It may sound backwards, but people who spent decades earning high incomes should be the last to run out of money in retirement.
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High earners often struggle in retirement because their portfolios fail to match their spending lifestyle, which may require $6.25M+ to save $250,000 in annual expenses at a 4% withdrawal rate.
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Sixth-earners typically save less than 5% of their gross income in equity, Social Security takes almost nothing from the highest earners, and the risk of the return sequence is compounded by large withdrawals during market downturns, making deliberate portfolio balancing and income-generating assets critical.
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A recent study identified one trend that doubled Americans’ retirement savings and moved retirement from a dream, to a reality. Read more here.
However, financial planners will tell you, often with weary familiarity, that six-figure earners are among the most financially fragile retirees they work with. The reasons are less obvious than you might expect, and more avoidable than most people realize.
One of the biggest risks to a high earner’s retirement isn’t just bad investing, it’s the life they’ve built. A $400,000 annual income not only covers all your expenses, it also supports a certain standard of living that becomes non-negotiable over time. This includes things like private schools, business class, specific zip code, club membership, and possibly multiple properties. None of these will feel comfortable after 15 years, they feel inferior.
Read: Data Shows One Habit Doubles America’s Savings and Boosts Retirement
Most Americans underestimate how much they need for retirement and overestimate how much they are prepared for. But the data shows that people with one habit have more than twice as much income as those who do not.
The really big problem arises when the paychecks finally stop, and the portfolio has to multiply the income that was never measured directly to replace it. A family spending $250,000 a year needs a larger nest egg than the standard retirement calculator suggests. Assuming a 4% withdrawal rate, this lifestyle with a $400,000 profit would require $6.25 million just to break even, and this is before taxes, health care, and vacation carry home.
High earners save well in absolute terms, but in quantitative terms, they are often not so good. Taking out $23,000 a year from a 401(k) sounds responsible, and it is, but for someone earning $500,000, this is less than 5% of their retirement income. The rest can be taken up by taxes, lifestyle, and using that scale quietly with income.
The gap between what high earners save and what they actually need to maintain their lifestyle in retirement is often large and remains unexamined for years. No one sits down and calculates their $3 million portfolio, which is impressive on its own, but likely only replaces a fraction of what they’re currently using. When someone in this position retires, math becomes inevitable.
For many Americans, Social Security is a reasonable floor for retirement income, and for high earners, it’s a complete mistake. The Social Security formula continues on purpose, but it replaces a much higher percentage of income for low and middle earners than for high earners. A person earning $500,000 a year for thirty years may collect $3,5000 to $4,000 a month at full retirement age. This is $42,000 to $48,000 a year compared to a lifestyle that costs five or six times that amount.
The result is that every high-earner retirees with an income gap that Social Security doesn’t bridge, and the entire burden falls on whatever portfolios they’ve been able to accumulate. If this portfolio is not large enough or does not generate enough income, the gap becomes a slow bleed.
A bad market in the first few years of retirement hurts any retiree, and for high-income earners, it can be disastrous. If the drawdown is large and the portfolio declines at the same time, the math turns brutal very quickly. Selling assets in a down market to finance an expensive lifestyle accelerates portfolio depletion in a way that is difficult to recover from, even when markets eventually recover.
Low-income earners with lower expenses have more flexibility, and can reduce payments, delay withdrawals, or adjust time-consuming procedures. High earners who have built fixed, expensive lifestyles have very little room for control when markets don’t interact.
None of this is inevitable, and high earners who spot the trap early have the money to solve it, they just have to be intentional about it. This means saving a reasonable percentage of your income and doing more than just raising contribution limits. It also means building a portfolio that is specifically balanced to replace real money, not just a standard retirement number.
It also means building income-generating assets, such as equity stocks, REITs, and income ETFs, that generate cash flow without requiring frequent sales. High earners who retire comfortably are not those who have made the most; they are the ones who create positions that match the life they planned to live.
The gap between good planning and good planning is where retirement security can be won and lost.
Most Americans underestimate how much they need for retirement and overestimate how much they are prepared for. But the data shows that people with one habit have more than that twice the savings of those who do not.
And no, it has nothing to do with increasing your income, saving, cutting coupons, or even reducing your lifestyle. It’s more direct (and powerful) than any of that. In fact, it’s shocking how many people don’t take this practice for granted.
