The Biggest Retirement Planning Mistake High-Income Earners in Their 40s Make — And How to Avoid It

Avoiding Hidden Retirement Planning Pitfalls in Your Forties

In this episode of The Retire Early Retire Now podcast, host Hunter Kelly, a certified financial planner and founder of Palm Valley Wealth Management, discusses common mistakes high income earners in their forties make while planning for retirement. Kelly provides a step-by-step guide on estimating your retirement needs using simple rule-of-thumb math. He emphasizes the importance of considering not just regular expenses but also large, one-off expenditures like travel, homes, and weddings. The episode also highlights the advantages of working with a financial advisor to identify and plan for potential blind spots, ensuring a well-rounded and achievable retirement strategy. By understanding trade-offs and making intentional decisions, listeners can better align their retirement plans with their values and goals.

00:00 Welcome to The Retire Early Retire Now Podcast
00:27 The Biggest Mistake High Income Earners Make
02:01 Estimating Your Retirement Number
05:11 Beyond the Numbers: Planning for Life's Complexities
07:31 The Importance of Accounting for Big Ticket Items
10:36 Making Intentional Financial Decisions
14:26 How Palm Valley Wealth Management Can Help
15:50 Conclusion and Final Thoughts

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Transcript

0:00

And welcome back to The Retire Early Retire Now podcast, the show where we dive deep into all the strategies that help high income earners achieve financial freedom sooner, live better, and take control of their retirement. I'm your host, hunter Kelly, certified financial planner and founder of Palm Valley Wealth Management. Today's episode is especially important if you're in your forties making a strong income and starting to get serious about what retirement might actually look like for you. Because even with a high income and years of smart saving, there's one mistake that I see over and over again, and it's not what you think. It's not about your 401k, your investments, your tax strategy, it's something more subtle, but if you're not paying attention to it, it can completely derail the best retirement plans. So today I'm going to walk you through a couple of different things. One, I wanna walk you through on how to estimate what you'll need for retirement using. Some simple rule of thumb math, how to think through your goals beyond just a number, and then I'll reveal the biggest blind spot I see in retirement plans for high income earners in their forties. But before we jump in, go ahead and like this podcast, share this with a friend and leave a five star review on your favorite podcasting app. Again, I appreciate everyone that listens. it's been growing. The podcast has been growing like crazy because of your reviews and probably sharing it with friends and things of that nature. So I deeply, and thankful for that. And again, I just wanna continue, getting, I. to more people's ears so that they can create a retirement plan or a, a plan to become financially free so that they can live the life that they are fulfilled and enjoy to live, whether that's with family, traveling, whatever they may want and like to do. and so again, thank you for sharing this, but let's go ahead and jump in. So today I wanted to start out with, how do we calculate our number? How much do we need for retirement? and. And so I asked you a question if someone walked up to you with a blank check, said, Hey, how much do you need to retire on a monthly basis? You may have a number in mind, so close your eyes. Think about that number. You may already know that number. Is it 2000 a month? Is it 5,000 a month? Is it 20,000 a month? What number would you need to go? Ah, that's what I need to live the life that I want to enjoy. Um, and don't be skimpy with it, right? Not just what I need to get by, but what I can do to maximize. My retirement. And so for the sake of this example, let's say it is$8,000. So if I needed$8,000 to live on. What would I actually need in my investment accounts to be able to consider retirement? And so one of the easiest ways to estimate this is by using a 5%, withdrawal rule, especially if you're planning on retiring before 60. so you can use a 5% withdrawal rule. I've talked about this, a couple of different times in various episodes. But if you're willing to, build a well diversified portfolio that can grow over time and have the expectation that in some years we may need to cut down on spending a little bit, in some years we may be able to increase spending depending on market fluctuations and things of that nature. you can. realistically use a 5% withdrawal rate on your funds. So if you're, if we're using$8,000 a month, let's just round up and say that's about a hundred thousand dollars a year, right? And so if we're using that math at a 5% withdrawal rate, we would need roughly$2 million saved, excluding for taxes for the sake of this argument saved in our accounts. Why? Because at 5% withdrawal rate,$2 million gives you about a hundred thousand dollars a year. So let's say that number was about$150,$150,000 per year, we should be aiming for about 3 million. And so this can give us a great aiming point. We don't have to get all, super scientific and. And come up with these numbers, for this reason or that reason, especially if you're early on in your investing career. If you're just starting out, this is a great way to go, okay, my expenses are here now. what do I need in the future, in my investment accounts to kinda work toward now, things will change. You may get married, you may have kids, you may have a different style of living 10 years down the road. but I'm assuming, hey, you're