← Your Next Dollar: Money Management for High Earners
Your Next Dollar: Money Management for High Earners
Net Worth Number At Every Age You Should Try Reaching As A High Earner
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Today, on your next dollar, we're diving into one of the most misunderstood questions in personal finance. How much should you actually have at every age and how much should you be saving at every age? We're going to go into the 20s, the 30s, the 40s, the 50s, and the 60s to talk about some of the challenges and the strengths at every single decade. The things that you do in your 20s are going to be very different than the decisions you make in your 30s and 40s. We're going to talk about the specific numbers that you want to hit in each decade. We're going to talk about some of the ways to think about these frameworks and how to think about your savings rate. Because long term, what you need to understand is every single person situation is different. The way you want to live in your retirement may be different than someone else down the street from you. And so we want to make sure that we are focusing on our own retirement and our own savings rate going forward. So welcome to your next dollar, powered by Nerd Wallet wealth partners, the show where we help you make smarter decisions with your money today so you can build the life you want in your financial future. I'm Andrew Giancola. Let's dive in. So today we're div diving deeper into how much you should have saved at every age as a high earner. And I want to talk through at the top of the show here, why your savings rate matters. There's three reasons why you should consider or be thinking about your savings rate. Now, in this episode, our entire goal is to get the gears flowing because personal finance is very personal. And so your savings rate may be very different than the person down the street from you who has different financial goals. And so we want to make sure that we are thinking through this in a way that makes sense for our own situation. So number one is it. This is a variable that you can control. If you decide that you want to save more money because you want to retire early, you can increase your savings rate. Or if you decide that you want to spend more on vacations or things that you love, then you can decrease your savings rate if you are willing to work a little longer. Number two is this works on both sides of the retirement equation. Well, how much you spend every single month is going to go down when you increase your savings rate. In addition to the amount of money that you're putting into your portfolio or wherever else you are saving, that is going to go up. And so it helps you have the ability to, to consider retiring early if you Want to. So a household spending $300,000 a year needs roughly $7.5 million to retire under something like the 4% rule. And a household spending $180,000 per year only needs $4.5 million to retire under something like the 4% rule. So when you're looking at this, it could be a consideration where you increase your savings rate and decrease the amount that you're spending every single month. Number three is it can shorten your timeline. And, and a lot of times, if you're return chasing or trying to get that extra half a percent or 1%, your savings rate will help you, especially in the early days, not have to chase those returns as much. Because in reality, your first a hundred K, 200K, 500K that you build up your savings rate is a big factor. When you're thinking about that compounding starts to kick in a little more after 500k to a million dollars. And so we're thinking through our savings rate so that we can get to this point in time where we are moving the needle and we are getting the ball rolling on this. Now, what factors should be considered when determining your savings rate? Well, there's two factors that I like to think about. The first one is when you are going to retire. Well, this is going to be very different for many people. Some people may want to work until age 65 or 67 because you love your job and you love working. Some people may want to retire in their 40s because they want to get out of this office. They don't want to be working anymore. And so these are two very different scenarios. And your savings rate is going to be very different based on when you want to retire. Number two is how you plan on living in retirement. All of us have different goals when it comes to retirement. Some of us may want to live in a cabin in the middle of the woods and our cost of living is going to be much lower. Some of us may want to live in a high rise in the middle of Manhattan and have the beautiful view over Central park and spend tens of thousands of dollars every single month on cars and clothes and everything else. And so that's a very different situation. There's nothing wrong with either one of those. But you have to decide how you want to retire and what you want your retirement to to look like. This is why it is very different for each and every single person, because it is very personal how you think about your savings rate. And so our goal here is to give you a framework to help you think through this process to think through, where do I want my savings rate to land? And start to get the gears turning on what you want your retirement to look like. Because I think for many high earners out there, they're so focused on their careers that they haven't actually thought through some of this stuff. And this can be very helpful long term. So in this framework, we're going to give you three, three tiers at every single age. And we're going to be going through the