Where We All Come From

It keeps me humble just to know exactly where I came from and all the hard work I had to put in to be here.”

– Ha Ha Clinton-Dix, NFL Player

I recently had reason to look at my personal Social Security Earnings History. Wow!

I only earned $4,127 in 1990 as a Private in the U.S. Army. Things did improve, but not by much; I earned a whopping $12,834 when I received an Honorable Discharge in 1993.

The next 5 years weren’t too much better, as I attended college full-time and worked any job that would accommodate my class schedule.

In 1999 I entered the world of professional finance and like most people, my first job out of college didn’t pay much. Of course, things improved and it was a lot of fun to see how much they’ve improved from my first “real” job at age 16 (flipping burgers at Hardee’s) to now.

Anyway, the point is that almost everyone has a history of low paying jobs at some point in their early life. The most successful people I know all have stories about starting out broke, pinching pennies, & working their way up the ladder.

So now here you are, a high income American. Your family earns a minimum of $14,000/month, probably much, much more. You have a comfortable home, vehicles that don’t breakdown all the time, “people” who mow your yard & clean your house, and you don’t have to worry about making ends meet anymore. Good for you. You’ve done well & should be proud of what you have accomplished.

So let me ask you a question; “Now that you’ve become accustomed to living on a six-figure income, do you have a retirement account large enough to support yourself in retirement?”. Probably not and here’s why; you haven’t always been a high income American.

You started out as a low income American who couldn’t afford to save. Then you became an average American, saving enough to have an average retirement. Then in your late 40’s or early 50’s you became a high income American maxing-out retirement contributions. Your current retirement contributions are large, but time is not your friend. Those contributions don’t have 30 years to become the huge account balance required to support your current lifestyle in retirement. The small amounts you invested in your younger years may result in a $300,000 – $500,000 account balance. $500,000 may have been fine on a $3,000/month lifestyle, but it won’t get you very far on a $14,000+/month lifestyle.

Think about it. High income Americans have all kinds of financial obstacles and saving enough money to maintain your lifestyle in retirement is one of them.

We’ve previously discussed how high income Americans can max-out 401(k) contributions & Roth IRA contributions. But let’s face it, that isn’t nearly enough to support your current lifestyle in retirement. How do I know? Because the 4% Rule tells me so.

The 4% Rule

Basically, the 4% Rule says you can systematically withdraw 4% of your account balance each year without ever running out of money during your lifetime. If you have a $14,000/month lifestyle, you need accounts worth $4,200,000 or more. A $20,000/month lifestyle requires $6,000,000 or more. A $30,000/month lifestyle needs $9,000,000 or more.

Unless you became a high income American at a young age and consistently maxed your 401(k) & Roth IRA contributions, there’s not much chance you have enough money to support yourself in retirement.

So what should you do? The answer is simple; you have to save & invest outside of your retirement accounts. And remember, saving 10% of your income is a minimum. Since you have a lot of catch-up to do to support your new lifestyle, you probably need to save more, maybe 15% – 25%. A good financial planner can figure out exactly how much you need to be saving.

Save & invest a portion in stocks and bonds, not mutual funds. Why? Because mutual funds spit-off capital gains that you cannot control. That means more taxes. You can control the capital gains on individual stocks & bonds, opting only for long-term capital gains, tax loss harvesting, and other techniques to minimize or eliminate investment taxes.

Save & invest a portion in income producing real estate; apartments & commercial buildings. It’s a great diversifier, pays for itself, produces much needed retirement income, & depreciation can help lower your tax liability.

The point is, you need to be saving as much as possible & it needs to be as tax efficient as possible.

I know someone is saying; “I used to be just fine on $5,000/month & I’ll be just fine going back to $5,000/month in retirement, so I’ll enjoy my high income now instead of worrying about saving.”. Have you ever thrown the e-brake while driving down the interstate at 80 mph? Why not? Because it’d be suicide; you’d cause a fatal accident. It’s the same thing when you try to go from $15,000/month, $20,000/month, $30,000/month down to what you “used to live on”; it’s financial suicide.

Think about it, suddenly dropping from a $20,000/month lifestyle to a $5,000/month lifestyle is a 75% reduction in your standard of living! It’s a financial disaster. I’ve never seen anyone do it successfully. If you think you can pull it off, take it for a test drive. Try it for 3 months & see what happens. I believe you’ll quickly change your mind.

And don’t count on Social Security. The people most likely to lose Social Security benefits are high income Americans. You can’t count on ever receiving it. In the unlikely event that you do, consider this; the maximum Social Security benefit is $34,332/year. For a high income earner, that’s only 1-2 months of income. If your spouse also has the maximum benefit, that’s 2-4 months combined. You still need 8-11 months of income from your retirement accounts & real estate investments.

High income Americans need to save & invest as much as possible unless they’re willing to crash & burn in retirement … and I don’t know any who are willing to do that.

Sapiat Asset Management is a fee-only, independent registered investment advisor, specializing in goal oriented, financial planning & investment management for Gen X Individuals & Families, their Businesses, & the Trusts that benefit them.

It’s a fun exercise to look at ones Earnings History and see how income has grown over the years. For those of you that are interested, here’s the link:

My Social Security

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