How to retire with a high income: A definitive guide

You might be surprised at how many high-income folks still live paycheck-to-paycheck. And, high-income debt is a thing that a lot of people struggle with. 

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It’s a common scenario, and one that I’m super familiar with: You’re in the prime of your career and earning good money. But, your job stinks. It provides no satisfaction. You’re paid well, but that’s about it. You want out. You want to retire with a high income. 

I happen to know a little something about this.

I did something similar – after 14 years of working in information technology, I quit the rat race at 35 and now spend my time traveling the country with my wife in our Airstream travel trailer. I love almost every minute of it.

And, I’m about as transparent as they come – in the last year both my wife and I worked full-time jobs, we earned a combined $250k. The year before that, it was about the same, give or take.

My first job out of college in 2005 was worth $55,000 a year to me. Each year, I’d get cost-of-living raises and every time I switched jobs (a tactic I highly recommend to maximize the growth of your earnings), I enjoyed a nice bump.

14 years after I started my career, I increased my salary by a factor of three.

In other words, I know what it’s like to earn a bunch of money…way more than what I needed to provide for the basic needs of life. Way more than I truly ever thought that I would earn.

And if you’re sitting in your career earning big bucks, I’m going to drop some wisdom into your lap that might just transform the way that you think about your salary and your lifestyle.

If you’re earning a high salary and want to retire early, you’re in the right place.

3 things to know about high incomes

A high income is different than being “rich”

If you are not familiar with the term “pseudo-affluence”, here’s what you need to know. Earning a high salary doesn’t necessarily mean you’re financially stable. The pseudo-affluent are people who typically earn high incomes and do certain things to make themselves look rich.

But, looking rich doesn’t mean that you are rich.

The pseudo-affluent generally:

  • Earn a high-income, but spend the majority of what they make
  • Wear expensive suits or carry Louis Vuitton purses
  • Drive high-end luxury or sportscars like BMWs, Porsches, and Mercedes
  • Genuinely believe that rich people act rich

Naturally, this does not mean that everybody who drives a BMW is pseudo-affluent. The world isn’t black and white enough to make such a concrete statement. However, those who do spend the vast majority of high incomes DO tend to drive these cars and live in wealthy neighborhoods to display their wealth.

“Many are good people, well-educated and perhaps earning a six-figure income,” writes Alexander Green, author of the book Beyond Wealth: The Road Map to a Rich Life. “But they aren’t balance-sheet rich because it’s almost impossible for most workers – even those who are well paid – to hyper-spend on consumer goods and save a lot of money.”

Moral of this story: Your high income is worthless if you’re spending the majority of it.

High-income families still battle with debt

You might be surprised at how many high-income folks still live paycheck-to-paycheck. And, high-income debt is a thing that a lot of people struggle with.

Nearly eight in 10 workers in the United States live paycheck-to-paycheck, and it’s not just low-income earners that account for those numbers.

More than half of minimum wage workers said they needed to hold down two jobs to make ends meet, while one in 10 workers earning $100,000 or more yearly say they live paycheck to paycheck,” wrote U.S. News.

And, that’s only those who actually admit it.

Here’s the thing: High-income jobs also come with an unwritten expectation to “look the part”. When we’re in high-level roles, we aren’t expected to drive to client meetings in a 2001 Toyota Corolla. Why? Because we look more successful when we’re rockin’ the brand new 7-series Bimmer.

But, lifestyle inflation has a way of eating through the hard work that we put into our careers.

A couple of the best graphics I’ve seen about this “fake wealth” come from Zack Van Zant who mapped the average Joe’s savings level relative to income and perceived “needs”.

There are Average Joes and Extraordinary Joes.

To the average Joe, savings rates increase marginally as our lifestyle – along with our income, increases substantially.

 

The average Joe is in contrast to the “Extraordinary Joe’s” savings level, who resists the temptation to increase perceived needs along with income:

Moral of this story: Your lifestyle paints a better picture of your financial freedom than your income. Earning a high salary is a wonderful thing, but if we spend the majority of our earnings, it’s tough to truly get ahead.

Your 5-step guide to retiring early after a high-income career

Step 1: You don’t need a budget, but you need to know where your money is going

Though your budget doesn’t need to look exactly as mine did, tracking your spending and controlling where your money is going is equally important in a high salary as it is a lower one.

In fact, there’s a good argument to be made that it’s more important with a high income because high incomes enable more spending. Your means are greater, and as a result, more money can be spent on more expensive things that, if not controlled, can systematically squeeze the freedom out of your financial situation.

