4 Ways You Can Maximize Your Retirement Savings During Your Highest Earning Years
Written by
Kerra Bolton
Edited by
Daria Uhlig
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The average American with a bachelor’s degree earns about $2.3 million over their lifetime. Much of that money is made during their peak earning years, which generally occur between the ages of 45 and 54, making it essential to strategically plan for retirement to ensure long-term security.
Here are four ways to maximize your retirement savings during your highest-earning years.
Consider the ‘Backdoor IRA’ Strategy
Retirement experts often urge peak income earners to max out their retirement contributions and aim for their annual contribution limits, especially if their employer is offering a match.
The annual contribution limit for 401(k)s this year is $23,000, plus an additional $7,500 if you are over 50. For individual retirement accounts, the limit is $7,000, with a $1,000 catch-up option.
But why stop there?
Daniel Milan, an investment advisor representative and managing partner at Cornerstone Financial Services, recommends contributing the maximum allowable amount to a traditional IRA and then converting those funds to a Roth IRA via the “backdoor Roth IRA” strategy.
The benefit of a backdoor Roth is that it allows high earners to (legally) sidestep income-based contribution limits on Roth IRAs.
However, you may have to pay federal, state and local taxes on converted earnings and deductible contributions. In addition, the conversions could boost you into a higher tax bracket for the next year.
Develop Discipline
It can be tempting to put newfound cash from a raise or promotion toward buying a bigger house or a nicer car, or taking your dream vacation. The popular term for it is lifestyle creep, and it can keep upwardly mobile individuals from reaching their retirement goals.
“What happens is they are unable to improve their financial condition because they spend everything they make,” said Robert Johnson, a finance professor at the Heider College of Business at Creighton University.
Johnson said, “People are wise to effectively invest any money from a raise and act as if you didn’t receive the raise. Continue to live the same lifestyle you led before receiving a raise and invest the difference.”
For example, if you received a $5,000 annual raise early in your career and invested it in an investment account growing at a 10% annual rate, after 30 years you would have invested $150,000 and earned nearly $760,000 from those investments.
To some, a 10% average annual return is unrealistic. However, Johnson cited Ibbotson Associates’ data, which concluded that since 1926, the average annual return on an S&P 500 stock has been 10.3%, while investments in long-term government and long-term corporate bonds have grown by an annual average of 5.7% and 6.2%, respectively.
Johnson said, “People would be well-advised to pay heed to Warren Buffet’s sage words: ‘Do not save what is left after spending; instead spend what is left after saving.'”
Plan for Healthcare Costs
According to a Peterson-KFF survey, at least 3 million Americans owe medical debt of $10,000 or more.
As people age, their health naturally deteriorates, requiring more doctor’s office visits, more advanced medical care or even skilled nursing care. You can offset the costs of that care by allocating part of your savings to long-term-care insurance or a health savings account (available only to those with eligible high-deductible health plans) or other account earmarked specifically for future healthcare costs.
“I believe we need to be talking about healthcare planning in our 30s, 40s and 50s alongside all other retirement conversations — save your money and your body,” said Jessi Chadd, chief wealth officer at Aspyre Wealth Partners. “Because if you don’t have your health, the bulk of your savings end up being used for medical expenses instead of the fun things you’ve planned for retirement.”
Review and Adjust Accordingly
Regularly assessing and adjusting your savings strategy, including your income, expenses, debts and financial goals, are essential, especially during your high-earning years. But avoid the temptation to go at it alone.
“When we get sick we go to the doctor,” Johnson said. “Yet somehow people believe they should be able to navigate the ever-increasingly perilous financial waters without getting professional help.”
In a previous interview with GOBankingRates, Johnson recommended preparing an investment policy statement. The document, which a financial advisor typically prepares for you, outlines your return objectives and risk tolerance over a relevant time horizon. An IPS also sets out the ground rules of the investment process and guides your plan.
“The whole point of an IPS is to guide you through changing market conditions,” Johnson said. “It only needs to be revised when your individual circumstances change.”
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