5 Things the Middle-Class Must Do Differently Than the Rich When Saving for Retirement
Written by
Sean Bryant
Edited by
Molly Sullivan
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Are you trying to save for retirement as a middle-class family? It shouldn’t be too big of a surprise that things will be a little different than they are for someone with substantial wealth.
Without a trust fund or inheritance to rely on, you will be forced to work hard to build a realistic retirement plan that will provide you with enough money to live comfortably throughout your retirement years.
Keep reading as we discuss five things middle-class families must do differently than the rich when saving for retirement.
Consistently Plan
The rich don’t need to worry about how inflation affects prices, being able to maximize growth on their investments and how much they plan to spend in retirement. This isn’t the case for the middle class. These three factors are crucial to retiring comfortably without running out of money.
Consistently tracking your investments’ growth and putting together realistic spending plans will increase your chances of retiring with enough money. At a minimum, you should revisit your retirement plan annually, whether that be a quick recap of your progress on your own or with the help of a financial advisor.
In your retirement plan, you should update your figures for inflation and your expected lifestyle. For example, if you plan on traveling during retirement, you must factor an uptick in travel expenses into your plan. You don’t want to retire and have no extra funds to take that dream vacation to Italy.
Factor Social Security Into Your Plan
Social Security will play a major role in your retirement plan. With the Social Security Administration projecting shortages by 2035, the middle class must have a backup plan. Currently, Social Security is estimated to replace around 40% of your pretax income during retirement. But what happens if this percentage is dropped down to 30%?
The middle class must have enough investments, cash flow and stability to weather a drop in Social Security benefits. The rich don’t need to worry about a 10% decline in Social Security as they will likely have plenty of other income streams to support their lifestyle. Social Security will be a major component of your retirement plan, but you’ll want to have other income streams and plan for reduced benefits.
Save Too Much
Social Security leads us to our next point: The middle class needs to save too much. The risk of running out of money as a middle-class retiree is a very real threat. Going back to work in your 70s or 80s is the worst-case scenario.
Oversaving during your working years is not only common; it’s required to retire comfortably. The general rule of thumb to save 10% of your income is too low for the middle class. Aiming for an annual savings rate of 15%-20% puts you in a better retirement position.
“Unlike the wealthy, who often have diverse investment portfolios and multiple income streams, the middle class may rely more heavily on these employer-matched contributions to bolster their retirement nest egg,” said Abid Salahi, co-founder of FinlyWealth. “Failing to take full advantage of these matching contributions leaves money on the table, a grave mistake that can significantly hinder long-term financial security. A 2023 study by Vanguard revealed that a staggering 20% of employees miss out on the full employer match, a missed opportunity that could amount to thousands of dollars over a lifetime.”
Choose Safer Investments
The middle class can’t afford to lose thousands of dollars from their savings like the rich can. While the rich might invest in risky startups or speculative asset classes, the middle class chooses more stable investments, like blue-chip or high dividend-paying stocks.
As you near retirement age, you should also change your portfolio’s asset allocation to reduce your risk further. For example, you might want your portfolio to include more bonds than stocks.
Although the rich might increase their overall return with risky investments, the chance of losing everything is real. Rising prices are already making retirement planning difficult for the middle class, you don’t want to watch your savings disappear due to one bad investment.
“Diversification is key but must be approached conservatively,” said Ben Klesinger, co-Founder and CEO of Reliant Insurance Group. “While the wealthy might diversify into riskier assets such as start-ups or alternative investments, the middle class should concentrate on building a diversified but more stable portfolio. This can include a mix of stocks, bonds, and possibly some real estate within their comfort zone.”
Work Longer
The rich have options when it comes to when they retire. This isn’t always the case for the middle class. Because the Social Security Administration increases your benefits each year you delay taking payments up to age 70, many will work a few extra years to maximize their Social Security benefits.
Many middle-class workers might elect to delay payments to retire more comfortably without the threat of running out of money. Even if you don’t plan on working a few extra years, full retirement age isn’t until 62. While the rich might retire in their 50s, the middle class generally works an extra decade to receive health insurance benefits like Medicare.
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