Retirement Planning for HENRYs

Do you make over six figures and still feel like you don’t have enough saved up? If this sounds like you, you might be a HENRY (high earner, not rich yet). As we’ll explain later, these individuals often have trouble saving for retirement, even with their high salaries. In this article, we’ll break down what a HENRY is, as well as outline how to plan for retirement as a high earner.

What Is a HENRY?

A HENRY (high earner, not rich yet) is a person who, as the name suggests, may have a high-paying job but hasn’t built up enough wealth to be rich. Shawn Tully, a Fortune writer, first used the term in 2003; however, he outlined its meaning in more detail in a 2008 article titled “Look Who Pays for the Bailout.”

Tully defined HENRYs as individuals or families who earn between $250,000 and $500,000 per year, often working in professions such as doctors, lawyers, financial advisors, and small business owners. But despite their high income, they feel financially squeezed because of factors like education costs and living expenses.

For example, a family with children that earns the figures Tully put forth will often face high spending for food, transportation, or school tuition. While the family could make a combined $500,000, they may feel like they’re only spending their money to survive and not build a nest egg for retirement.

Though many HENRYs haven’t attained substantial wealth out of necessity, which is often the case for parents, young professionals, or because of high taxes, some HENRYs often spend their income to live like they think they should. They may buy a bigger house, a nicer car, or take luxurious vacations. But at the same time, they may neglect investing, which keeps them dependent on their occupation for income for the future and into retirement.

How to Plan for Retirement as a HENRY

Planning for your post-working life can feel complicated, especially if it seems like your spending is going everywhere else besides your savings. Below are some steps HENRYs can take to get the ball rolling on their retirement plans:

Set Attainable Goals

The most natural way to begin the retirement planning process is by identifying attainable financial goals. To do this, you’ll have to consider your current position, as well as where you want to go. Think about your current earning power, how much it could grow, and how much you want to have saved or invested by the time your career ends.

After you know your large-scale goals, the next step is creating smaller benchmarks that can help you get there. For instance, you may want to have $1,000,000 saved by the time you retire. To get there, you might aim to max out your retirement accounts each year or save a certain percentage of your income. As we’ll discuss further in the next section, this is something a financial advisor can help with significantly.

Consult with a Financial Expert

One of the most effective places to start is consulting with an expert, such as a retirement planner or financial advisor. These professionals can use their knowledge to help you find ways to realize your goals.

For example, to help you maximize your earnings, they may help you develop a budgeting strategy. They may also recommend ways to manage risk, including techniques like diversification and asset allocation.

During your first meeting, expect to discuss your goals and current financial situation, including details about your investments, cash, debts, and expenses. After this, they’ll be able to help you map out a comprehensive plan that can take you to retirement.

In the specific context of retirement planning, look for advisors with credentials such as:

• Certified Financial Planner (CFP)
• Chartered Financial Consultant (ChFC)
• Chartered Financial Analyst (CFA)

Max Out Tax-Advantaged Accounts

Another valuable way to set yourself up for retirement as a high earner is putting money in tax-advantaged retirement accounts, such as 401(k)s, IRAs, or Roth IRAs. The primary advantage of these accounts is that you can invest within them and potentially earn more than you put in. These accounts can also earn compound interest. Since they’re tax-advantaged, you’ll either be able to put off paying taxes on the funds you put in or not have to pay them at all, as with Roth IRAs.

The government sets requirements for how much you can place in each one. So, to get the most bang for your buck, it’s often wise to max out your account each year. Here are the maximum allowed annual contributions for each type, as per the Internal Revenue Service (IRS):

• 401(k): $22,500 for employee contributions ($30,000 if 50 or older), and $66,000 for both employer and employee contributions.
• IRA and Roth IRA: $6,500 or $7,500 if you’re 50 or older.

It’s important to note that Roth IRAs have an income limit for contributions, especially if you already have an employer-sponsored retirement plan. This means, as a high earner, it’s likely you might be unable to contribute to one of these accounts. The number varies by filing status, ranging from $138,000 to $228,000. This falls right within the HENRY income range. A common tactic to get around this is known as the Backdoor Roth IRA. This is where you contribute funds to a regular IRA and then roll it over to a Roth.

Tax Diversification

Diversifying tax advantages across multiple accounts is another component to keep in mind while planning for retirement. Each type of retirement account often has unique tax benefits, as well as drawbacks. Storing money in different types allows you to reap the benefits of all retirement vehicles.

For example, consider Roth IRAs vs. 401(k)s. The former allows for tax-free withdrawals when you turn 59.5 years old. On the other hand, the latter is tax-deferred, meaning you’ll need to pay some taxes when you begin to withdraw your money. Even so, the annual contribution limit for Roth IRAs is much lower than the limit for 401(k)s. Therefore, it’s often good to have both accounts, helping you get the best of both worlds.

Build an Investment Portfolio

As noted earlier, a notable knock on HENRYs is that they heavily depend on their job’s income. One of the ways to break this dependence is by putting together a diverse, substantial asset portfolio.

Investments can provide additional income, as well as boost your overall net worth. Combined with a high-paying job, a strong portfolio could, in some cases, accelerate your retirement plans and move you out of the HENRY category.

Constructing a well-diversified collection of income-generating assets is easier said than done, however. A financial advisor or investment manager can help you get started or provide guidance as you work to build your investments.

Keep Tax Efficiency in Mind

As you plan for retirement, it’s crucial to prioritize tax efficiency in both your investments and strategies. This will allow you to avoid paying unnecessarily high taxes, keeping more money within your reach for your golden years. While your financial advisor can offer in-depth insight specifically about your situation, tax efficiency often includes:

• Employing tactics, such as tax-loss harvesting, to offset capital gains taxes.
• Investing within tax-advantaged accounts, like Roth IRAs or 401(k)s.
• Buying and holding so you don’t turn over assets quickly and continuously pay taxes on capital gains due to excessive trading.
• Investing in mutual funds that keep tax-efficient strategies in mind.
• Considering tax-deferred investments, including annuities.
• Investing in tax-exempt bonds.

Frequently Asked Questions

What is tax diversification?

Tax diversification is a method that involves using different types of accounts, all with varying tax considerations. The idea is that you would use both taxable and tax-advantaged accounts, allowing you to maximize your tax benefits, as well as your ability to withdraw funds for retirement.

For instance, this approach may involve having tax-free accounts (e.g., Roth 401(k)s or Roth IRAs), tax-deferred accounts (e.g., traditional 401(k)s or IRAs), as well as a fully taxable brokerage account. With this, you get to take advantage of the varying contribution limits for each account, while also reducing your tax burden in retirement. By having taxable accounts, you’ll also have more freedom to withdraw money at any time, since these don’t have the same limits as tax-advantaged accounts.

Why don’t HENRYs have savings?

HENRYs often don’t have substantial savings because they have other places in their life that demand their money. Key examples include common household expenses, having a mortgage, or paying for a child’s education. HENRYs may also fall within a higher tax bracket, despite not making quite enough to be considered wealthy. This can eat into their ability to stash away a significant amount of money for later in life.

What is the average age of a HENRY?

HENRYs can be any age; however, it’s common for them to be adults in their 30s to 50s. These are usually individuals who have risen professionally to the point where they can command a higher salary. People in this cohort may also have children or more family obligations, raising their expenses and keeping them from attaining that elusive “rich” status.

How can I tell if I’m a HENRY?

Based on Shawn Tully’s original definition of the term, you may be a HENRY if you make between $250,000 and $500,000 a year and, despite your high income, don’t have that much saved up. HENRYs often feel like they’re not rich, even though they earn much more than the average American.