Author: Marc Klein
December 08, 2023
Anyone can lose their job, even those with high salaries. So it’s important to know how to offset any financial concerns related to job loss.
In this article:
Even if you’re a high earner, you’re not immune to economic and career volatility. In fact, unemployment is rising fastest among households making $125,000 or more. And certain job fields may be more volatile than others, such as those in the tech and finance industries.
So, prepare for whatever life throws at you — before it throws it. Here are some ways to increase and protect your nest egg so you can retire comfortably.
Experts recommend having three to six months of living expenses in an easily accessible fund. For retirees, some recommend having closer to one to two years of accessible cash. There isn’t a magic number that everyone should save — it depends on your financial status and stage of life.
There are a few things you can do to build an emergency fund before you retire:
Even with a high salary, budgeting is still key — especially if you’re saving for retirement. What you put away now directly impacts what you have to live on later.
Some experts recommend replacing about 80% of your pre-retirement income. So, if you make $100,000 per year, you’ll need at least $80,000 per year when you’re retired to have a comfortable lifestyle. And there are various methods to get you to that desired retirement income, such as age-based savings goals (saving 1x your annual salary by age 30, 3x your annual salary by 40, and so on).
So how do you grow your money to get to these goals? One way is to take advantage of high interest rates.
Lifestyle inflation is when someone spends more money as they make more.
If your lifestyle inflates every time you get a raise, it can lead to debt, increased financial obligations, and a lack of investment in your long-term finances. And the financial decisions you make when you're younger can catch up to you later on in life. Think about what happens when those raises stop (which is exactly the case if you’ve lost your job or retired). You’ll be in for a rude awakening when you have a certain lifestyle in mind, but the funds don't match up.
So, how do you avoid lifestyle inflation?
There are limits to how much you can contribute pre-tax to a retirement plan each year, set by the Internal Revenue Service (IRS). In order to maximize your retirement savings, contribute as much as you can up to these limits … maxed out if possible. The more you contribute now, the more you have for retirement later.
Plus, if you’re 50 or older, you may also be able to make annual catch-up contributions, which allow you to exceed those contribution limits.
Be sure to check the IRS website or speak with a financial advisor to verify what your max pre-tax contribution is.
Having multiple streams of income can mean more cash for retirement. It also means more to keep track of. This is a good “problem” to have, but it can get confusing. Luckily, there are ways to make this effort easier.
Regardless of the method, you should always know where your funds stand — pre-retirement to ensure you’re saving enough, and post-retirement so you know you’re living within your means.
Your federal tax returns report all of your income, expenses, and other pertinent tax information to the IRS, telling the government how much you earned and how much you’ve already paid in taxes during the year. Review these returns to ensure you’re being strategic (legally, of course) in reducing the amount of taxes you owe.
One way is to keep an eye on your taxable income. The more you earn, the more on which you’re required to pay taxes, the higher tax bracket you can be in. But there are ways to potentially reduce that number.
In general, too much of any kind of debt can be bad. But believe it or not, there is a difference between bad and good debt.
To avoid bad debt, ask yourself if what you’re looking to purchase can benefit you financially in the long run: taking out a student loan can lead to a college degree which can lead to a higher paying job. But can you say the same about racking up credit card debt to buy a large-screen TV? Probably not. Another way to avoid bad debt is to carefully choose and manage your credit cards. Find a card that offers a rewards program so you can earn on purchases. And when you use that card, have a plan to pay off the bill.
Paying off debt can play a major part in reaching your full financial potential — regardless of how much money you make. In fact, there’s a name for this: “HENRYs,” or “high earners, not rich yet.” Earning between $250,000 and $500,000, HENRYs have significant discretionary income and a strong chance of being wealthy in the future, but most of their funds go into costs — such as debt — rather than building wealth for the future.
Financial fads are the latest and hottest investments that are driven by hype, realize large short-term gains, but then end as quickly as they started. Sure, you can make a decent amount of money initially, but if you don’t time things correctly, the fad will end, and it can cost you substantially.
A classic example of an investment fad is the dotcom bubble in the late 1990s and early 2000s, where investors poured money into internet-based startups — usually without any due diligence because of a fear of missing out on their chance to cash in. And when many of those companies didn’t turn a profit, the bubble burst leading to many popped investments.
By chasing a fad, you’re throwing caution to the wind and abandoning sound investment fundamentals for the chance to hit it big — which is the opposite of what you want to do if you’re a high earner preparing for retirement.
Asking for financial help is never a bad thing … as long as you ask the right person.
Who would you rather rely on to help build and maintain your retirement fund: a professional financial advisor with years of experience and knowledge, or your cousin parroting financial advice they read somewhere on the internet? Pretty easy answer, right? For example, your helpful cousin may tell you that because of your high income, your credit score will see a boost. Which is sort of true, but not in the way they think. A financial advisor, on the other hand, would explain the nuances of high income and credit, detailing the different indirect impacts your income can have on your credit score.
This is an oversimplified example, but you see the point. If you’re going to take advice that relates to your hard-earned money, you should probably take it from a professional who spends their day dealing with the details. It can pay off in the long run. No offense to your cousin.
Estate planning is the process of designating who will receive your assets in the event of your death or incapacitation. It’s not a fun conversation, but if you’ve spent your life earning a high income and turning it into a portfolio of assets, don’t you want the peace of mind from knowing you have a plan for where it all goes?
And once you have that plan, be sure to regularly review and update it if needed.
It’s a good idea to at least look at it annually to make sure your wishes are still the same. You should also review it following life events, for better or worse, such as:
Reviewing your estate plan will help you ensure that your life’s work — financial and otherwise — will be passed on in accordance with your wishes.
Even if you earn a high wage and retirement is close, you’re not impervious to job loss. Nobody is. So, taking the steps to continue to grow your funds while also protecting them is of the utmost importance and can send you on the path to a happy retirement.
About the author:Marc Klein
With his eyes set on becoming the next great ad man (at least until his comedy writing career took off), Marc earned his journalism degree and went straight into advertising for various gaming and tourism clients. He later expanded his credentials to include public affairs and communications work for several environmental science organizations before returning to his marketing roots. A lifelong scholar with recent studies in strategic communication, Marc enjoys tying humor into his writing and simplifying complex financial subjects into engaging and easy-to-digest content for a wide variety of audiences.
This material is for informational purposes only and is not intended to replace the advice of a qualified tax advisor, attorney or financial advisor. Readers should consult with their own tax advisor, attorney or financial advisor with regard to their personal situations.
Wealth degrades over time without interest, so it’s important for high earners to carefully invest or save money in high-interest accounts to offset that degradation.
When retirement is decades away, it can be easy to put off saving for it. In fact, according to a 2018 Northwestern Mutual study, one in three Americans has less than $5,000 saved for retirement, one in five hasn’t saved anything, and 33% of Baby Boomers have saved $25,000 or less.