You spend your working years building wealth and putting yourself in a position to live off a comfortable retirement income. However, once you reach age 65 (or more accurately, age 67 or even 70), it becomes less about growing your money and more about how to preserve it — in other words, how to avoid outliving your savings and investments. Instead of working longer, you could try saving smarter, no matter your economic situation or social class.
When retirement planning, you should focus on accumulating wealth over the years and imitating financially savvy upper-middle-class individuals who build their nest eggs comfortably. Here are four ways the American upper middle class can make their wealth before they retire — and three ways to maintain the same social status throughout retirement.
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Live Below Your Means
Living beneath your means is the most important thing you can do to build wealth, especially if you’re saving for a major purchase or life event. Even if you are in the top income quintile, you can still just cover your basic living expenses and keep them much lower than your income each month.
By minimizing expenses, you’re able to avoid debt and have the opportunity to use your disposable income to grow your net worth. This type of savings plan can not only boost your median household income but also help you better reach your retirement goals.
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Set Achievable Financial Goals
Having goals is important in most aspects of life, especially regarding finances. No matter your occupational status or skill set, as part of the wealth-building process, you should take the time to understand what’s truly important to you and then devise a plan to accomplish those goals.
For example, you may want to travel frequently during retirement. To do that, you’ll need to understand how much it will cost and be able to budget for the expense. By laying out financial goals, you can build a road map for accomplishing each objective.
Build an Emergency Fund
Emergency funds are a must for everyone, regardless of age. Unexpected expenses will happen at some point in your life, but having the money available will help you avoid credit card debt. Many financial advisors recommend that you have at least three to six months’ worth of expenses in emergency savings in case you experience a financial shock, such as a job loss or a hospital stay.
Invest Disposable Income
If you’ve got a decent amount of disposable income at the end of the month, you should be putting that extra money to work by using it to invest and grow your net worth.
You could put that money in the stock market or invest in real estate. You could even put it in a high-yield savings account for a small boost to your savings. By taking advantage of compounding interest, you’re able to speed up the wealth accumulation process.
“Upper-middle-class retirees often built their wealth by starting to invest at an early age,” said Matt Atwood, a certified financial planner (CFP) at TimeWise Financial. “This includes a diversified portfolio that combines stocks, bonds, real estate and other investment vehicles.”
He continued, “They may have taken advantage of tax-efficient investment strategies, like maximizing contributions to retirement accounts and using tax-advantaged investment vehicles like municipal bonds and tax-deferred investments.”
How To Preserve Your Wealth in Retirement
Once upper-middle-class people have grown their wealth and retired with a comfortable amount of money, the focus must shift to preserving that wealth. Other than relying on your Social Security benefits, here are a few strategies to follow.
Set a Budget
Having a budget is important, no matter what life stage you’re in. The best way to ensure you live within your means is to understand where your money goes each month.
However, once in retirement, budgets typically change quite a bit. You’re no longer saving for retirement and may need to allocate more money toward healthcare expenses. While you may no longer have a mortgage, you could want to spend more on travel.
It’s important to update your budget each time things change in your life. This will allow you to ensure you’re not spending more than you can afford.
The first couple of years in retirement might be the most difficult, as you get a good understanding of how much you can spend, but these are the years that will be critical to making sure your retirement savings can outlast you.
“When preparing for retirement, you want to review and be honest about your expenses and budget,” said Rebecca Awram, an independent mortgage broker at Seniors’ Lending Centre.
“Meeting with a financial planner to take a look at your savings, investments, pension fund, eligibility for government programs and any outstanding debt will be essential for understanding what you [can] ‘pay yourself’ each month once you retire.”
Awram also said, “Many financial planners will recommend a 75% replacement rate to your income, meaning if you earn $100,000 annually, you will want at least $75,000 each year you are retired. However, this may not all come from savings. Be sure to look into what Social Security you qualify for and how much your assets, such as your home and investments, are likely to appreciate over the next decade.”
Update Your Investment Portfolio To Balance Income and Growth
Once you hit retirement, your investing objectives will be a little different. During the majority of your life, you were focused on growth. You wanted to grow your portfolio as large and as quickly as possible. However, now that you’re in retirement, your biggest focus will be preservation.
That means you’re going to be looking for income-producing investments. These still can grow your portfolio, but not at such a high rate. Instead, they are a lower-risk investment, which is better for a retiree’s timeline.
Many investment portfolios are balanced between stocks and bonds. If you want to be a little more conservative, you can adjust your portfolio based on the “rule of 100.” This says you should subtract your age from 100, which is the percentage of your portfolio that should be in stocks. For example, if you’re 70, 100 minus 70 would mean you should have 30% of your portfolio in stocks and 70% in bonds.
Make Your Withdrawals From the Correct Account
Most people have several different investment accounts that are used to fund their retirement. As you start withdrawing funds, ensure your Roth accounts — Roth IRA or Roth 401(k) — are the last things you touch. Because these accounts grow tax-free, you want them to be able to continue compounding for as long as possible.
You should also make sure to withdraw from accounts with required minimum distributions first, to avoid penalties. At the same time, look into different strategies to help you minimize your investments’ tax liability. This could be a great time to reach out to a financial advisor.
“Create and execute a withdrawal strategy for your retirement and investment accounts,” said Chris Urban, a retirement income certified professional (RICP), CFP and the founder of Discovery Wealth Planning. “Leverage the tax code to convert pre-tax assets into after-tax assets in years when your income may be lower.”
Urban also suggested looking for opportunities for tax-bracket planning, which involves “tactically withdrawing assets from retirement and investment accounts with various tax treatments to pay for living expenses.” Doing this could reduce the amounts of taxes you are expected to pay throughout your lifetime.
Caitlyn Moorhead contributed to the reporting for this article.
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Sources
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Matt Atwood, TimeWise Financial
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Rebecca Awram, Seniors’ Lending Centre
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Chris Urban, Discovery Wealth Planning
This article originally appeared on GOBankingRates.com: How the Upper Middle Class Can Retire Rich
