It may sound backwards, but those who have spent decades earning the most should be the last to run out of money in retirement.
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High earners often face retirement vulnerability because their investment portfolios fail to match their spending lifestyle, and at a 4% withdrawal rate it may take more than $6.25 million to maintain $250,000 in annual expenses.
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Six-figure earners typically save less than 5% of their total income, Social Security offers little replacement for high earners, and large withdrawals during market downturns can cause return sequence risk to take a bigger hit, making intentional adjustments to portfolio sizing and income-producing assets critical.
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A recent study found that there’s one habit that can double Americans’ retirement savings and take retirement from a dream to a reality. Read more here.
Yet financial planners will often tell you, with a sense of weary familiarity, that people making six-figure incomes are among the most financially vulnerable retirees they work with. The cause isn’t as obvious as you might think, and it’s easier to prevent than most people realize.
The biggest threat to high-income earners’ retirement isn’t just bad investments, it’s the lives they’ve built. A $400,000 annual income not only covers all of your expenses, it also meets a certain standard of living that quietly becomes non-negotiable over time. This includes private schools, business class, specific zip codes, club memberships, and possibly even multiple properties. In 15 years, none of these will feel like luxury goods, they’ll just feel like flooring.
read: Data shows one habit can double Americans’ savings and boost retirement
Most Americans vastly underestimate how far they will need to retire and overestimate how ready they are. But the data shows a person with a habit Those who have saved more than twice as much as those who have none.
The real big problem arises when the paychecks finally stop and the portfolio must replicate the income it never replaced with specialized scale. Household expenses of $250,000 per year require a much larger nest egg than standard retirement calculators assume. Factoring in a 4% withdrawal rate, this lifestyle on a $400,000 income would require $6.25 million to break even, and that’s before taxes, health care, and vacation home expenses.
In absolute terms, high earners are good savers, but proportionally they tend to be less good. A maximum 401(k) benefit of $23,000 per year sounds responsible, and it is, but for someone making $500,000 per year, that’s less than 5% of total retirement income. The rest can be absorbed through taxes, lifestyle and spending, which creep up as income rises.
The gap between what high earners save and what they actually need to maintain their lifestyle in retirement is often huge and has gone unexamined for years. No one sits down and counts their $3 million portfolio, which is impressive on its own, but it will likely only replace a fraction of their current spending. Once the person in this position retires, math becomes inevitable.
For most Americans, Social Security is a meaningful floor for retirement income, while for high earners it’s effectively a rounding error. The Social Security formula is intentionally progressive, but it replaces a much higher proportion of income for low- and middle-income earners than for high-income earners. A person who earns $500,000 per year for thirty years might receive between $3,500 and $4,000 per month at full retirement age. Annual costs are $42,000 to $48,000, while lifestyle costs are five to six times that amount.
The result is that the income gap among high earners throughout their retirement lives is barely affected by Social Security, with the entire burden falling on the investment portfolios they managed to accumulate. If the portfolio isn’t big enough or doesn’t generate enough income, the gap will slowly drain away.
A bad market in the first few years of retirement can take its toll on any retiree, and for high spenders it can be catastrophic. When withdrawals are large and the portfolio declines at the same time, the math can quickly become brutal. Selling assets to fund a high-consumption lifestyle in a down market can accelerate the depletion of a portfolio, making it difficult to recover even if the market eventually rebounds.
Low-income earners with modest spending have greater flexibility to cut spending, delay withdrawals or make adjustments in ways that buy them time. When markets don’t cooperate, high-income earners who already lead fixed, high-cost lives have much less room to maneuver.
None of this is inevitable, and high earners who recognize this pitfall early on have the income to work around it, they just need to consciously steer it. This means saving a meaningful percentage of your gross income and doing more than maximizing your contribution limits. It also means building a portfolio specifically sized to replace actual expenses, not just generic retirement numbers.
It also means building income-producing assets, such as dividend stocks, REITs and income ETFs, that generate cash flow without having to constantly sell them. The highest earners who retire comfortably are not the ones who earned the most, but the ones who earned the most. They build a portfolio that matches their actual planned life.
The gap between good income and good planning is the difference between gaining and losing retirement security.
Most Americans vastly underestimate how far they will need to retire and overestimate how ready they are. But data shows that people who have a habit will have more than double Savings for those who don’t.
No, it has nothing to do with increasing your income, saving, cutting coupons, or even reducing your lifestyle. It’s simpler (and more powerful) than any of them. Frankly, it’s shocking that more and more people aren’t adopting this habit, considering how easy it is.
