How Do Rich People Plan For Retirement?

Are you rich yet?

A high net worth (HNW) means at least $1 million in investment assets. According to Fed net worth data from DQYDJ.com, only the top 12.5 percent of American households qualify.

But that may not be enough to be considered wealthy.

According to a Charles Schwab wealth survey, Americans said you need $2.2 million to be wealthy. Even including primary residence equity in net worth, only 9 percent of Americans have that much or more.

Will You Ever Be Rich?

Even if you don’t already qualify as high net worth, you’ll need to get there to retire with an income in the top third of retirement-age Americans.

Here’s why.

• According to the Motley Fool, the average retirement benefit from Social Security for a worker and his or her spouse is $32.7k.
• Per Fed income data from DQYDJ.com, an income of $76.5k puts you in the 67^th percentile of Americans aged 67 (the Social Security Administration’s full retirement age for those born in 1960 or later).
• Assuming you draw 4 percent of your portfolio when you retire, you’ll need nearly $1.1 million for that draw to supplement the average Social Security benefit up to $76.5k.

If you reach $2.2 million, and assuming your home equity matches the average of $588.4k for the 91^st percentile, your $1.6 million portfolio should allow a $64.5k safe draw. With the average Social Security benefit, you’ll be able to live on over $97k a year, putting you in the 79^th income percentile for 67-year-olds.

What Do Wealthy Americans Say About Retirement?

According to a recent First Citizens survey conducted by Logica Research, affluent Americans need $3 million to retire comfortably and $5.5 million to have enough to leave a sizeable inheritance.

Perhaps unsurprisingly, nearly all wealthy Americans think their money management skills are as good as or better than those of others (66 percent said better than, 30 percent the same as, and only 4 percent worse than others).

Another interesting tidbit is to whom these wealthy folks compare themselves – 35 percent compare themselves to those with more than they have. The majority, 55 percent, compare themselves to others with similar levels of wealth. Just 10 percent compared themselves to those with less money.

Do these wealthy people plan their finances?

Definitely!

Nearly three in four (74 percent) have a written financial plan, and most (54 percent) have updated their plan in the past year. Only 4 percent said they’d last updated their plan more than five years ago.

When do they plan to retire?

The answer depended on their generational cohort: 

• Boomers retired or plan to retire partially by age 62 and fully by age 66.
• Gen Xers retired or plan to retire partially by age 60 and fully by age 65.
• Millennials retired or plan to retire partially by age 56 and fully by age 62.

It isn’t clear if the differences are due to increasingly realistic expectations as people get closer to when they thought they’d retire, generational changes in attitudes toward work, or a combination of the two.

For those still working, the most important financial goals for retirement stated are:

• Maintaining lifestyle throughout retirement – 44 percent.
• Retiring with enough to enhance lifestyle when retiring – 22 percent.
• Helping their family as much as possible before they pass away – 20 percent.
• Passing on wealth once they pass away – 13 percent.

Eight Things the Wealthy Do to Prepare for Retirement

As mentioned above, most wealthy people have written financial plans that include retirement planning.

The main purpose of retirement planning is to make sure you can live the lifestyle you choose without worrying about running out of money before you die.

Another purpose for many, as mentioned above, is to have enough to afford to give generous gifts to their kids and other family members while they’re alive and leave a good-sized inheritance to their kids.

Sean Polley, Private Wealth Manager, Polley Wealth Management says, “The first thing I recommend to clients is to have a comprehensive plan. Most wait and wait because life is busy. However, the sooner you build a plan, the better your outcome will likely be.”

Benjamin Hooper, Founder of Comal Wealth Management expands, “We help our clients maintain a comfortable retirement by embracing ongoing financial planning and communication. Goals and priorities frequently change, so it’s important to understand that financial planning is an ongoing process; not a one-time event.”

Here are some methods the wealthy (and those who plan to become wealthy) use in their planning.

1. Quantify your goals

If you don’t know where you want to go, how can you possibly plan how to get there?

Quantifying here doesn’t mean simply picking a target net worth number, what many adherents of Financial Independence Retire Early (FIRE) call their “FIRE number.”

It means coming up with your number based on your specific desires. If you want to travel extensively, you need to come up with a plausible annual amount you want to spend on traveling based on:

• Where do you want to go?
• How often do you want to travel?
• How long do you want your trips to extend?
• Do you want to travel first class, business class, premium economy, or with the lowest fares?
• Do you want to stay at the ritziest hotels, more reasonable but still luxurious accommodations, low-cost hotels/hostels, or camping?
• Do you want to travel solo, with a companion (spouse or other), or with your kids and grandkids?

