can be problematic in some cases.

With a revocable trust, on the other hand, you do not give up ownership of your assets. This type of trust is also more commonly used to transfer assets to beneficiaries while the grantor (in this case, you) are still alive.

If you’re curious about the type of trust you should set up, as well as other financial moves you should make with a net worth of $5 million or more, it can be helpful to work with a lawyer or an estate attorney.

Final Thoughts

The path to long-term wealth can be bumpy at times, and it will probably be decades long. However, you can take steps to protect what you have so you don’t have to move backwards all along the way.

No matter what you do, you should make sure to diversify your assets so all your eggs are never in a single basket. Diversify across multiple sectors of the economy, stocks and bonds, real estate, and international markets so your net worth is poised to rebound nicely regardless of which economic crisis comes next.