twenties, the thirties, the forties, the fifties, and the sixties to give you some considerations to think through if you want to increase your savings rate. The first consideration, though, and the first piece of the tier is on pace for high earners, when you look at those numbers, many times they could be setting the bar a little low. And so we want to consider what are the other options that we have? Because we have this beautiful thing called a high income that you can take and, and put towards your financial future, or you can take and put towards your financial goals, or you can take and spend more on the things that you love. And so we want to make sure that we have these different parameters. Number two is ahead of the curve. So this is for folks who maybe want to have a little extra savings or they're thinking through, maybe I want to be ahead of the curve of just the standard fidelity numbers that are going to make me retire at 67. Maybe I want to retire a little earlier, getting closer to traditional retirement age, like a 65 or 60 or maybe even earlier than my 50s. This is going to be ahead of the curve where you're buying additional years of freedom. And so that's just the thought process behind this. And then elite. So this is where you're thinking about generational wealth. You want to hand down wealth to kids, or you want to be able to utilize money in a different way, give the charities that you believe in, all these different things. This is going to be the framework surrounding exactly how we think about this. So first, let's dive into the 20s. The 20s is where you build your foundation. And if you're in your 20s, you have one of the most valuable assets of all, which is time. Time is the thing that can help you when it comes to building wealth. And if you get started now, it is really cool some of the stuff that you can do with your dollars. So at age 25, if you're on pace, 0.5 times your income is what they say to have. So if you make $200,000 per year, having $100,000 saved up at age 25 is on pace for retirement. At age 30 it is one times your income. But we want to think a little bit more outside the box. We want to make sure that we are moving towards our retirement goals. So if you want to be ahead of this at 25 is 1 times your income and at 30 is 2 times your income. And if you want to be elite, then 1.5 times your income at age 25 and 3 times your income at age 30 is what we are looking at here. Now, how do you think about this? Or what are some things that you can do in your 20s to potentially focus on that may help you build wealth or increase that savings rate over time? Number one is consider maxing out your 401k from day one and capturing that full employer match for a lot of high earners out there. The 401k can help you with your tax situation because you get $24,500 per year that you can put into your 401k that you do not get taxed on those dollars. This can be a great savings for high earners if they want some of that pre tax money or they want to get some of those tax deductions in that given year. Now, long term, the other consideration to think through is if you want more flexibility because you are retiring early, then something like a taxable brokerage account could be something that you consider. Second is thinking about funding the Roth IRA every single year. Now, many high earners don't know that you can do a backdoor Roth ira, meaning you contribute money to a traditional IRA and then move that over to a Roth ira, because there are income limits to a Roth, you begin to get phased out. And so we want to make sure that we are thinking about adding some contributions to our Roth, if that is part of our financial plan. Now, the trade off with some of these backdoor strategies again is that you are not putting dollars into something like a taxable brokerage account. Or if you want to prioritize more living expenses, then you can do that as well. But these can help you with your broader financial plan. So we want to make sure that we are thinking about the tax consequences of both sides when we have this in place. Next is when you are young, one of the best things that you can consider is increasing that savings rate. If you can increase it to 25 to 35%, that can be very helpful long term. Why? Because every dollar you invest in your 20s is so incredibly valuable. You have so much time for this money to compound that in reality, these are some of the most valuable dollars that you can invest. You can invest significantly less than someone who starts in their 30s because you started early and you allowed compound interest to get to work. You have that valuable asset of time, which is really powerful. Now, realistically, not Everybody can save 25 to 35% of their income. That is just a goal that you can set out for yourself. And if you say to yourself, hey, I do want to invest 20, 30, 40% of my income because I'm young, I want to get as many of those dollars into these accounts. And then one of the things that you can consider is just increasing that amount slowly. You can increase it by 1% a month, 1% a quarter, until you hit that goal. That is another way to just slowly do this. So it's not as painful. Now let's dive into the 30s. The 30s is the accumulation phase. This is the phase where, hey, a lot of us are dealing and getting pulled in a bunch of different directions. You may have your career going on. You may have kids in the house where you have a lot of different responsibilities with your children. You may be just getting married. You may be, you know, having aging parents. There's a lot of things happening in your 30s, and many times the 30s and 40s we