The Affluence Illusion: Navigating Financial Realities in Retirement Planning

The Affluence Illusion: Navigating Financial Realities in Retirement Planning
Posted by: Alec Lowell Category: Think Ahead

A recent study by the Center for Retirement Research at Boston College revealed that a significant number of high-income households overestimate their retirement readiness. This highlights the importance of meticulous retirement planning, irrespective of one’s financial status.

This analysis, based on data from the Federal Reserve Survey of Consumer Finances (2019), found that 28% of households inaccurately perceive themselves as prepared for retirement. Among high-earning households, this figure rises to 32%. This shows that the ability to earn does not equal the ability to plan. In fact, higher income families are more likely to have a false sense of security when it comes to retirement readiness. The importance of retirement income projections generated by financial professionals is  emphasized as the go-to solution.

The overestimation of retirement readiness is due to several common misconceptions:

  1. Low Balances in Retirement Savings Plans: Workplace retirement accounts may give a false sense of security due to inadequate savings for retirement income.
    Understanding withdrawal rates and potential income from retirement savings is crucial. Seek the help of a financial professional  to help learn accurate figures.
  2. Single Retirement Saver in Dual-Income Households: Couples relying on a single individual for retirement savings may underestimate the need to replace both incomes in retirement, posing a significant risk to financial security.
    Generate financial projections of a couples’ cash flow needs beyond the anticipated life expectancy. Gain a realistic pro-forma of what financial needs will be during retirement.
  3. Misunderstanding Tax Implications: With the multitude of retirement accounts available and varying tax implications for each, many do not analyze these details to maximize long-term cash flow, including not knowing when to trigger the start of Social Security benefits.
    Solution: Gain an understanding of tax laws and tax consequences on each account. Learn the optimal time to utilize funds, including Social Security benefits.  Then, access assets in a strategic and specific order to achieve tax efficiency.

An additional population showing a financial disconnect between lifestyle and retirement preparedness is “HENRYs”, (High Earners Not Rich Yet) an acronym coined by Shawn Tully, who first used it in Fortune magazine in 2003. It  refers to individuals in their working years earning between $250,000 and $500,000 per year.  They have an opportunity to create lasting wealth, but have yet to do so.

The HENRY population’s false sense of preparedness is due to a high-consumption lifestyle combined with misplaced financial priorities. There is an astounding lack of saving, investing, and planning being exhibited by the HENRY sub-group. The 50/30/20 rule, allocating 50% of income to living expenses, 30% to discretionary spending, and 20% to savings, is seemingly disregarded. Though this saving structure has been a standard recommendation since the early 2000s, fewer and fewer individuals in their earning years are aiming to achieve it.

A tendency among high-net-worth individuals  is to entrust their assets to a “Wealth Manager.” Typically, this is an individual or firm with expertise in managing ‘investable assets.’ What this approach may not address however, is the humanitarian element of recognizing the investor as an individual with varying needs and tendencies. While it’s important to have invested assets well managed, it’s equally important to take a holistic approach to one’s financial plan. This is the differentiation between a “Wealth Manager” and a true “Financial Planner.”

Financial Planners play a pivotal role in facilitating conversations about the growing affluence illusion and guiding clients toward a more prudent approach to wealth management. By challenging conventional beliefs and highlighting the potential consequences of financial complacency, advisors should empower clients to make informed decisions aligned with their long-term financial goals.

Ultimately, overcoming financial illusions requires a holistic approach that prioritizes prudent savings habits, strategic investment strategies, and individual preferences toward important matters such as education, legacy, and philanthropy. These are all part of comprehensive retirement and financial planning rather than simply managing invested assets. A Full Scope Financial Plan aligns with clients’ particular current and future goals and helps them prioritize what they value most.

This approach requires strategy and involves multiple professionals coming together in the best interest of the client, including legal, tax, and life insurance advisors. By working in unison, these professionals can help enhance client outcomes and foster long-term financial success.

“Lowell Newman exemplifies this collaborative approach, as we are a Full Scope Financial Planning Firm, not just Money Managers. With our proactive mindset, we offer comprehensive financial, retirement, and legacy strategies for high-net-worth individuals.  We prioritize client aspirations and nurture lasting relationships by providing thoughtful financial advice tailored to individual needs and circumstances. We offer case-specific strategy sessions on a complimentary basis. Avoid the affluence illusion. Think ahead and give Lowell Newman a call.

About the Author


Alec S Lowell

Alec is a Certified Financial Planner® with extensive knowledge in the insurance and financial services industries. Since graduating from The Ohio State University in 2014 with a degree in Finance, his focus has been on methodically serving the financial needs of individuals, families, and businesses alike.