Planning for retirement can seem complicated, but much of the process often comes down to consistency and having a long-term vision. With a little bit of guidance, you can come up with a plan to save and invest your way toward an enjoyable retirement, even if you don’t earn a ton of money.
How To Go From Broke in Your 40s to Millionaire in Your 50s: 8 ‘Late Start’ Retirement Tips
Learn: The Simple, Effective Way To Fortify Your Retirement Mix
In fact, many of the retirement planning steps that wealthy people take can be replicated by people of varying income levels.
Some of the top ways that wealthy people plan for retirement that not everyone necessarily follows, but which are often accessible, include the following, according to Kevin Ross, chartered financial consultant and senior managing director of private wealth management at Bridgeway Wealth Partners, LLC.
Living Below Their Means
Being wealthy doesn’t have to mean spending extravagantly. By definition, spending more than you make (including any asset growth) causes you to lose wealth. So, wealthy people tend to be good about living below their means. That doesn’t mean they don’t spend money, but they also often spend less than they could technically afford.
“Wealthy people tend to be aggressive savers and are always looking to increase the amount of assets they have invested — as a habit,” Ross said.
Investing for Growth
Living below your means can help you save money, but wealthy people tend to go a step further by investing for growth.
“Generally speaking, wealthy people don’t just save,” Ross said. “They deploy their savings into growth-oriented investments — often utilizing tax-advantaged ‘wrappers’ to shield the growth from taxes — and always seek to increase the amount of their money that’s working, earning and growing.”
But that doesn’t mean wealthy people are always searching for the next hot stock. In many cases, investing for growth is a matter of consistently allocating to a diversified portfolio that grows over time, not overnight.
Focusing on Taxes
As mentioned, investing for growth tends to have a tax component to it. When planning for retirement, wealthy people often try to find ways to minimize their tax bills, such as in terms of how they structure their investment portfolios. If you’re earning dividends in a taxable account, for example, that could trigger taxes every year, as opposed to deferring taxes by holding non-dividend-paying stocks.
“Once wealthy people have more than enough income from their income-generating investments, it frees them up to invest more tax efficiently in growth-oriented investments that will not exacerbate their taxable income,” Ross said. “Since they don’t need any more income, they can treat their surplus assets as an accumulation portfolio — one with no money coming out of it — which is more tax efficient than a distribution portfolio, one with periodic income payments being taken out of the portfolio.”
Staying Disciplined
As much as people might like to think there’s some special formula that wealthy people use, oftentimes it’s more about sticking to the basics.
“Achieving wealth in a reliable way is nothing more than being disciplined enough to stick to the core principles of wealth creation,” Ross said.
That includes factors such as “living within your means, minimizing taxes, maintaining adequate liquidity for emergencies, saving and investing as much of your discretionary income as possible, allocating your money into growth-oriented asset classes that have the capacity to outpace inflation, not panic-selling during bad markets, and not over-investing in good markets,” he said.
Focusing on the Long Term
Retirement planning can take decades. So, part of being disciplined means maintaining a long-term outlook.
Wealthy people “tend to be very good at staying on track and not losing sight of their longer-term goals,” Ross said. “The short term is less important to the wealthy.”
For example, the stock market historically has gone up over time, with the S&P 500 returning an average of 6% to 7% after inflation, as a SoFi article notes. But if you look at each year individually, you’ll often see much bigger swings. In 2018, for example, the S&P 500 including dividends fell by 4.23%, according to an NYU analysis. If you got spooked by the negative returns and pulled your money out, you would have missed out on the 31% gain the following year.
So, focusing on the long term can help your retirement savings grow, without requiring you to constantly meddle with your investments.
Maintaining Sufficient Liquidity
Lastly, wealthy people tend to plan for retirement while paying attention to their liquidity needs.
“Maintaining sufficient liquidity is one of the things that wealthy people do,” Ross said. “It protects you from having to sell an illiquid asset at a fire-sale price because you need to get out of the investment quickly in order to meet liquidity needs.”
However, this is one area that non-wealthy people might not emulate in the same way, considering that liquidity needs can vary significantly based on your financial picture.
“Wealthy people generally have vast liquid reserves of capital that allow them to pursue opportunities into high-growth private equity, real estate or other such illiquid investments,” Ross said. “Illiquid means that the money cannot readily be turned back into cash until a liquidity event takes place, which usually takes years to occur.
“Wealthy people have enough liquidity to be able to tie up money in such investments. Those … who have not yet established a sufficient pool of liquid capital that they could access in the event of an emergency should not be considering highly illiquid investments.”
That said, most of these core principles can be followed by people of all income levels. The amounts earned, saved and invested might differ, but the core concepts often remain the same.
Said Ross: “There is no magic to what wealthy people do.”
More From GOBankingRates
- 10 Best Cheap Gym Memberships
- 10 of the Most Valuable Pennies
- 3 Ways to Recession Proof Your Retirement
- IRS Collection Notices: 4% of Americans Fear 'Catastrophic Financial Stress'
This article originally appeared on GOBankingRates.com: 6 Ways Wealthy People Plan for Retirement Differently
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