call the messy middle because you're just so busy and there's so much going on that the last thing you may be thinking about is your finances. And so one of the things we want to do is help you through that process and talk through some of the things that you can consider. So in your 30s, let's say you start at age 35. Well, at age 35, on pace is two times your income, and at age 40, it is three times your income. So an example is if you make $200,000 per year, having $400,000 at 35 and having $600,000 at age 40 can be a starting point. Now, ahead of the curve would be 3 extra income at age 35, and at age 40, it'd be 5 extra income. And if you want to be elite, then it would be 5 extra income at age 35, and it would be 7 extra income at age 40. Now, in your 30s, you may be considering something like a mega backdoor roth if your 401k plan allows it. Now, you have to check to see if your 401k plan does allow this. But this is one way that you can get more dollars into increasing your savings rate, especially if you have a really high income and you have some extra Dollars on hand that you want to consider. Again, the trade off is these dollars are locked up until retirement age. And so we want to make sure that it is part of our financial plan before we actually put these dollars or execute some of these options. Two is you might be looking into something like a taxable brokerage account. I have spoken to many of my friends who are in their 30s who are trying to get their finances together, and they're like, hey, I don't want to work until I'm 65. I want to consider working until my 50s. Or maybe you want to work into your late 50s, if that's the case. A taxable brokerage account is something to consider because it helps you bridge the gap. Because if you retire a little earlier, before traditional retirement age, where you can pull out of those taxable accounts something like 59 and a half for your Roth IRA or your 401k, then you may just want to have this bridge, this ability to bridge to age 59 and a half and have this cash on hand inside of something like a taxable account. So you got to think through those considerations when you were planning this out and having that trade off in place. The next thing is thinking through things like buying a house. We just did an episode on Buy Verse Rent and talking through how to run the math on buy versus rent. So you know exactly what to do when you think about buying a house. But making sure that you do this intentionally and not just emotionally is going to be one of those areas that can help you tremendously, especially in your 30s. But you want to run the numbers on this and you want to be intentional about this. Just because your paycheck got bigger, just because you got that huge bonus, doesn't always mean that the best decision for your situation is to just buy a much bigger house. Always do the math. Always run the numbers so you're intentional about this decision. Next is you can start to consider, especially if you have people who depend on you, consider your estate planning foundation, because there's a couple of different things that you can think through. One is, do you need a will? Are there people who you need to make sure that your assets are going to the right folks. And a lot of things are put into place that are going to help you get those assets, the right folks. Two is if you have a higher net worth, something like over a million dollars, considering something like a trust can be another thing that you can put into place. And so consulting an attorney or someone who can help you through that process is something you want to just consider or keep in the back of your mind as you approach your 30s. And then also let's find some balance. Let's find some balance in our life with the way that we are thinking about spending and the way that we are thinking about investing for our future. We may not want to invest every single dollar in our future unless that's what we truly value. We may want to balance some of that out with some lifestyle spending and some things that we actually enjoy. So thinking through all of these options and in your 30s, we want you to enjoy life. I know it gets messy. I know your career is taking a lot of your time, I know a lot of your family dynamics may be taking a lot of your time. But this is a really cool decade because you can build a tremendous amount of wealth if you set yourself up and start these automations early. Now let's go to the 40s because the 40s is where we can widen the gap. This is where folks start to earn even more money. Maybe you're getting promoted, maybe you are at an executive level or a VP level, maybe you are building up a company. And so this is where your income can increase and you can widen the gap between your income and expenses and take those extra dollars and put them towards wealth building activities or other things that you actually value. And so when we look at our 40s, we can start at age 45 and when we look at someone who is on pace at age 45, we can see they have it at 5x their income. At age 50 it's 6x their income. And if you want to be ahead of the curve, it'd be 7 extra income at age 45 and, and at age 50 it'd be 9x your income. And then elite would be 10 times your income at age 45 and at age 50 it would be 12 times your income. And so one of the things to think about here is when we approach our 40s, I know you still are in the messy middle. You got a lot of things pulling you in different directions. Maybe you have aging parents, maybe you have kids that are starting to get older or they're going to college. Maybe you have young children and you're still dealing with