High-income earners need:

  • financial visibility
  • cashflow tracking (money in vs. money out)
  • a financial roadmap to help focus spending and investments

We use Personal Capital to provide the financial visibility that we need. We also track, through the use of spreadsheets, our cash flow and general trajectory toward our money goals even though we’re no longer earning a consistent income.

Personal Capital is one of the easiest financial applications I’ve used. Works well. Colorful. Gets the job done.

If you are a high-income earner, what are some of the things you’re doing to keep yourself honest? High incomes are great, but only when we design a system where we keep the majority of the money that we earn. They can lull us into a false sense of security.

Step 2: Establish an emergency fund of at least six months

An emergency fund is crucial to high-income earners because our lifestyles very often require quite a bit of resource to maintain.

Another way to describe your emergency fund is your “FU Money”. Meaning, if things get bad at work or you find a better option, having enough stashed away means we can easily say, “F-U, I’m out!” at work at a moment’s notice.

FU Money means you can effectively put a stop to full-time income immediately and still remain financially independent, at least for a while. It doesn’t necessarily mean or imply that you can flat out retire. But, it does give us options, and lots of ’em! FU money is good money.

Unfortunately, the majority of people don’t have adequate emergency funds. And, the last thing we want to do is plop unexpected costs onto credit cards.

 

How much emergency fund money should we have?

Usually, I like to encourage at least three to six months, but for high-income earners, err on the side of six months. If you cannot last six months without income, then you have a problem.

You’re probably spending too much money. Your lifestyle has become overinflated to the point where it’s putting you into a position of weakness.

Step 3: Forget what the experts say and just focus on YOU and your goals

There isn’t just one single way to get out of debt, build wealth and achieve financial freedom.

I don’t care what the experts tell you. If they believe there’s a one-track path to success (probably their way that’s available in their book for the low, low price of $9.95), remove yourself from that conversation and never seek their advice again. Why? It’s B.S.

I’m a big fan of the “try it and see” method, especially if you’re a high-income earner.

If an expert says that you gotta get up an hour earlier in the morning in order to be successful, then try it if you’re properly motivated. If it’s working for you, then keep doing it. Otherwise, re-gain those 60-minutes of sleep and put your effort toward something else.

Check out these point-blank statements that I believe wholeheartedly to be true.

There is no one way to get out of debt. Your way is just as valid as mine.

There is no one way to invest in the stock market. I prefer index fund investing. Others prefer dividend investing. Frankly, I don’t care what method you choose. They all work. The point is to do it. Just try. More on this below.

There is no one way to live a sensible lifestyle. If you want that 80-inch television, who am I to tell you that it’s unnecessary (we haven’t owned a television in years, by the way)? Buy whatever you feel is necessary for you and your family.

There is no one way to manage your finances. Some married couples have combined finances (like my wife and me). Others have kept them separate. Some use Ally savings accounts. Others use money market accounts. As long as you aren’t stashing your wad of cash under your mattress, there are a ton of different ways to manage your finances effectively.

There is no one way to budget. Heck, some people don’t even use a budget. Many subscribe to the “pay yourself first” method and forget a budget entirely. Others prefer to keep their budget so they can see exactly where their money is going. If budgeting works for you, keep it up!

There is no one way to retire early. My wife and I sold both of our homes and bought an Airstream that we live in full-time. While that works for us, it sure as hell won’t work for everybody. And, that’s okay. Big homes or small, it is up to each and every one of us to decide how to retire early and what we’ll do once we reach that point of sweet no-job ecstasy.

Don’t blindly focus on what financial or so-called early retirement experts tell you (yes, that includes me…though, I don’t consider myself an “expert”). Do what works for YOU.

Step 4: Don’t just save; invest your wealth

No one ever got rich by saving money.

It seems to go against the grain, but it’s also a fact of life. Saving money isn’t what gets the majority of us rich.

Saving is not the magic sauce to early retirement. There is nothing wrong with it, though!

It is true that saving money does not lead to wealth. That said, there’s nothing wrong with saving some cash by changing up the spending habits you developed over the years that probably resulted in wholesale hemorrhaging of your precious greenbacks from your wallet. Don’t get me wrong, saving money is great. It’s wonderful. It all helps.

It’s just not the magic sauce to early retirement.

Early retirement is enabled through household wealth. How much money you have, rather than how much you save. That’s the delicious gravy that, when smothered over a stack of steaming hot mashed potatoes, makes the meal.

Ultimately, wealth is built by investing your earnings. Here, take a look at a pretty graph that puts in chart form what little effect saving money has over your household wealth. I warn you, however, that there are a bunch of sleep-inducing financial buzzwords that permeate that post.

