When financial advisors went to school or obtained certifications, they were taught to plan for earnings that grew or were consistently maintained throughout a person’s working career. That was certainly an accurate planning method in the past when people rarely changed jobs and retired at 65 with a going away party and a gold watch as a parting goodbye gift. If you are using this methodology today, you may be making a very large wealth planning mistake that could wreck your wealth building plans and goals.
“Wealth can only be accumulated by the earnings of industry and the savings of frugality” – John Tyler
Early in my wealth management career, I would run wealth projections for clients (and myself). These projections would lay out a roadmap of how we expected wealth to grow based on reasonable estimates that factored in starting investment balances and earnings. We would also make estimates for future savings and investment rates of return that included their entire working career (usually 65 years of age) and throughout retirement. These projections would make us feel comfortable that we were doing the right thing and were on the right track.
But then an interesting thing started to happen that took us a while to notice. It seemed that many workers weren’t staying employed by their company until 65 years of age anymore. Some were being offered early retirement packages at 63 or 62 or were even let go during restructurings or reorganizations. It seemed that peak earnings were no longer the final year of employment like it often was for previous decades.
Peak earnings began to drop from 65 to 62 and then from 62 to 60. Soon enough peak earnings dropped even lower into the mid to upper 50’s for many employers. Now here we are in current times and it appears that peak earnings are now occurring at an age of around 52 years old.
This has major planning ramifications for most households;
- Savings rates are too low when we are young adults. Households in their 20’s, 30’s and 40’s often delay saving for retirement because it seems so far off into the future. For many in this age demographic, the best time to start saving for retirement is “anytime later on once I have more money.”
- Household expenses tend to rise in our late 30’s and 40’s. As household’s enter their 40’s they often take on a number of increased spending requirements such as larger homes, nicer cars, while the kids get older and incur larger expenditures for activities and education (and things like smashed cars, weddings, and all kinds of interesting scenarios.
- People often don’t get serious about retirement until their 50’s. When household’s get to their early 50’s it often dawns on them that they are getting older, losing steam, losing the desire or ability to work as hard. They start really thinking about retiring. Their thought process is along the lines of, “I’ll start hammering on retirement once I get the kids through college and my expenses drop.” But the expenses aren’t controlled and by the time they are, earnings begin to top out and decline.
- When people really are focused on retirement, their earnings are now in decline. Households are now in a retirement planning pickle because they never really factored in how their earnings would decline as they entered the home stretch in their careers. They often find themselves being replaced by younger, faster, hungrier competition in the workforce that is willing to “do more for less.” Alas, a financial conflict reveals itself.
When you run your financial projections and wealth building road maps, it would be wise to account for a realistic decline in earnings as the statistics are clearly demonstrating this shift in the workforce. You need to account for earnings declining at a realistic rate to ensure that your wealth plan is accounting for this decline.
If you are carrying debt loads into your 50’s and 60’s (think mortgages on that bigger house!) and then the cars, the kids, college, and think that earnings are going to save the day, you may need to think again. Rising expenditures on a foundation of debt along with shrinking earnings results in painful squeezes that sneak up on households.
The fact is, when we age, we often lose energy, lose our desire to play politics, and lose our ability to keep up with all kinds of changes and technology shifts. This is part of the career life cycle. So if you are in corporate America, you need to be aware of what is happening around you. If you are self-employed, you may have more control over things but may still need to account for a loss of energy and passion towards managing the business that drives the earnings.
What are you doing to prepare for earnings declines as you get older?