Given the experience that I have had working with high wage earners, I have uncovered a less discussed truth: they have a difficult task in order to continue their lifestyle throughout retirement.

People that are used to living on above average incomes have several hurdles to overcome.  They usually pay more in taxes, they are accustomed to a certain lifestyle and you can argue that they have limited capacity to save on a pre-tax basis.  Let me explain further:

Let’s take a family that is used to living off of $250,000 per year.  Let’s assume that they have a tax expense of 40%, which leaves them with $150,000 to live off of each year.  Let’s also assume that only one family member produces that income and they are able to “max out” their 401k plan ($18,000 in 2015 if under 50, $24,000 if over 50).  This amount is just less than 10% of the gross earnings per year while working.  Although $24,000 is a lot of money, it will do little to replicate their lifestyle.

Let’s contrast that with a family that earns $100,000 per year, but has managed to sock away that same $24,000 into their retirement plan.  The hurdle to reproduce that level of income in retirement is much easier to overcome for two reasons; one being the much lower living expenses and the other being how much they are saving on a percentage of income basis.  Saving 24% of your gross income is tremendous and rare, but it certainly happens.  The asset base that is needed to reproduce that lifestyle can be much lower and Social Security will also count as a much higher percentage of the overall income picture in retirement.

High wage earners that are interested in reaching financial independence need to carefully think through this reality and plan accordingly.  Regardless of your income, the message remains the same:  “It’s not what you earn, but what you keep.”  The burden of retirement savings will continue to be shifted from employers and the government to individuals.  Those that start saving early, maintain a high level of savings throughout their working lives and keep their living expenses within their means will have the ability to experience a retirement that is filled with options and financial flexibility.  In other words, “financial independence” is the target.

Plans like 401k/403b/IRA’s are a start and Social Security is certainly an asset, but additional plans and concepts will be needed in order to maintain a similar level of spending in retirement.  At Legacy Trust, we have the expertise to help you quantify your goals and to recommend strategies that will help you reach your idea of financial independence.