How To Offset Financial Concerns Related to Career Volatility for Accomplished High Earners

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.

Know How Much High-Earners and Retirees Need in an Emergency Fund

Should you suddenly lose your job, an emergency fund can make it easier to handle any financial impacts without having to drain your savings account or retirement funds.

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:

• Consistently set aside the same amount of money from each paycheck.
• Treat your emergency fund as you’d treat any bill and prioritize it equally with other expenses.
• Put your money in an account with a high interest rate so it’s growing.
• Reduce your debt.

Balance a Budget With a High Savings Rate While Looking at Retirement

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.

• A certificate of deposit (CD) offers you a high interest rate in exchange for leaving your money untouched for a pre-determined term while it matures. Then you can withdraw the initial deposit along with the interest it earned. CDs typically come with an early withdrawal penalty if you take your money out before the maturity date.
• A jumbo CD works the same as a standard CD, only it requires a higher minimum deposit than usual.
• A bump-up CD allows you to “bump up” your interest rate, usually one time during the term, if the rate goes up after you’ve deposited your money.
• A high-yield savings account offers a much higher interest rate than a traditional savings account and is not locked into specific terms. However, it may come with additional restrictions such as a large minimum deposit or a minimum balance to maintain each month.

Managing Lifestyle Inflation as an Older Adult

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?

• Create a budget – Make a list of needs and wants.
• Do the math – Figure out exactly what impact your new salary will make after taxes and expenses.
• Automate things – If a certain amount of your boosted paycheck automatically transfers into a savings account, you won’t be tempted to spend it right away.

Maximize Your Retirement Contributions

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.

Carefully Review Your Income Streams

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.

• Embrace technology – Whether it’s software or an app, there’s a world of tech options that can help you.
• Ask the pros – There are professionals who do this for a living if you’re willing to pay for their service.
• Maintain a spreadsheet – Don’t trust technology or others to do the job? You can create your own spreadsheet with all income streams accounted for and regularly update it as things evolve.

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.

Carefully Review Your Tax Returns

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.

• Max out your 401(k) and Health Savings Account (HSA) – Since your contributions into these accounts are not taxed up to certain limits, and you can divert money directly from your paycheck into them, you end up with less income to tax.
• Claim deductions – Deductions can reduce the amount of your income before you calculate the tax you owe.
• Take advantage of tax credits – Tax credits can reduce the amount you owe or increase your refund.

Avoid Bad Debt

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.

• Good debt has the potential to increase your wealth such as student loans.
• Bad debt comes with high interest rates and doesn’t have the potential to increase your wealth, such as taking out personal loans for discretionary purchases like vacations.

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.

Be Wary of Financial Fads and Trends

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.

Consult a Financial Advisor

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.

Regularly Update Your Estate Plan

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:

• Marriage or divorce
• The birth or adoption of a child or grandchild
• Death of a loved one
• Getting or losing a job
• Changes to tax laws

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.