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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purchasing power over time, which has caused the traditional advice of saving a million dollars for retirement to be outdated.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.
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Securities and advisory services offered through EWA LLC dba Equilibrium Wealth Advisors (a SEC Registered Investment Advisor).
* Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate.
* Corporate bonds are considered higher risk than government bonds but normally offer a higher yield and are subject to market, interest rate and credit risk as well as additional risks based on the quality of issuer coupon rate, price, yield, maturity, and redemption features.
* The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. You cannot invest directly in this index.
* All indexes referenced are unmanaged. The volatility of indexes could be materially different from that of a client’s portfolio. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. You cannot invest directly in an index.
* The Dow Jones Global ex-U.S. Index covers approximately 95% of the market capitalization of the 45 developed and emerging countries included in the Index.
* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
* Gold represents the afternoon gold price as reported by the London Bullion Market Association. The gold price is set twice daily by the London Gold Fixing Company at 10:30 and 15:00 and is expressed in U.S. dollars per fine troy ounce.
* The Bloomberg Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.
* The DJ Equity All REIT Total Return Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.
* The Dow Jones Industrial Average (DJIA), commonly known as “The Dow,” is an index representing 30 stock of companies maintained and reviewed by the editors of The Wall Street Journal.
* The NASDAQ Composite is an unmanaged index of securities traded on the NASDAQ system.
* International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.
* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.
* The risk of loss in trading commodities and futures can be substantial. You should therefore carefully consider whether such trading is suitable for you in light of your financial condition. The high degree of leverage is often obtainable in commodity trading and can work against you as well as for you. The use of leverage can lead to large losses as well as gains.
* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
* Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
* Past performance does not guarantee future results. Investing involves risk, including loss of principal.
* The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee it is accurate or complete.
* There is no guarantee a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
* Asset allocation does not ensure a profit or protect against a loss.
* Consult your financial professional before making any investment decision.
In 15 minutes we can get to know you – your situation, goals and needs – then connect you with an advisor committed to helping you pursue true wealth.
EWA, LLC dba Equilibrium Wealth Advisors, is an SEC-registered investment advisory firm providing investment advisory and financial planning services to clients.
Investments in securities and insurance products are not insured by any state or federal agency.
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In 15 minutes we can get to know you – your situation, goals and needs – then connect you with an advisor committed to helping you pursue true wealth.