I’ve noticed an overriding concern among my clients. Many ask me this important question. How do I maintain the lifestyle I’ve become accustomed to throughout my retirement? The answer may not be as simple as it first appears. Many people make the mistake of believing that a high income will automatically result in a desirable retirement. People seem to say to themselves: as long as I earn an income that is many times the national average and make good investments, I’ll be okay in retirement. However, I’m not convinced of this. Why do I say this?
I work with many clients who earn a very high income annually, many times higher than the national average. Most Americans would be envious of their incomes. However, when we run an analysis of their retirement goals, based on some concepts outlined in this article, they are often surprised to learn that they cannot retire with their desired lifestyle. If you are thinking about the lifestyle you’ll live in retirement, here are some key concepts you should be considering.
The High Income Fallacy
A high income might actually put you at a disadvantage for retiring with your desired lifestyle. How so? I’ve noticed a trend among high-income earners. No matter how much money people make, they seem to spend accordingly. Most people do not seem to save more even though their incomes increase.
Earning a high income can actually have the opposite effect of what you might think when it comes to retirement. How so?
People who earn high incomes tend to live more lavish lifestyles than lower income earners. If they become accustomed to those lifestyles, then they must save a lot to maintain that lifestyle in retirement. If your lifestyle becomes more expensive and you become accustomed to it, you will need more money in retirement than people who are accustomed to a less expensive lifestyle. This does not mean that you shouldn’t afford yourself some of the luxuries in life that you’ve earned. It does mean, however, that you should be aware of how adjusting to those luxuries impacts your retirement needs.
It’s Not About How Much You Earn
Here is the key concept. It’s not how much you earn – it’s how much you keep that defines your retirement lifestyle. To help you keep more of your hard-earned income, here are five key areas to consider:
- Save more than you think you need.
- Look carefully at family relationships.
- Ensure you protect your assets from unjust seizure.
- Take advantage of tax strategies.
- Invest wisely based on your unique retirement goals.
Save More Than You Think You’ll Need
Analyze your current income against expenses. Look very carefully at how you are spending money. In my experience, a close analysis of income and expenses shows many areas where savings can occur but are not. Some key issues to consider include:
- How many of your annual expenses are discretionary versus fixed?
- Are you able to allocate a portion of discretionary expenses to savings on an annual basis?
- How often do you buy a car?
- Do you plan to support weddings?
- Will you buy a vacation home?
- Will you take expensive vacations for the next several years?
- Will your income requirements actually go up the first few years after retirement?
In my experience, working adults tend to spend less than people who just retired and have a lot of time on their hands. New retirees usually are in good health and want to enjoy the fruits of their labors while they are still physically able. This can mean that they spend more in the first few years of retirement than they had anticipated. Make sure your retirement income planning accounts for this phenomenon.
Examine Carefully The Financial Impact Of Family Relationships
The relationships with parents, children and heirs tend to be our most meaningful but also our most complicated relationships. So I recommend that you plan to spend time thinking about these areas.
Caring for parents can be very expensive. Make sure your financial plan accounts for this. Will you bear sole financial responsibility? If you will be contributing with siblings to parental support, how much do you think this will total per year? How many years will you be providing this support?
Find a way to help children become completely financially independent. Kids are staying at home a lot longer these days and parents are living a lot longer. If your children live with you or you support them for ten years longer than you plan, this could have a major impact on your retirement. Here are two articles to help you think about this topic:
- Will My Children Ever Be Truly Financially Independent – one of my articles
- Don't Count On Mom And Dad's Money – by Michael Loizzi
Make a plan to support the educational needs of children and grand-children. Education is a major expense and most loving parents and grandparents want to help in this area. Make sure your plan is tax advantaged and appropriate to your level of wealth so the impact on retirement is mitigated.
Protect Assets From Unjust Seizure
You’ve worked very hard to accumulate your assets. But if they are unjustly taken through legal actions or other attempts at seizure, this could have a major impact on your retirement. Here are some steps to consider for asset protection.
Estate planning attorneys are very important to instituting legal protections. At Whitnell, we are not attorneys, but we recognize the importance of these relationships and actively encourage them. If you have not worked with an estate attorney before, or if your financial situation and assets have changed substantially since last updating your estate, it’s probably time to take some steps in this area.
Insurance products also help protect assets from unjust seizure. Again, Whitnell is not an insurance company and cannot provide expert advice in this area. However, we can help you discover a good insurance partner to help protect your assets, if you do not already have such a partner.
Our role in this process is to make sure you have the right advisors and experts at the table to create a plan that is unique to your situation.
Take Advantage Of Tax Strategies
You might be surprised at how many tax strategies are available to you. Taxation is a key source of wealth transfer – to the government. This can have a sizable impact on how much wealth you retain.
With the increase in tax rates, you should be thinking about tax strategies for the here and now, not just the future. Tax planning is a core strategy of our company and an area where we help your clients make smart decisions with their wealth.
Invest Wisely Based On Your Unique Retirement Goals
Make sure you have a solid plan to grow your wealth through an appropriate investment strategy. Your plan should be based on your horizon to return and risk adjusted for your age. As it relates to retirement, make sure your return projections are based on realistic assumptions, not best-case scenarios.
Don’t assume that growth in wealth through asset appreciation can be the primary source of your retirement income. Savings are the key to having enough money to invest so it can grow over time. The more you save when you are young, the longer the timeframe you give that wealth to grow and mature. Time in market is key to realizing growth goals, not market timing.
Retirement planning is complex for most affluent families. There are so many priorities to balance and so many requirements to satisfy. Caring for parents, children and heirs will almost certainly be the source of your greatest joys in life. But this care should not prevent you from realizing the retirement you’ve always dreamed about. Figuring out a way to balance everything usually requires the help of a dedicated professional who will take the time to listen to you and understand your goals. If you are not sure about your retirement picture, let’s have a conversation.
The information contained in this article is provided for informational purposes only. No illustration or content in it should be construed as a substitute for informed professional tax, legal, and/or financial advice.