daycare and things like that. But we want to make sure that we are also thinking about our savings rate and where we want this to go because we have a couple of decades before potential or traditional retirement age. And so we want to think through, okay, if I do want to retire at traditional retirement age, what do I need to do with My savings rate, do I need to bump this up in order to achieve some of my goals? And so for some folks, they may want to consider bumping it up to something like 35% plus of their income during those peak earning years. If you're earning really good money, you can start to automate your investments into something like your brokerage accounts, like your taxable accounts. Whatever you are looking at doing, you can automate that money into those accounts and start to get the ball rolling. This isn't something where you have to dig into the weeds with budgeting. You don't have to spend a lot of time on every single line item. Just automate the process of where you want those dollars to go and you don't have to worry about it anymore. Get it out of the checking account so you don't overspend it and instead just send it to the places that you want it to go. Now, it also may be worth auditing your portfolio during this timeframe, looking at your asset allocation and kind of thinking through what you want that asset allocation to going forward. Especially if you have things like concentration, risk, or if you're looking at things like RSUs. A rule with your RSUs is thinking through, okay, well, how do I want to handle these? Do I want to keep these RSUs because I believe in this company long term? Do I want to move these RSUs somewhere else? Somewhere like my taxable brokerage account or wherever else I am prioritizing with my financial plan? These are all different things that you want to consider and there's a lot of nuance to this. So it's really worth having a conversation with your financial advisor and to make sure that you figure out what risk makes sense for your own financial plan. This is going to be the key when it comes to rsu. A lot of high earners are dealing with this, and so we want to make sure that we are thinking through this with our advisors. Next is to consider getting serious about tax strategy if you have not done so already. Because tax strategy can really help you long term when it comes to saving some of those extra dollars. Not to mention that those extra dollars that you save have a lot of opportunity costs. Opportunity for you to put them towards memories or doing things with your family. Opportunity to put them towards future you or things that you value. And so because of this, we want to make sure that we are having conversations with our CPA and having conversations with our advisors to make sure that we can think through tax planning in a way that fits best for us. Learning how to do this and balance aging parents, having kids, or if you're single, being able to increase that savings rate can really help you long term. And also, don't forget, as you start to build wealth and as you start to really get serious about this, making some time for those memories and vacations, things like that can be a benefit if that's something that you truly value. And so considering that is another big option. Now let's look at the 50s and we want to talk through the 50s because this is a very important decade. There's a lot of cool things that you can do in your 50s that can help you catch up on some of your contributions. But also this is the time where we really want to think through our retirement planning and have the plan in place. So in your 50s at age 55 on pace is 8 extra income. And at age 60 on pace is around 10 extra income. If you want to be ahead of the curve, you want to be 11 extra income at age 55. And if you want to be ahead of the Curve at age 60, 14 times your income is the way to consider looking at this. Then elite at age 55 could be 15 extra income and at age 60 could be 20x your income. Now there is a lot of cool things that you have available to you once you reach the age of 50. Things like catch up contributions, if you have been contributing to retirement accounts are one great benefit. So things like the 401k for example, if you're between ages 50 to 59, you have an $8,000 catch up contribution. Also your 403b and your 457 plans have that available as well. Age 60 to 63 actually have a special super catch up contribution which we'll talk in the next section about. But it's $11,250. Things like a simple IRA, they have a $4,000 catch up contribution and your traditional IRA or your Roth IRA has a $1,100 contribution and your HSA has an additional $1,000. So because you are age 50 or beyond, you are allowed to do these catch up contributions to put more money into these accounts, which is a great benefit to consider if that is part of your plan and you're trying to increase your contributions to some of these accounts and these catch up contribution amounts can change over the course of the last couple of years. We've seen this increase over time, so make sure you double check the IRS website so you know what the exact catch up contributions are currently right now. The next thing is to make sure you have your retirement plan in place. Now this sounds simple, but high earners tend to focus a lot of time and energy on their career. And then as time goes on, they have not thought through some of their retirement plans yet. So five years out from retirement, we want to make sure that we consider having a plan in place because we want to know what the next steps are and we want you to consider thinking through some of their health care options