probably in your forties. You've done a good job, you've built your income to maybe not peak, but you're starting to get a very healthy income and you're saying, oh, I can kind of see that retirement down the road. And so, we can start here and say, oh, I need$2 million or$3 million, or whatever that number may be. And so there's some things that we should be thinking about beyond just the numbers that we should start planning for. and so retirement planning isn't about just hitting a number. It's about building a life. That means asking questions like what type of legacy do I want to leave? will you help your kids buy homes or fund weddings? Do you want to give charitably, set up a donor-advised fund, support a cause that you believe in? And what happens in the what if scenarios. What if the market drops early in retirement, or your health changes unexpectedly? These are all things that we should be thinking about and adding into. The plan so that when these what ifs pop up or when these things that come to fruition or things that you've always wanted to do, are ready to be funded, we have had a plan for that. We have planned, to fund that. We have an account for whatever that may be. And so these are all things that separate good plans from great ones because they account for life's complexity and not just a spreadsheet. And so this would be a, a good plug for why you should work with a financial advisor is because. They can start to see these blind spots, right? So financial advisor may see a hundred to 150, sometimes more, plans per year. And so they see, they get rep after rep, after rep, and they know these blind spots. They know how to ask the right questions to go, okay, well, do we want to fund our our daughter's wedding or is there a certain amount that we want to leave? To our kids or to a specific charity, and how do we do that? What's the best way to do that? and then have you thought about these What if scenarios, right? we wanna make sure that we're thinking beyond the numbers, right? You may have that$3 million or that$2 million that you. Quote, unquote said, you need to plan for and save up for. but then what are we gonna do with it? How are we gonna spend it and what's gonna, allow us to be, most fulfilled in our retirement? Right. And so that leads me into, the biggest mistake that I see, especially those that have kind of built some wealth. They're maybe in their mid forties, early fifties, and they ignore this mistake, right? And they ignore, these one off. Lifestyle expenses, and so here's the mistake that I see all the time. People plan. For their annual retirement lifestyle, but forget about big ticket items, right? So these are the expenses that don't happen every year, but when they do, they can make a big dent into your portfolio. So these are things like a once in a lifetime trip, through Europe or Asia. Some, some big travel. paying for your child's, college full tuition or maybe a dream wedding. Again, that's kind of what we mentioned here, just a minute ago. buying a vacation home or upgrading houses. Joining a golf or country club, purchasing new cars and boats and things of that nature. And so these things that you may have an opportunity to do that, if you don't give much thought to them and you make rash decisions can really have a dramatic effect on a, potentially a longer term, deal with your retirement. Right? And so. None of these are wrong. In fact, they might be a huge part of your life and what you're working toward. but if you're not, If they're not planned for in advance or properly, they can force you to withdraw too much too soon. And that creates long-term risk, to either your retirement portfolio or income if you're already already in retirement or getting ready to retire, or it can push back, that retirement, retirement date. So the truth is these aren't surprises. They're choices, right? And so, You need to, account for them through planning and, like any other financial goal, right? And so one of the most common things that. I see once I start working, with a couple or a person kind of in their forties, late forties, early fifties, they're planning for retirement is that they don't think about, they may need, two or three more cars in their lifetime. Right? And so when we start running through their retirement plan, they're like, yeah, I need about. 5, 6, 7, whatever amount per month, and so on and so forth. and they go, oh, well I also need a car. Right? And so we start projecting that out and we, we buy a car, let's say every seven to 10 years, right? If they're really driving in, for a while, right? and so those purchases can have a dramatic effect on that income because those are not, just day-to-day purchases, right? Those can be upwards of 50 to, let's say,$70,000 depending on, what type of vehicle you're buying and things of that nature. Or maybe they want, a bigger house. they, they plan, their initial retirement plan on this lower or less expensive lifestyle, right? these big purchases, you want to make sure that you understand that you wanna make sure that you're planning for it. And so really what I'm getting at is, hey, how do we make intentional decisions and how do we weigh these trade offs?'cause that's really what this is, right? We make, we're making this, these decisions. And these decisions have trade-offs. Do I buy the bigger house? Or do I not? Right? And what does that look like if I do, and what does that look like if I don't? And so there's some sort of trade off there. And so you can call it an intentional trade off. You can call it choices, whatever that may be. And so I. Again, none of these choices that I've mentioned, like going on a lifetime trip to Europe or Asia or some doing a cross country trip, across America or paying for your