When investors get started on their journey, they look to accumulate as much wealth as possible. The first $100,000 is the most challenging milestone, but wealth compounds more easily once investors reach that point.

However, the mentality shifts once an investor ends up with millions of dollars in their portfolio. Growth remains important, but investors start to prioritize wealth preservation. This new priority gains more significance as wealth continues to grow.

A Redditor finds themselves in this situation and shared a post in the Fat FIRE subreddit. The individual has a successful construction company that helped him amass a $7 million portfolio. The individual has $3 million in a 60/40 portfolio, $500k in a 401(k), and $3.5 million in real estate.

I’ll share some of the ways investors like the Redditor can minimize risk in these scenarios. The Redditor specifically mentions asset protection in the event of bankruptcy or a lawsuit, so the insights will be geared toward those concerns. However, it’s good to speak with a financial advisor if you can.

Retirement Accounts Offer More Protections

Individuals who want to minimize the risk of a lawsuit or bankruptcy taking out their finances may want to contribute the maximum amount to their retirement accounts. 

401(k) plans offer more leverage, as the Employee Retirement Income Security Act (ERISA) protects these accounts from creditors and lawsuits. These accounts are also protected from Chapter 7 bankruptcies, which allow you to preserve a lot of capital under the worst-case scenario.

Individual retirement accounts offer the same protections, but the level of protection you receive varies for each state. Furthermore, there is a limit to how much you can protect from a Chapter 7 bankruptcy. Right now, the limit is a little over $1.5 million. Any excess balance is not protected from a Chapter 7 bankruptcy, but this amount is adjusted every three years due to inflation.

An Umbrella Insurance Policy May Help Business Owners 

The amount of insurance a business owner needs depends on their line of work. People who are offering online products and services don’t need as many safeguards as business owners in the construction industry. 

The Redditor does well in construction and may want to upgrade their umbrella insurance to mitigate their risk. Umbrella insurance covers lawsuits, but it also includes property damage, medical bills, and settlements.

Each insurer is different, and it’s good to compare options before committing to a policy. Insurance policies are good for any construction company, but when it comes to protecting wealth, paying a little extra for additional coverage may be worth it.

Create an LLC for Each Real Estate Property

 

Limited liability companies (LLCs) separate your personal assets from your business assets. Under this arrangement, if a lawsuit takes place, your personal assets are not at risk due to any of your company’s mistakes. While the Redditor likely has an LLC for the construction business, not as many people set up LLCs for their real estate properties.

If you have less than 10 properties, you may want to create an LLC for each property. The advantage of having an LLC for each property is that any lawsuits from one property won’t spill over into additional properties.

It’s more logistical work to manage multiple LLCs and involves small annual expenses for each one, but it will help with wealth preservation. Creating an LLC for each property becomes more difficult if you rapidly scale your real estate portfolio.

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