as well. Let's say for example, you retire at age 55. Well, if you retire at age 55, Medicare is not coming until 10 more years at age 65. And so we want to make sure that we are thinking through our healthcare and how we are going to handle that. If you stop working early, you may have Cobra available to you, but that's only for 18 to 36 months. And a lot of healthcare plans out there can cost anywhere from 1500 to 2,500 for individuals. And so we want to just make sure that we are thinking through some of these health care plans and you have a plan for health care. Many times folks who do not do well early in retirement is because they did not plan for health care. And so we just want to make sure we consider that. Also, it may be worth mapping out something like a Roth conversion plan before RMDs are going to begin at age 73. So if you don't know what an R and D is, that is required minimum distribution and at age 73. And this could change at any given time. So check the IRS website. But currently at the time recording this at age 73, the IRS requires you to start drawing money on things like your 401k, your traditional IRA and accounts like that. You have not paid taxes on those dollars yet and so the government wants you to begin paying taxes on those dollars. And so when we think about something like the rmd, there are ways to get around this with Roth conversions. Now these can be complicated and you can end up with a big tax bill if you don't plan this out properly. So consider talking to your nerd wallet Wealth Partners Financial Advisor if you are going to consider doing some of these Roth conversions because you want to make sure you do this right now. Lastly, we have the 60s. The 60s is where you're going to execute the transition. As we start to approach retirement age, what are some of the things that we want to consider? Well, first there are some key catch up contributions that we want to look into. And if you do need catch up contributions in your 60s, there are a number of them. That you can check on the IRS website to see if they work for you. But also we want to think about sequencing our withdrawals tax efficiently because there's a big thing when we think about when we retire called sequence of return risk. So if you retire during a down market, you can see your portfolio takes a much larger risk than would be if you did not retire in a down market. So when we think about this, we want to make sure that we are pulling from the right accounts. And so your financial advisor can absolutely help you map this out so that you are pulling on the right accounts for your specific financial situation. Also, you may want to consider executing Roth conversions in the gap years between retirement age and savings 73. This potentially can help you avoid some of those RMDs if that is part of your goal. And so if you don't want to do those required minimum distributions that we talked about that you have to start pulling out at age 73, then you can consider doing this as well, where you execute some of those Roth conversions. And talking to your advisor and making sure you do this right is going to be very, very important. Your 60s is the time frame where it's a great time to consider enjoying life and spending time doing the things that you absolutely love. So that's it for our breakdown of how much you should save by age. If you guys have any questions, make sure you shoot us a message and let's dive into some of our favorite videos of this week.
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Here's the average and median net worth by age. Social media will often paint an extremely unrealistic picture on what is realistic for money. So here's the actual list by decade so you can see exactly where you stand. For people inside their 20s, the average is a little over $110,000 where the median is about 7,500. For all of you that don't know the difference. Average takes in everyone and divides it. And so if we have one or two billionaires inside their 20s, this is going to wait at extreme extremely up like it has here. Median throws the outliers out and finds a more realistic middle. This is the one that I probably pay more attention to. Inside your 30s, the average is going to be about $309,000 where the median is going to be about $35,000. Inside your 40s, the average is going to Be 776,000 where the median $125,000.
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So there's a lot of takeaways here for high earners. One of the biggest ones I see for me personally is I don't want to be anywhere near those numbers. We want to make sure that we are building wealth over time and we're enjoying our retirement and hand to enjoy life and build wealth in the future. So really, really important to make sure that you learn from some of this stuff, but also take it with a grain of salt and figure out what your goals are for your net worth first and go after that target. That's going to be the target that you want to find. If you need help finding this kind of stuff, NerdWallet Wealth Partners has financial advisors who can walk you through step by step, building out that financial plan. Thank you for listening to this episode of your next dollar. Don't forget to follow us on Apple Podcasts, Spotify, YouTube, or whatever your favorite podcast player is. And don't forget to leave us a five star rating and review on on your favorite podcast player. In the next episode we're going to talk about how to combine finances as a couple. So make sure you're subscribed to this podcast and we'll dive deeper. Can't wait to see you on the next episode. Thanks so much for listening. We'll see you next time.