DETERMINING A NEW RETIREMENT TARGET IN A HIGH-INCOME WORLD

The landscape of retirement planning for high-income earners has drastically shifted. The traditional million-dollar retirement fund can now be far from sufficient due to inflation, ever evolving lifestyle needs, and more. This blog explores the updated financial planning considerations that could be necessary for securing a comfortable retirement, emphasizing the importance of a significantly larger retirement fund and providing practical steps to achieve this goal. Inflation can significantly erode an individual’s purchasing power over time, which has caused the traditional advice of saving a million dollars for retirement to be outdated.

Take, for example, a high-earning young couple around the age of 35, inflation can reduce the value of their savings by approximately 2.5 times over the next 30 years. This means that by the time a 35-year-old couple retires at 65, their current lifestyle which costs $15,000 a month will equate to $36,000 a month in future dollars. To maintain their lifestyle, this couple needs an annual retirement income of $432,000 in future dollars. Considering Social Security might cover about $100,000, they need an additional $332,000 annually from their personal retirement savings. Using a common methos of a safe withdrawal rate of 4%, they would require a nest egg of approximately $8.3 million. This may ensure that they do not deplete their principal and may be able to sustain their current standard of living.

In order to achieve their retirement goals, high-income earners should first maximize contributions to their retirement accounts but also need to save additional funds to meet their target. These can include maxing out Roth 401(k)s and 403(b)s. Each individual can contribute $23,000 annually to their Roth 401(k), totaling $46,000. With employer matches, this amount could increase to around $60,000 annually. These earners may also utilize Backdoor Roth IRA strategy by contributing up to $7,000 each to these accounts per year. Outside of retirement contributions, consistent monthly savings can also significantly enhance an earner’s ability to reach their goals. For example, saving $7,000 monthly, starting from zero, over 30 years at a 7% return, will accumulate approximately $8.6 million. This involves disciplined saving well beyond pre-tax retirement contributions, directing $2,000 monthly into brokerage or other investment accounts.

A high savings rate can be highly beneficial to a successful retirement but may also require careful budgeting and possibly even lifestyle adjustments. Two strong rules of thumb to ensure these earners are saving responsibly are to limit housing costs to 30% of take-home pay, ensuring they do not exceed $6,900 monthly, and to avoid “lifestyle inflation” by setting aside a portion of income for purely discretionary spending while prioritizing savings. This discretionary spending should also be focused, avoiding unnecessary high-cost or luxury items if these purchases do not align with long-term financial goals.

One major pitfall for a couple earning $500,000 annually may be overspending on housing, which could potentially derail their savings plan or disrupt financial stability. To maintain balance, it’s recommended that they adhere to a recommended housing budget, ensuring that their home purchase fits within their financial means. Alongside prudent housing choices, diversifying investments is an essential strategy for investors, and potentially avoiding the allure of high-risk, high-reward opportunities. Discussing these investments with a financial advisor can help investors determine if they are aligned with long term savings and retirement planning goals. Focusing on a diversified, low-cost portfolio can help ensure steady growth with manageable risk.

For couples with children, another significant expense that could come int the picture is planning for private education, which can be as costly as college tuition and potentially impact savings. Planning education expenses carefully and considering all schooling options could alleviate some of the financial burdens.

Lastly, unforeseen events such as divorce could severely impact financial stability. Consulting an attorney and potentially considering a prenuptial agreement and maintaining separate accounts for significant expenses are among some prudent measures that could protect financial health. By carefully managing these aspects, high earning couples can help safeguard their financial future and achieve long-term stability.

The path to a secure retirement for high-income earning couples may involve recalibrating financial targets to account for inflation and lifestyle changes. By maximizing retirement contributions, maintaining disciplined savings, and avoiding common financial pitfalls, this goal can be much more attainable. Aiming for a larger multi-million-dollar nest egg may provide a comfortable and sustainable retirement, providing peace of mind and financial security for the future.