January 2005

The word affluent comes from the Latin affluere: to flow abundantly. Which gives us today’s definition: "Having a generously sufficient and typically increasing supply of material possessions."

But just how generous? Close Merriam-Webster’s and turn to the financial-planning texts, and you’ll find these definitions:

• Affluent investors: individuals with portfolios of $500,000 to $1 million
• High-net-worth investors: people with $1 million or more invested
• Ultra-high-net-worth investors: those who have more than $5 million in investments

Other than having a little more abundance flow their way, are the rich really different from other people?

"It depends on the issue," says Charlie Mueller, senior vice president of personal financial services for Northern Trust. "Does everybody want a better life for their children? Absolutely. Is everybody concerned about the impact of intergenerational wealth transfer on their children? No."

Top financial concerns
What financial issues worry the wealthy? The most important financial goals of affluent investors, according to research by the Spectrem Group, are:

1. Ensuring a comfortable retirement: 42 percent
2. Not falling below their current standards of living: 20 percent
3. Financing their children’s education: 10 percent
4. At least doubling their wealth in the next five years: 5 percent
5. Protecting their estates from the impact of estate taxes: 4 percent

Investors are also concerned about market volatility due to terrorism, the economy and wars in Afghanistan and Iraq, according to the Spectrem Group.

The rich and retirement
Nothing worries the wealthy more than having enough money for retirement.

More than nine out of 10 millionaires worry that rapidly rising health-care costs will significantly affect their ability to enjoy their golden years, according to a survey of 1,312 millionaires by Northern Trust.

"It was surprising to learn that, regardless of age or level of wealth, no one is immune to the devastating affects of spiralling health-care costs," says Thomas Hines, Northern Trust senior vice president and head of the financial planning group.

The millionaires in Northern’s study also worry that large tax increases, stock market declines, personal and family health issues and inflation could make it harder for them to enjoy a comfortable retirement.

One solution: Go back to work.

Many of the millionaires in Northern’s study are working in retirement or plan to. And only one in four investors surveyed by Spectrem Group plan to ever fully retire. Instead:

• 12 percent said they’d never retire.
• 27 percent said they’d pursue a new career.
• 35 percent said they’d work a reduced work schedule.

"Supporting an extended retirement is clearly a concern of the rich as well as the not-so-rich," Mueller says. "While you’re more likely to see millionaires working on corporate boards than greeting shoppers at Wal-Mart, working is definitely one way the wealthy plan to fund their retirements."

How millionaires see the market
Even millionaires were hit by the recent bear market. More than two in three suffered a significant decrease in wealth, according to Spectrem Group’s research.

The richest investors—those with more than $25 million in assets—tended to have the most diversified portfolios and were thus the least likely to experience a serious drop in their wealth.

And that’s the secret to succeeding in even the toughest markets: diversification.

"The bear market of 2000 to 2002 reminded investors of the importance of diversifying," Mueller says. "It’s age-old advice, but it can’t be overstated: Diversify."

Passing prosperity on
Wealth transfer is a top priority for the wealthy.

But despite the fact that 80 percent of the affluent feel confident about their estate plans, for most of them, this merely means that they have created a will.

"For most wealthy people, a simple will is not enough," Mueller says. "To be a successful steward of your wealth, you really need to develop a comprehensive estate plan with a professional."

But financial stewardship goes beyond deciding who will get what and how. It’s also a matter of the impact a new fortune will have on your beneficiaries.

"At Northern, we’ve seen the whole range of the effects of wealth transfer," Mueller says.

"On one end, wealth can exacerbate substance-abuse problems and marital tribulations and can enable a beneficiary to be dependent on family wealth instead of serving as a productive member of society. On the opposite end, we see cohesive, responsible, productive families that are able to transfer their values as well as their wealth from
generation to generation."

Transferring the family values as well as the family fortune may be the secret to breaking the stereotypical make-it-and-lose-it-in-three-generations chain. That’s where the first generation makes the family fortune, the second maintains it and the third squanders it.

To transfer family values, Mueller recommends:

• Educating your children and grandchildren about money and wealth at an early age. Northern provides education through formal courses and forums, as well as through private meetings where clients can bring their children and grandchildren.
  
  
• Involving your children and grandchildren in your plans for your wealth. "Some people don’t want to let their kids know about the extent of their wealth," Mueller says. "But it’s in everyone’s best interest to let them know about your estate plan now instead of leaving a surprise for them to discover at the lawyer’s office after you’re gone."
  
  
• Teaching philanthropy. "The skills people use to give money away are the same as those that allow you to make it in the first place: planning, budgeting, interviewing and people skills, for instance," Mueller says. "Involving the children and grandchildren in the family’s philanthropy demonstrates the importance of being good stewards of wealth."
  
  

The millionaire mindset
Whether you’re already wealthy or just intend to be, one mindset of millionaires that can be helpful to everybody is to consider the life cycle of your wealth.

"There are three phases," Mueller says. "There’s accumulation, where you’re building your net worth. Next is preservation, where your main priority is to maintain what you’ve earned in real terms. And the third is transfer, where you’re distributing your wealth to the next generation and the generation after that.

"Regardless of how many zeroes there are on your net-worth statement, this approach will help you think through the issues you face now and will face in the future in managing your wealth."

Want more information?
To learn more about accumulating, preserving or distributing wealth, contact your Relationship Manager, or call the Northern Funds Center at 800/595-9111.