Are You Maximizing Your Peak Income Years, or Leaving Money on the Table?
Congrats- you have hit your 50s, or maybe early 60s. The kids are launching or have launched. You are in a good place in your career and life seems to be getting a little easier and freer- maybe more so than it ever has after a long, long time. It’s easy to take your foot of the gas and enjoy the spoils of your life. And yet hitting auto-pilot too soon can be the difference between having lots of freedom later- or a very different future than you envisioned. How do you know you are not blowing the peak earnings period of your life? We’ve got some tips:
It’s tempting to pull back a little and coast. But a little more gas for a few more years can make your life a smoother ride for life.
First, it’s time to really look at your cash flow. It is not unusual for new clients of ours to be surprised that we go right to how much they are spending and where they are spending it. Our goal is to help our clients match their spending with their values. After all, in order to get $1 to spend, you have to earn that $1 PLUS the taxes on it. So, if you are like most people, you are spending dollars that are not worth it, at least somewhere. Often, with such high income, it’s easy to just say yes to the big house you no longer need, renovations for a kitchen you never cook in, an expensive car you don’t really value, high end travel that over exhausts you, and hobbies you may or may not get to. We don’t want our clients not to have the things they enjoy- we want them to have as much of what they want as possible! But we do want them to ask themselves what they want, why they want it, and if they want it now, or later- when they may enjoy it more.
But it’s not just the big expenses. We also want them to look at “leaky buckets”. These are items that are small and just add up. It’s not unusual for our new clients to find lots of those after-tax dollars being spent on small things- like wine subscriptions, cable packages, home services or maybe even insurance they really don’t need or want anymore. The idea around looking at your cash flow is to focus your finances on the things that bring you joy, by getting rid of the items that don’t. And your peak earning years are the best time to do this- BEFORE you get into bad habits.
Second, it’s not enough just to look at not spending money you don’t care to spend, it’s also important to then put it in a place where hopefully it works well for you long term. High income clients, particularly those who had early years with high expenses, should look closely at how they are saving and create a plan that makes sense. While a company retirement plan, HSA plans and IRAs can be great low hanging fruit, how you put these in place can have a big impact on what you get out long term. For example, it can be tempting to put away that 401k money pre-tax now, but if you do, you could be forgoing a tax-free benefit later when you need it more to possibly lower your tax bracket, give you access to a tax-free lump sum, or even lower Medicare premiums.
Also, for high income people in their peak earning years, saving in company sponsored plans, even with a catch-up contribution, are often not enough to get them to financial independence alone. This is especially true for people who are behind in building their assets. Additional savings is often required. However, in the absence of a plan to save, it’s easy to just spend more or put the money in assets that don’t make sense for your goals- like second or third homes you would never visit enough to justify the cost, or investment “opportunities” you heard about at the club. A plan that thinks about long term cost, asset allocation, and tax planning can be beneficial at this time in your life.
Controlling your cash flow and finding great ways to build on it are essential steps, but what about the real risk to your peak earning years? What if you lose that job, or have a sudden drop in income? How do you prepare for that? The answer is: before it happens. Treat this time in your life like the prize possession it is and protect it. You should be keeping a solid profile in your industry, but more importantly, your best protection is your network. Build it. Find opportunities to know your peers, mentor, and share your expertise where you can. Don’t be afraid to develop new skills and niches. You don’t have to be over the top with this, but make sure you know three to five people that can keep you in the game as long as you want or need to be in it. Ideally, you are building your reputation, so people are coming to you before you want to leave.
It’s also important that if you are not financially independent yet, you still have adequate disability insurance and possibly long-term Care Insurance. These types of plans coupled with adequate emergency funds that are liquid and not exposed to market risk can make a big difference should life take an unforeseen turn.
This time of year is a great time to review your spending and savings strategy from the last twelve months to make plans for the next twelve. You most likely started a career and then hit the gas petal hard. It’s tempting to pull back a little and coast. But a little more gas for a few more years can make your life a smoother ride for life.