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Ten Ways to Turn Wealth into Financial Security

Hollywood sensation Marilyn Monroe died broke. Singer Willie Nelson earned millions, lost millions, still owes millions to the IRS. The list could go on, naming big-bucks sports figures, entertainers, entrepreneurs and many folks who accumulated it a few dollars at a time by hard work and thrift. ("Make Your Own Living Trust," Dennis Clifford, Nolo Press, April 2000).

Too many people have learned that making a fortune is the easy part. "In the long run," cautions multi-millionaire entrepreneur and educator Robert T. Kiyosaki, "it's not how much you make, it's how much you keep, and how many generations you keep it." (Robert T. Kiyosaki, Rich Dad Poor Dad, New York: Warner Books, 1998)

What can you do to protect the financial success you've achieved, provide for your own security and pass on your estate to heirs you choose? There are no guarantees. However, there is much you can do to help turn wealth into long-term financial security.

Steps to help protect your wealth include the following:

  • Recognize the difference between income-statement rich and balance-sheet rich, stresses Professor Thomas J. Stanley, author of The Millionaire Mind.

    If you earn $500,000 a year, but spend $503,000, you are broke, worse off than the person who earns $50,000 but spends only $45,000. You may be income-statement rich, but you are balance-sheet poor. (The Millionaire Mind, Thomas J. Stanley, Ph.D., Kansas City: Andrews McMeel Publishing, 2000).

    Stephen Ragatz agrees. Ragatz is a Chartered Financial Consultant and a Chartered Life Underwriter, and vice president of estate planning and business succession planning for Swenson Anderson. "One of the biggest mistakes people make is they look at their income versus their net worth," he explained in an exclusive interview with New York Life.

  • Become financially literate. And then keep learning all your life, building financial knowledge and expertise. Learn how to read a financial statement, how to understand a prospectus, how to put money to work for you. "Today, I often meet people who are too busy to take care of their wealth," says Kiyosaki. The more you know about money, the better you will be able to use and control it to achieve your objectives.
  • Don't confuse debt with wealth. If you buy a $3 million house with a $2.75 million mortgage, you are not worth $3 million. You are $2.75 million in debt. Most affluent families, points out Stanley, live fairly modestly. They avoid debt.
  • Distinguish between assets and liabilities. What is the difference? Explains Kiyosaki: "An asset is something that puts money in my pocket. A liability is something that takes money out of my pocket." In other words, if you want to build and protect wealth, allocate your money to assets that help generate assets.

    Example: If you have $50,000 to use. You can spend it all on a new luxury car, which, in five years, will be worth perhaps $25,000. This is a liability. Or you can put it into an asset (real estate, stocks, even a collector sports car) that holds the potential for an increase in value. If it returns even 5%, after five years, your original $50,000 is now worth $63,800.

    Kiyosaki summarizes the concept simply: "Rich people buy luxuries last, while the poor and middle class tend to buy luxuries first."

  • Get good advice. Entrepreneur Kiyosaki stresses that he does not have to be smart... as long as he can hire the services of people who are. Surround yourself with quality advisors, including a CPA, attorney, insurance professional and other advisors. They will help you protect your assets and enable you to pass them on to the next generation.
  • Accumulate independent retirement money. More to the point, do retirement planning. If you are a business owner, for instance, don't assume you will be able to sell it for the "right" price when you are ready to retire. Rather than put all your eggs in one basket, set aside a percentage of all earnings in conservative assets to help guarantee a secure retirement, no matter what happens to your other assets.

Steps to help preserve your wealth so it can be passed on to the next generation:

  • Know what you want when it comes to distributing your wealth. Have objectives. "All decisions about wealth transfer must be objectives driven," explained New York Life agent Michael Piotrowicz, CLU, ChFC, in an interview. Piotrowicz, an industry veteran who works primarily with clients who own businesses valued at $20 million and up, adds that "I can have two clients with almost identical situations and end up with two totally different plans, based on their objectives.

    "That's why we spend more time talking about family issues rather than financial issues," says Piotrowicz, "to find out their objectives and what is important to them... We address people problems. We ask questions about what to distribute and when. One major goal is to avoid family conflicts."

  • Decide how much control you really need. "Many people simply aren't comfortable giving it away," says Ragatz. "They are reluctant to give up control. This is the case even though the more they are able to give up, the lower their estate taxes will be."

    The solution to succession planning problems may include lifetime gifts and the use of trusts. But these involve giving up a degree of control. It's important to decide how much you want to give up.

  • Prepare the next generation and discuss your intentions with your family, recommends Ragatz. "Too often, there is very little communication with beneficiaries. The kids have no clue about what they will receive at the parent's death, and they have even less of an idea what to do with their inheritance when they receive it." One of the things Ragatz stresses is the importance of teaching heirs how to use their money, not just spend it.

    Piotrowicz agrees. It's called succession planning, and it is crucial. "There can be a lot of emotion involved. However, it is important, when possible, to be honest and objective with heirs," he says, adding that there may be tough decisions to make. "If a business is involved, do you sell it or make it available to the heirs? Most of all, discuss what to do with the money."

  • Protect your wealth from estate taxes and other pitfalls with life insurance. Life insurance is the last piece of the puzzle," adds Piotrowicz. "Life insurance is a tremendous tool to help achieve distribution goals, all generally income-tax-free. It is the only asset that has that kind of tax advantage."

Guarantees? There are none. However, by addressing the above issues, you can dramatically increase the potential for turning the wealth you've achieved into long-term financial security for yourself and for your loved ones.


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Ten Ways to Turn Wealth into Financial Security

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