3 Ways Upper Middle Class Retirees Stay Rich in Retirement
Written by
Sean Bryant
Edited by
Molly Sullivan
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You spend your working years building wealth and putting yourself in a position to live a comfortable retirement. However, once you retire, it becomes less about building additional wealth and more about how to preserve wealth.
Here are four ways upper middle class people can build their wealth for retirement — and three ways to maintain the same status throughout retirement.
How To Build Wealth For Retirement
When planning for retirement, you should focus on accumulating wealth over the years. Here are a few ways that wealthy individuals build their nest eggs:
Live Below Your Means
Living below your means is the most important thing you can do to build wealth. This means your expenses are less 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.
Set Financial Goals
Having goals is important in most aspects of life, especially regarding finances. As part of the wealth-building process, take the time to understand what’s truly important and then devise a plan to accomplish those goals. For example, you may want to travel frequently during retirement. To do that, you must 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. Unexpected expenses will happen at some point in your life, but having the money available will help you avoid credit card debt.
Invest Disposable Income
By making sure there is disposable income available at the end of the month, you’re putting yourself in a position to put that money to work. You could choose to invest it in the stock market or through real estate investments. 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, certified financial planner at TimeWise Financial. “This includes a diversified portfolio that combines stocks, bonds, real estate and other investment vehicles. 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 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. 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 but may need to allocate more money toward healthcare expenses. You may no longer have a mortgage, but you 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, mortgage advisor 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 ‘pay yourself’ each month once you retire.”
Awram 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 the focus is going to be on income-producing investments. These still can grow your portfolio, but not at such a high rate. Instead, they are a lower risk, 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.
You’ll also want to look into different strategies to help you minimize your investments’ tax liability. This is when it’s smart to work with a financial advisor.
“Create and execute a withdrawal strategy for your retirement and investment accounts,” said Chris Urban, CFP, RICP, founder at Discovery Wealth Planning. “Leverage the tax code to convert pre-tax assets into after-tax assets in years when your income may be lower.”
He 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. This could reduce the amounts of taxes you are expected to pay throughout your lifetime.”
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