How often do you want to eat out, and at what level restaurants?

How much do you want to gift your kids and grandkids and how often?

How much do you want to donate and how often?

And, of course, how much do you anticipate spending on fixed costs?

Once you have a plausible budget, increase the dollar amounts by a plausible inflation rate between now and when you plan to retire.

For example, if you have ~20 years to go and expect inflation to match its long-term average of 3.5 percent, the “rule of 72” says you’ll need to double all your projected expenses, except for ones that can’t increase such as a fixed-rate mortgage.

Along these lines, I’ve created our retirement budget and projected it for (too?) many years past when I plan to retire.

2. Quantify your retirement income (including the decision about when to claim Social Security benefits)

The Social Security Administration (SSA) has a nifty tool to estimate your eventual retirement benefits. Once you use it to get your expected retirement benefits based on your planned claiming age (whether claiming as early as age 62, accepting up to 30-percent reduced benefits; at full retirement age, up to age 67 depending on your year of birth; or delaying claiming to increase benefits by 8 percent per year delay up to a maximum level at age 70), use the same inflation rate you used above to adjust your estimated benefits, since Social Security benefits get annual cost-of-living adjustments (COLAs).

Add to this any other non-portfolio income you expect to have in retirement, such as:

• Rental income.
• Royalties.
• Credit card rewards.
• Annuity payments.
• Part-time wages or gig income.

Don’t forget to reduce these by any related expenses (e.g., rental income may imply mortgage payments, property taxes, maintenance costs, property management fees, etc.) and adjust the net amounts for inflation to the extent you expect them to keep up.

Again, my projection spreadsheet includes all these.

3. Plan on reducing your taxes as much as legally possible, and account for that minimum in your retirement budget

You can affect your income taxes in retirement by a variety of means, such as:

• Drawing some of the money you need from Roth accounts.
• Funding an Indexed Universal Life (IUL) permanent life insurance policy and borrowing against its cash value. I’ve started looking into doing this but haven’t decided yet.
• Selling appreciated assets owned for over a year, taxed at the lower long-term capital gains tax rates.
• Investing in US bonds, federal agency bonds, and your state’s municipal bonds to reduce your federal and state income taxes.
• Funding deferred income annuities including Qualified Longevity Annuity Contracts (QLACs) to defer Required Minimum Distributions (RMDs) on a portion of your retirement money up to age 85. This is another area I’ve started investigating.

4. Plan how you will draw money from your nest egg

Once you know how much you expect to have in your portfolio at retirement, how much you’ll want to spend, and your expected tax situation, you can decide on your drawdown strategy. For example:

• Will you draw a static amount such as with the 4-percent rule (adjusts only for inflation) or use a dynamic drawdown strategy such as the Guardrails Approach? My plan assumes the latter.
• Will you use dividend income to fund your annual shortfall between income and expenses without having to sell shares?
• Will you use a bucket strategy, and if so, how many years’ worth of expenses will you keep in cash equivalents, bonds or bond funds, and stocks or stock funds? If you plan to use such a bucket approach, how will you decide which bucket you’ll draw from each year and when will you rebalance between buckets? My plan includes keeping three years’ worth of expenses in cash equivalents, another eight years’ worth in bond funds, and the remainder in stock funds, rental properties, and crypto.
• How will you decide how much to draw from taxable, tax-deferred, and tax-free accounts (i.e., Roth accounts)?

5. Plan how to address RMDs higher than what you’ll need to fund your retirement expenses

Depending on your income tax brackets now and in retirement, you may want to convert tax-deferred money in traditional Individual Retirement Accounts (IRAs) and 401(k) plans to tax-free Roth accounts.

If you have no traditional IRAs (e.g., rolling all these into a traditional 401(k) plan), you can avoid extra income taxes when making back-door contributions to Roth IRAs, even if your income is above the income limit for Roth contributions. In 2024, these limits are at a Modified Adjusted Gross Income (MAGI) of $146k for individuals and $230k for joint filers).

Here’s how – you open a traditional IRA and fund it with after-tax dollars. Then, you immediately roll the contribution into a Roth IRA. Since the conversion is immediate, there should be little or no gains, so you won’t owe taxes (beyond having paid taxes on the initial contribution because it’s made with after-tax dollars).

As mentioned above, you can use QLACs to defer some of your RMDs to age 85.

Once you’ve done everything possible to reduce your RMDs, you can take the portion that’s over what you need to cover your spending and contribute it to charitable causes. Beyond that, you’ll have to pay taxes, but can reinvest those dollars in your taxable portfolio where you may be able to defer taxes indefinitely if you invest in, e.g., individual stocks and don’t sell them.

