Financial Advisors

3 Retirement Saving Tips for High Net Worth Individuals

Retirement represents a significant milestone for many working Americans. Unfortunately, it’s a juncture that many people approach with a sense of trepidation.

Why? The fear of retirement often stems from one uncomfortable question: “Will I have enough?” Retirement presents opportunities to travel, pursue passions, and spend quality time with loved ones, but it also carries high financial costs that will only compound with age. For instance, consider healthcare costs: Nearly 70% of retirees over the age of 65 required long-term care in 2019, and it’s just one example of the persistent but necessary expenses that come with age.

A well-allotted savings account and an effectively managed stock portfolio are the best tools available to help your money last in retirement. Still, all market investments come with an inherent assumption of risk. Investors preparing for retirement must consider and confront market uncertainty when making the decisions that will help define their golden years.

Facing the Unknown

High net worth retirement planning comes with ambiguity, and a fear of the unknown can cause people to act instinctually rather than based on market insights.

Prudent spending and saving have a far greater effect on a retirement fund than market performance, yet many investors focus only on the market while ignoring the impact of their day-to-day financial decisions. They know they are not doing everything they could to plan for retirement, but they lack the discipline to make necessary changes. People often feel overwhelmed, and that feeling is only exacerbated when taxes, social security payments, and inflation enter the equation.

In the face of these obstacles — real and perceived — it’s natural that prospective retirees seek reassurance and guidance from their peers regarding their biggest retirement fears. This can lead to an unhealthy desire to “keep up with the Joneses,” causing people to feel compelled to compare themselves to those that appear more prepared for retirement. This kind of thinking often leads to spending and saving decisions that do not benefit your particular situation.

Market Matters

More Americans have their wealth invested in the stock market than ever before. In a mere 30 years, the percentage of U.S. citizens that owned stocks shot up from 30% to 50%. While this trend enables more new investors than ever to realize their economic potential, it has also bound their financial fates to stock market performance.

Stocks are not a guaranteed way to build a retirement fund. An extended economic expansion and one of the longest bull markets in history has led to high stock valuations that could expose the 50% of Americans who are shareholders to market volatility. People aren’t looking toward the future of the market with optimism — they’re struggling with a sense of anxiety as they wait for the other shoe to drop.

Despite unprecedented growth in recent years, the market is finally showing signs of outpacing its underlying fundamentals. A significant correction — or potential crash — would inevitably impact investors’ abilities to meet their retirement planning goals, and their responses could determine how they’ll spend retirement.

Inexperienced investors tend to react in one of two emotionally driven ways when faced with an imminent, meaningful correction. First, they’ll overexpose themselves to short-term risks to capitalize on returns “while the getting is good.” Second, they will batten down the hatches and underexpose themselves to risk for fear of an all-out collapse.

The limitations of both approaches demonstrate the importance of sound principles rather than emotional responses. The ability to make money last through retirement depends on adhering to these principles.

How to Make Your Money Last

It bears emphasizing: Personal spending and saving habits have a more significant impact on financial security than market performance. The cornerstone of responsible financial behavior is sustainable spending. While they’re still working, sustainable spenders should be able to make significant contributions to their retirement accounts without resorting to credit. Many experts suggest a savings rate of 15% to 20% of gross income during a person’s working years.

For sustainable spending in retirement, the rule of thumb is 4%. Financial manager Willian Bengen conceived this “4% rule” 25 years ago, and the fact that it still resonates is a testament to its effectiveness. The rule is simple: Draw 4% from your savings in the first year of retirement, and then adjust that amount for every year after.

Skeptics of the 4% rule say retirees might not be able to depend on the strategy because it doesn’t account for today’s historically low interest rates. Taking into account the current low interest rates and the likelihood that equity returns will be muted, I suggest a spending rate of 3% to 3.5% of a portfolio’s value to maintain sustainability.

High net worth individuals face the same fear of retirement that the majority of people feel, though they navigate those same issues with a more substantial cushion. But merely being wealthy will not make your money last through retirement — sustainable spending is just as crucial for high net worth individuals.

Here are a few specific strategies that can help high net worth individuals maintain their lifestyles:

1. Make accurate models: Collect a comprehensive picture of your expected income sources during retirement. Having this down will make it easy to calculate how much money you should withdraw from your portfolio every month to cover your living expenses.

Getting a realistic idea of their financial situations early in retirement will enable high net worth individuals to make any necessary lifestyle changes.

2. Start budgeting early: Develop a conservative budget before retirement, and then stick to that budget for your first year or more of retirement before contemplating potential changes. As an alternative to the 3.5% rule, consider building a budget by taking your yearly working salary and subtracting 25%. Living on a budget is a necessary skill, and a little discipline goes a long way.

3. Don’t change everything at once: Try not to change your everyday lifestyle in meaningful ways until you’re used to managing your finances in retirement. I’m not saying to skip that cruise you’ve always wanted to take — just don’t go overboard.

As you advance in age, you’ll learn what changes you can implement to make sure your money lasts in retirement. A tried-and-true strategy is to move into a smaller house because it offers opportunities to downsize maintenance costs while enabling high net worth individuals to unlock their home’s surplus equity and put it toward retirement goals.

It’s always a challenge to enter a new phase of your life, and retirement is no exception. Planning for retirement requires people to confront market uncertainty and their own financial habits — and not everyone wants to change. High net worth individuals need to realize that they are susceptible to the same pitfalls of retirement planning as anyone else.

Fortunately, there are processes and products that can help you leverage your wealth to ensure you know how to make your money last through your next adventure in life.

Matthew Blume is a portfolio manager of private client accounts at Pekin Hardy Strauss Wealth Management, and he also manages the firm’s ESG research and shareholder advocacy efforts. He earned a B.S. in electrical engineering from Valparaiso University and an MBA from Northwestern University’s Kellogg School of Management. Matthew is a CFA charterholder.

This article is for informational purposes only and is not a recommendation of any particular strategy. The views are those of Matthew Blume as of the date of publication and are subject to change and to the disclaimers of Pekin Hardy Strauss Wealth Management.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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Matthew Blume, CFA

Matthew is a portfolio manager of private client accounts at Pekin Hardy Strauss Wealth Management, and he also manages the firm's ESG research and shareholder advocacy efforts. He earned a B.S. in Electrical Engineering from Valparaiso University and an MBA from Northwestern University's Kellogg School of Management. Matthew is a CFA Charterholder.

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