kids' wedding or whatever that may be, none of those are bad decisions. Those are all great decisions, right? but if you have certain goals, you can't always buy everything, right? not everybody has Jeff Bezos money. Not everybody has Elon Musk money. Not everybody has. billions and billions of dollars where they can essentially do whatever they want, right? for the vast majority of people in the world, there's trade-offs, right? So you can't just afford anything that you want, right? or everything that you want. You can afford anything, but you can afford everything. So the goal. is to align that plan with your values. And the more that you can kind of take the, the surprise out of these plans, the better off you're gonna be, financially, right? And so if you want to retire at, at 55 and and travel hard for the next 10 years, that's amazing. But maybe you don't need a second home right away. you want to fully fund your kids' college and a wedding. Great. But maybe you have to delay, retirement a year or two to make sure that you can have plenty of funds, available to fund those kids' college and wedding, so that at the tail end of your retirement, you're not running outta money. Right? So retirement planning is about balance. It's about trading time, money, freedom, and flexibility. And when you understand those trade offs, clearly you can make, decisions. become, or your decisions become pretty obvious, right? You have your values that we talk about a lot. you know exactly what you wanna spend on. Spend your money on why you wanna spend that money. and then you start to understand these trade offs. Like, if I do this, this will happen. If I do that, that will happen, right? and so the, those choices or the right decision, and I use right, and air quotes, those right decisions become more obvious, right? So the right decision for you may not be the right decision for me. Or Billy Bob down down the road. Right? and so everyone's going to be a bit different, but what we can all agree on is that if we can, plan for this the best way possible, we're gonna, we're gonna understand those trade-offs and make, better decisions and most likely have a more fulfilled life. Right? And so that's really the, the CRUT of what I wanted to get at today is, hey. A lot of people can go ahead and say, Hey, I need$2 million,$2 million,$5 million. but they fail to understand those one-off expenses, right? Those boats, those cars, those RVs, those, big travel expenses or. College tuition, weddings and things of that nature. They fail to plan for those one-off expenses, remodeling a home, whatever that may be. Again, those are not incorrect decisions. All those are great things. They sound awesome, right? But for the vast majority of people, unlike Jeff Bezos and Elon Musk like I spoke about earlier, uh, we're not gonna be able to buy everything, but we can buy anything. We just need to understand those trade offs. this is the kind of thinking, the math. The lifestyle, planning, the trade-offs. This is exactly what I do at Palm Valley Wealth Management to help my clients. I don't just build spreadsheets, and tell you a number. We help you design a plan that reflects your goals, your values, your vision, your future, whether that's legacy giving, world travel, whatever that may be. and, and we help you build that plan. We stress test that plan. so what if in inflation spikes, that's been the, the big thing the last few years. what if the markets go flat for the first five years of retirement? Or maybe there's a downturn, quickly in retirement? What if you're spending is, is higher than expected, right? our job is to make sure that your financial plan isn't just about numbers, it's about confidence, about getting rid of that head trash and understanding, Hey, I can retire because these are the things that I went through and plan for. and I feel confident that I can do so. So if you're in your forties, early fifties, and you're starting to take retirement seriously, And start to plan for that and wanna know what retirement would look like for you. Let's have a conversation. You can always go to my website, Palm Valley wm.com to schedule a free call. We can see how we can help you avoid some of these planning mistakes, create a retirement plan, that's built around you and your situation, and can help you retire and become financially free, hopefully sooner than later. Right? And so again, no. Can I gave you some, some good ideas on how you can know your number, some simple rule of math, to say, Hey, do I need 2 million? Do I need 5 million? Do I need 10 million? What is that number? and then. Plan for more than just your monthly bills. Include those big exciting stuff too, the travel, the the second homes, whatever that may be for you. make an intentional understand those trade-offs of what is gonna happen when you do make those decisions. And most of all, do not leave your plan to chance you either, If you don't have a plan, you plan to fail, right? I don't know who said it, but it's truer than true. so if you found today's episode helpful, do me a favor, share this with a friend. leave a quick five star review on your favorite podcast and app. It helps the show grow and it helps more people get access to the information and education that they need to do. Their planning and hopefully, retire early as well. And so again, thank you for listening to The Retire Early Retire Now podcast. I'm Hunter Kelly, and we'll see you in the next one. This podcast is for educational purposes only. It is not meant to be financial or investment advice. Do not make decisions solely based on this podcast alone. Please seek a professional when considering your own. Situation, please keep Palm Valley wealth management in mind when making those considerations.