6. Plan your investments to manage expected taxes

Related to the above, the accounts you use for your investing can have a massive impact on your eventual taxes in retirement. For example:

• Investments in Roth IRAs or Roth 401(k) plans are made with after-tax dollars but withdrawals are tax-free, including when you withdraw investment returns. An added benefit is that Roth accounts don’t count when calculating your RMDs. Roth accounts are often used by wealthy people to invest in assets that may appreciate massively (e.g., early-stage startups, cryptocurrencies, etc.). This is how Peter Thiel famously built up a $5 billion (yes, with a “b”) Roth IRA. This is something I’ve done to an extent, making most of my (small) crypto investments through a Roth IRA.
• My all-time favorite account type is the Health Savings Account (HSA). If your health insurance qualifies, this account type lets you contribute up to $4150 for individuals and $8300 for couples (plus $1000 catchup contributions if you’re at least 55 years old) in pre-tax dollars, investment returns are not taxed, and withdrawals for qualified health-related expenses are tax-free.
• Investing in real estate lets you sell investments (if needed) while deferring capital gains through so-called 1031 exchanges, as long as you roll the proceeds over into a new real estate investment.

7. Invest now to fund your eventual retirement

People who earn high incomes may or may not be strategic with how they manage their money. 

Even earning $200k or more may not protect one from living paycheck to paycheck if one spends it as fast as it comes in (or faster!).

People who want to become wealthy need to invest a sizeable portion of their incomes. In fact, since Social Security benefits replace 90 percent of low incomes, but as little as 15 percent of the portion of income above average indexed monthly earnings over $7,078, and none of income above the maximum Social-Security-taxable income, the more you earn, the less you can count on Social Security.

When investing for retirement, it’s best to use different types of accounts – Roth IRAs and 401(k) plans, tax-deferred accounts, HSA, and taxable portfolios. If you can afford it, maximize your 401(k) contributions including any catchups for which you qualify. If that’s more than you can swing, try to at least contribute enough to capture any matching contributions offered by your employer.

My favorite approach is to start investing as early as possible, even if it’s just 1 percent of income, and then allocate to investments half to two thirds of any income increases and/or one-time windfalls and bonuses throughout your career.

In addition, put five to 10 percent into short- and intermediate-term savings to cover emergencies and major irregular costs such as expensive vacations, down payments for buying a house, replacing a car, etc.

8. Protect yourself from catastrophic losses of various sorts

Imagine you’ve built up a seven-figure net worth and are sitting pretty as far as your retirement plan.

Then, heaven forbid, you or your spouse suffer an accident or health crisis that prevents you from being able to take care of two or more of your activities of daily living (ADLs), bathing, dressing, toileting, transferring (getting in and out of bed or chair), eating, and continence.

Without long-term-care (LTC) insurance, you’d have to pay for intensive care, and if the disability continues for many years, your finances could be devastated. This is why I bought a LTC policy many years ago. The monthly premiums are affordable and the policy protects our finances from such a catastrophe. If you can’t find a reasonable LTC policy, you can look for a life insurance policy that offers LTC coverage.

Another way to protect yourself is to buy an umbrella or excess liability policy. These policies cost relatively little because they only kick in once your homeowner or auto insurance liability limits are exceeded.

Buying $1 million or more in such coverage will protect you from massive judgments following a possible accident. As important, the insurer will be incentivized to cover the legal expenses incurred protecting you in court.

The above-mentioned HSA, along with Medicare, will provide you with good coverage if and when you and/or your spouse have significant health issues.

Finally, estate planning, trusts, and permanent life insurance policies can help protect your money once you’re no longer around. These may reduce taxes owed on your bequests, protect that money from lawsuits against your heirs, etc.

Six Things for Which the Wealthy Are Willing to Pay Extra

While building wealth, you will likely be very cost-conscious and avoid spending money you don’t have to. That was certainly the case for me.

However, once your net worth grows enough and assuming your income is high enough relative to your ongoing expenses, you may reach a point where spending extra makes sense if it lets you enjoy a higher level of service and/or reduce the time you need to spend doing things you don’t like.