You know, things like “market revaluation” and “consumer durable investments”.

It’s not about how much money we have. Wealth is a direct byproduct of what we do with that money. It’s THIS that enables early retirement.

Keep your savings in a Ziplock baggy under your mattress and you don’t prepare yourself for anything beyond the apocalypse. And even then, I doubt your local merchant will be around anyway to accept your cash for a loaf of bread because their credit card processing machine was destroyed in the nuclear blast that annihilated most of humanity.

Let compound interest work for you.

Step 5: Plan your strategy by giving your money a purpose

As a high-income earner, your money needs a purpose in life, just like you.

A reason for its existence. You’re not just going to work to earn a paycheck. If you’re like most of us, you’re at work to earn a living. To provide for your family. And, you’re doing an awfully good job at it, too. You’re bringing in big bucks.

The next step is to give your money purpose. Train yourself to think of your income as a tool. It’s a tool that you’ll use to build your future free of the constraints of full-time work.

This happens by giving your money purpose.

How to give your money purpose

Know where your money is going – You can’t begin to un-screw your financial situation until you realize where your money is going. Budgets can help, but frankly, your bank statement is all you really need to determine where your money is going and, importantly, whether your spending is setting you up to meet, or fail, at your financial goals.

Show me a man’s bank statement, and I’ll tell you what he values.

For example, those damn automated monthly payments for services that you may no longer use are killers. They were for us. Because you don’t have to lift a finger to make those payments, you quickly forget that you’re making them. Bank statements help. Just look at ’em. Can you justify it all?

Care about your future – More critical than most people realize, you need to care about what happens to your future self. Yes, we all want to be “successful”, but what does that mean? Do you actively want to retire early, or are you content with working through the traditional lifespan of a typical worker in our society? In 20 years, do you see yourself living in the same house? Working the same job? Driving the same car? What will change?

For the record, it’s okay if you have no interest in retiring early. But, knowing exactly what you want out of life – whatever that happens to be – will guide your money’s purpose.

Invest – If your company matches 401k contributions, at least contribute that amount. Remember, 401ks are pre-tax money, which means not only is your company shoveling you cold hard cash, but you’re lowering your tax burden by a dollar-for-dollar contribution into your 401k account.

Brokerage accounts work, too. We like Targeted Retirement investment accounts and have heavily utilized their automatic diversification strategy so we don’t have to worry about all that. Seriously, we just throw money into our brokerage account and literally forget it. There’s no secret sauce to getting rich in the market. Besides time. You gotta give it time.

Persistence – Early retirement is easy, but it’s not quick. It takes time, just like most goals worth striving toward. Avoid the rookie mistake of expecting 20% capital gains in the first year of investing your dough. It doesn’t happen that way, even in today’s outrageously lucrative market.

Your life’s purpose takes time, just like your money’s. Don’t expect miracles with your money. Reality doesn’t work that way. Budget and invest. Then, stick with it. I mean stick the hell with it. Keep throwing those greenbacks into your investment accounts. Month after month. Year after year.

Step 6: Automate your saving and investing strategy

Automation removes the element of discipline from the equation of saving money. With automation, we don’t have to remember to move our money to where it needs to go.

Through the magic of automation, we aren’t manually transferring our cash every single month, which definitely takes discipline. We don’t need to lift a finger after we set up an automated process to save money. It’s all done for us, like clockwork.

How does automation work?

Payroll deductions are often the easiest way to automate your savings. If your company offers a 401k plan, you’ll probably be able to setup auto-deductions from your paycheck to fund that account for your retirement. An IRA account can work the same way.

What are some of the things that can be automated?

  • Company-sponsored 401k contributions
  • Money transfers from checking accounts into savings
  • Monthly bill payments (cable TV, credit cards, etc) to reduce late fees

Banks usually provide automation services to make this easy. Companies typically provide automated payroll deductions for 401k and IRA contributions. Credit cards may also support automated payments every month.

Automation is key to removing the element of discipline from your financial life.

If you don’t yet have financial automation in your life, start today.

Make an appointment with your company’s HR department to find out about your 401k retirement options. Then, auto-deduct from your paycheck to start funding your retirement account.

Or, establish a savings account through a bank (we like Ally, but it could be with any bank) and create a recurring transfer from your checking account into that saving account.

Just start with one. Over time, consider other automation as well.

Check out the Automatic Millionaire, by David Bach, for an excellent in-depth look at how automation kicks our finances into high gear.

This article originally appeared on ThinkSaveRetire.