5 Things Middle-Class Retirees Can Learn From the Upper Class About Retirement
Written by
G. Brian Davis
Edited by
Jenna Klaverweiden
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Think the rich use complicated trusts and other maneuvers to plan their retirement differently?
While the wealthy do occasionally get fancy with tools and tricks, they mostly approach retirement from a different mindset. They plan longer term — which allows them to earn higher returns and pay lower tax rates. Here are five things middle-class retirees can learn from the upper class about retirement.
Also see five key financial habits of upper-class retirees.
Get Serious About Financial Education Early
Many middle-class households know the basics of budgeting. But how well do they understand investing strategies? How to evaluate risk and return? For that matter, what about the other dimensions of investments beyond risk and returns, such as tax advantages, liquidity, time commitment, recession resilience and so forth?
The younger you learn how to invest, how to diversify and how to build passive income streams, the more wealth you’ll likely build in your lifetime.
Plan for Financial Independence
Ask a random 30-year-old about their plan for financial independence, and they’ll probably stare at you blankly. A 30-year-old who grew up in an upper-class family may lay out their timeline and strategy to achieve it.
Financial independence means earning enough money from investments that you can cover your living expenses. In other words, working becomes optional.
Even as they plan for financial independence at a young age, most don’t retire in the traditional sense of stopping work and twiddling their thumbs all day. Cuan Tait, a chartered financial planner with Raymond James, sees his upper-class clients continuing to pursue big projects even after achieving financial independence. “It gives them structure and purpose, and of course extra income, which takes pressure off their portfolio,” he said.
Use Diversified Investments and Income Streams
Many middle-class workers will invest through their employer’s 401(k), and maybe buy a few index funds in their IRA. When they retire, they may lean heavily on Social Security or a pension.
“The wealthy own precious metals, dividend-paying stocks, IRAs, 401(k)s, private equity real estate investments, business interests, passive income and more,” said Melanie Musson, finance expert with Clearsurance.com. “They ensure they have multiple ways to earn money, so that when one or two investments perform poorly, the others make up for them.”
Plan a Tax Strategy
The middle class gets their paycheck and files a tax return, perhaps taking advantage of a tax-sheltered retirement account.
The rich learn the rules of the tax game to play it with no holds barred. Or better yet, they hire an expert to help them play it. For example, if they earn too much to contribute to a Roth IRA, they may make a backdoor Roth contribution by way of their traditional IRA.
“Wealthy people tend to think further ahead,” Tait said. “They plan which account to pull from in which order in retirement, to minimize their tax bill.” That often includes combining Roth and traditional retirement accounts, health savings accounts (HSAs), taxable brokerage accounts, cash-flowing real estate investments and cash accounts.
Pay Off Consumer Debt
Many in the upper class pay off all consumer debts, from credit cards to student loans to auto loans, before retirement.
Wealth advisor Scott Sturgeon with Oread Wealth sees many clients go so far as to pay off their mortgage before retirement. “Removing that monthly fixed expense can allow them to spend on things they’re really passionate about, invest more, give more to charity or support family members,” he said.
Alternatively, the wealthy might arbitrage their mortgage. If they have a low interest rate in the 2%-to-5% range, they could take the money they had budgeted for paying off their mortgage and instead opt to invest it for 8% to 12% returns. Either way, they budgeted for owning their home free and clear, and made a strategic decision about whether to do so.
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