Some examples include:

1. Concierge healthcare: Some medical practices charge an annual fee but then provide enhanced care. This includes being able to email, call, or text your doctor whenever needed (and get a quick response!); you can usually schedule a visit or virtual consultation with your doctor within a day or two; office visits start when scheduled (no waiting hours for an overworked doc) and continue as long as needed (rather than your doc rushing in and out in 15 minutes); and you can count on your doctor to coordinate with any specialists you need.
2. Landscaping and gardening services: If you don’t enjoy spending lots of time working on your yard, hiring professionals can save you that time, and should result in a better-looking yard.
3. Home cleaning and maintenance services: I don’t know many people who enjoy cleaning their toilets and kitchens. We certainly don’t. Hiring cleaning pros means we don’t have to spend time doing this, freeing up hours we can use to bring in more money and/or enjoy leisure activities.
4. Business or first-class tickets on long-haul flights and luxury hotels: These can dramatically increase the cost of vacations but being able to lie flat on a 12-hour (or longer) flight means you arrive more rested and don’t spend your first day abroad feeling like a zombie. Luxury hotels usually have more comfortable bedding, which translates to better sleep and more enjoyable days.
5. Regular massages and/or other bodywork: If these are your thing, getting regular treatments can help reduce stress and improve wellness.
6. Professional insurance, tax, wealth management, and investment advice: Even if you know enough to manage your finances without professional help, having a fiduciary professional review your plan with an objective eye can help ensure you’ve optimized things and appropriately mitigated risks.

To bring a sense of the value of professional financial advice, I asked some pros for their input for this article. You already read what two said above. Here’s some more.

Josh Radman, Principal and Owner, Presidio Advisors says, “So much of ‘building wealth’ is behaviorally influenced and it’s important to understand that our own psychological biases often chip away at the returns we would otherwise generate. Did you buy NVIDIA last year and have now convinced yourself that you’re a brilliant stock picker? These types of overconfidence biases can be detrimental to building long-term wealth, relative to those who consistently invest in well-diversified, broad-based indexes. 

“To build wealth, it’s also critical for folks to understand not just their risk tolerance (how much volatility they can stomach), but also their risk capacity (how much risk can they actually take, given their cash flows, assets, etc.). Sometimes, these two concepts aren’t in lockstep with each other. That can lead to a huge opportunity cost if you’re not taking enough risk for your anticipated future needs or a huge erosion of wealth if you take on too much risk for your goals and timelines. 

“I work with clients who have equity compensation (such as Restricted Stock Units from public companies). Many, particularly in today’s roaring hot market, are sitting on high concentrations of unrealized gains from their company’s stock. Concentration risk is real and all of those unrealized gains are just that – unrealized. To ensure a ‘comfortable’ retirement, it’s very important for clients to be well diversified across asset classes so they don’t subject themselves to additional, uncompensated risk because 80 percent of their portfolio is tied to the performance of one company stock.”

Jorey Bernstein, CEO, Jorey Bernstein Investment Consultants adds, “To build wealth, I recommend my clients start with a solid financial plan that includes setting clear, achievable goals and a diversified investment strategy. We focus on maximizing savings, minimizing debt, and making consistent, informed investments. For a comfortable retirement, we tailor strategies to align with each client’s unique vision, ensuring they have a balanced portfolio that considers risk tolerance and time horizon. It’s also crucial to regularly review and adjust the plan as life circumstances change. Additionally, I emphasize the importance of having an emergency fund, staying informed about financial trends, and seeking professional advice to make well-informed decisions.”

The Bottom Line

Whether you’re already wealthy or just on your way there, the above offers a wealth (no pun intended) of potential ways to optimally accumulate, protect, spend, and bequeath your money. While not everyone will need or want to use all of these ideas, they can serve as a great starting point when you develop your long-term financial plan.

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When you’re uncertain about money matters, submit your question to Wealthtender, and it may be answered by a financial advisor in an upcoming article or in the Wealthtender Expert Answers Forum. 

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This article was originally published on Wealthtender and is intended for informational purposes only and should not be considered financial advice. You should consult a financial professional before making any major financial decisions. Wealthtender earns money from financial professionals, which creates a conflict of interest when these professionals are featured in articles over others. Read the Wealthtender editorial policy and terms of service to learn more. Wealthtender is not a client of these financial services providers.

About the Author

Opher Ganel

My career has had many unpredictable twists and turns. An MSc in theoretical physics, a PhD in experimental high-energy physics, a postdoc in particle detector R&D, a research position in experimental cosmic-ray physics (including a couple of visits to Antarctica), a brief stint at a small engineering services company supporting NASA, followed by starting my own small consulting practice supporting NASA projects and programs. Along the way, I started several other micro businesses and helped my wife start and grow her own Marriage and Family Therapy practice. I draw on these diverse experiences to write about personal and small-business finance to help people achieve their personal and business finance goals.

Follow me on Medium (opher-ganel.medium.com).