Registered Investment Advisors (RIAs) deal with people at all wealth levels but most are upper income even if they are not billionaires. There is a retirement crisis and it’s not just hitting the working class.
The typical median wage earner making $50,000 a year and retiring at 67 can expect Social Security to pay him and his wife about $2400 per month. To maintain their previous spending levels this leaves a gap of about $1000 a month that has to be made up from savings. But many of these middle income people have not saved for their retirement. Which means working longer or reducing their lifestyle.
This problem is also hitting the higher income people. How well is the person earning over $200,000 a year going to do in retirement? The issues that even these so-called “rich” face are the same: increased longevity, medical care, debts and an expensive lifestyle are all issues that have to be considered.
“The $200,000+ executive expects a fine house, two cars, two holidays a year, private schools, to pay for his kid’s university tuition, and so it goes on. And this is not to mention the tax bill he’s paying on his earned income. A bunch of all this was really debt-funded, so effectively the executive spent chunks of his retirement money during his working days.”
When high income people are working, they usually don’t watch their pennies or budget. But once retired, that salary stops. That’s when savings are required to bridge the gap between their lifestyle and income from Social Security and (if they’re lucky) pension payments. At that point the need for advance planning becomes important.
Before the retirement date is set, the affluent need to create a retirement plan. He or she needs to know what their basic income needs are; the cost of utilities, food, clothing, insurance, transportation and other basic needs. Once the basics are determined, they can plan for their “wants.” This includes things such as replacing cars, the cost of vacation travel, charitable gifts, club dues, and all the other expenses that are lifestyle issues. Finally, there are “wishes” which may include a vacation home, a boat, a wedding, a legacy. The list can be a long one but it should be part of a financial plan.
If the plan tells us that the chances of success are low, we can move out our retirement date, increase our savings rate or reduce our retirement spending plans.
This kind of planning will reduce the anxiety that is typically associated with the retirement decision making.
Arie J. Korving, a CERTIFIED FINANCIAL PLANNER™ professional, has been delivering customized wealth management solutions to his clients for more than three decades. Prior to co-founding Korving & Company, he was First Vice President with UBS Wealth Management and held management positions with General Electric.