Regardless of salary, you need a plan and discipline

Earning a high income does not guarantee financial security. It does not mean you can achieve your financial goals. It doesn’t even give you better odds than someone who earns less but is a careful financial steward.

It gives you a big leg up. But nothing more.

Over the years, I have seen too many high-income earners squander that advantage. If you earn a high income, here’s how to use that income to create financial security.

First, a definition of sorts. I consider a high-income earner to be someone who can save 15% or more of their gross income annually and still afford a comfortable life, both essential and discretionary items. That probably means your household salary is at least $250,000, but in some high-cost areas, the threshold is higher. If that’s you, please read on. If that’s not you, but you have managed to build a nice nest egg, please read on, too, because this will reinforce your good habits.

The keys to building financial security:

• Start with a plan.

  Figure out how much you need to save, how long you need to work, and how much you can spend to afford the life you want. You are unlikely to achieve financial security if you don’t have a plan.

• Save: Max out your company retirement plan and save extra in a brokerage account.

  In 2023, the maximum you can save in a retirement plan is $22,500, or $30,000 if you are 50 or older. Unless you plan to cut living expenses in retirement, you need to build up significant after-tax savings. In 2022 the maximum Social Security benefit was about $40,000 for people claiming the benefit at normal retirement age. The annual sustainable withdrawal for your retirement accounts is unlikely to cover the balance of your spending needs. So, when you retire, you need a significant amount saved in a brokerage account.

• Guard against lifestyle creep.

  Too often, expenses go up with income, while saving doesn’t. A solution: “Pay yourself first.” Set aside a portion of your after-tax income in a brokerage account, and treat that as a non-discretionary expense. Automated saving is a valuable discipline.

• Guard against the unexpected.

  There is a real chance you will lose your high income before you expect to lose it. That can be because of economic forces, health, or premature death. Insurance can help, but aggressive saving is critical.

• Be tax-savvy but not tax-crazed.

  Defer taxes in your high-income years by maximizing 401k or 403b contributions. In your taxable accounts, own investments which avoid excessive capital gains or current income – for example, passive mutual funds should generate a lower tax bill than active funds, which trade frequently. But don’t be so focused on tax that you take inappropriate risk. For example, owning only municipal bond funds, just because they pay tax-free interest, increases risk by reducing diversification. Or not selling a large stock position just because it has significant unrealized gain subjects you to risk that the stock price will collapse.

• Don’t assume you can earn your way to financial security.

  Too many times, I have seen people with very large incomes end up without enough for retirement. Unless you save, no amount of income will be enough to create financial security.

• Don’t assume your high salary means you know how to invest.

  In fact, there’s often a negative correlation between income and investing smarts. High earners are typically great at their day job but often have little time for anything else. Like any other discipline, investing requires diligence, time, and patience.

High earners have a distinct advantage. They can afford a comfortable lifestyle during their working years and in retirement. But it is not guaranteed – and it won’t happen without a plan and the discipline to make that plan a reality.