Carrigg Wealth Advisors

Congratulations, you’re rich. Now how do you stay rich?

Congratulations, you’re rich.  Now how do you stay rich?

Robert F. Carrigg, Jr., CFP®

 

Welcome to my new blog series written specifically for those in the top 5% of income earners, roughly defined by $300,000 of income per year and/or $1,000,000 of financial assets.  If that’s you, congratulations, you’re what some might call rich! Now how do you stay rich? 

 

That’s where I come in. After almost 25 years serving hundreds of clients as a Financial Advisor, I am struck by how the rich sometimes have trouble staying rich. Let’s just refer to this set as Rich People or “RP”.  So by definition, I’m talking about “rich people problems.” Let’s get the collective eye-roll out of the way. Yes, this is the stuff of satire. Must be nice, right?    If you want to stop right here, I totally get it.  But the reality is, rich people have a distinct set of obstacles that keep them from becoming financially independent or what some might call “retired”. 

 

I advise my clients to focus more on becoming “financially independent” than necessarily “retired”.  Financial independence means having the assets or passive income to do whatever you want to do in life; take a meaningful job earning less, volunteering, starting a non-profit, or buy a farm, etc.  For some that means living on $100k per year; for others the number might be $500k and leaving $10 million to their children or charities.  Regardless, it is getting to a point when you either aren’t working or you are only working because you want to work, not because you have to work. And remember, companies fail, markets crash, and people get sick; we don’t always have as long as we thought to put our nest egg together.

 

 

Let’s start with what this blog is not.  This is not a blog about living in the cheapest house possible on ramen noodles and saving 80% of your income so you can retire at 30.  A quick Google search will give you plenty of those options. Nor is this a blog about why you shouldn’t go to Starbucks every day, join a CrossFit box, or eat out three times a week.  The fact is you’re a RP. You can afford to do these things and this is important, you can enjoy your life.  What I’m talking about here is not letting your spending and your RP lifestyle get totally out of control.  That old adage, a fool and his money are soon parted, it’s true. I find many RP get to a certain income or asset level and they start to feel like they can do whatever they want and as the wishful thinking goes, everything will work out just fine. In moderation country clubs, private schools, vacations, and second homes are the fruits of their labor, but if RP do everything and lose a handle on their expenses, it can be the slow bleed of denial that doesn’t end well. 

 

I ask my RP clients to have a simple goal in mind.  How do you get to a point where you have enough in financial assets (generally not including primary and vacation real estate) and passive income (social security, pensions, annuities etc.) so that someday you don’t have to work?  I believe all RP should have a “number.”  It might be $2 million, it might be $20 million but I find most RP lowball this amount.  The number RP require is almost always double their best guess.

 

To come up with your number, I would start with how much you want to be spend every year in today’s dollars and after taxes.  Let’s say, it’s $400k per year.   For now, let’s also assume the once dependable but now precarious pensions and social security are off the table.  As a rule of thumb, you would need to have roughly $10 million dollars of savings to generate $400k, or 4%, per year for the rest of your life.  And before you say I am out of my mind, let me just tell you that some experts think the 4% rule really should be 3% in this relatively low interest rate environment.  That puts your number closer to $13 million. 

 

Some of you might be asking, $400k per year?  How could I possibly spend that much?  Maybe you don’t.  But I find many affluent high earners are surprised when they confront how much they actually spend over the course of a year.  Even if you’re only spending $200k, that’s still around $5 million you’ll need to save.  

 

I’ve seen first hand what happens to many RP as they make more and more money.  They start to believe they’re finally free from financial constraints. Their standard of living creeps up in every category. Their clothes go from off the rack to custom. Their children’s schools and summer camps are elite private institutions. Frequent home renovations are the status quo. Vacations are first class 5 star international jaunts.  And why join one country club when you can join two?  There’s also the University Club, tutors, trainers, and decorators. I could go on. And everything seems fine because they are able to pay their bills and accumulate some assets.  The problem is they aren’t accumulating enough assets while their burn rate gets out of control.  For some that might mean another child enters private school or a family is unable to unload their $100K show jumping horse. Many people don’t find this out until it’s too late.  I know this because this is often when they come to see me. In my opinion, unless they’re working with (and actually listening to) a good financial planner, they really don’t have any way of knowing how far off track they’ve veered. And how do they know they’re working with a solid financial planner? They will say things RP might not want to hear. There are countless personal finance books, blogs, podcasts, and seminars on growing rich and investing but what is overlooked is the less sexy subject matter of how to stay rich and keep your expenses in check. This blog attempts to address just that. 

 

One more time, I’m not saying RP shouldn’t spend money and enjoy their success.  Enjoying success is essential as much as it can be elusive as a recent New York Time’s Magazine article titled Wealthy, Successful, and Miserable lays bare.  The sweet spot might be what I urge my clients to do, enjoy being a RP, but here’s the caveat: do it in moderation.  If golf is your thing, go out and join a country club.  If you’re into boating, get yourself a boat and yacht club membership.  If you think your kids would benefit from private school, go for it but first there are two things I urge you to do. 

 

  1. Do the math. Make sure you are able to do all of these things and stay on track to one day to be financially independent.
  2. Embrace saying no. If, after doing the math, you come to the conclusion that you can’t do every last thing your family’s heart desires, focus on the things that are really important. Financial self-awareness is a rare invaluable commodity. Now that you’ve arrived there you’ll understand and accept that you won’t try to do everything! And this might blow your mind, occasionally say no. That guy’s trip to Vail might be a blast but if it costs you $4k and it’s similar to four other excursions throughout the year, it might make sense to pass…and maybe throw a little cash at the 529 account. Yes, FOMO might kick in but you need to keep the future you in mind.

 

Robert F. Carrigg, Jr., CFP®

rob.carrigg@stewardpartners.com

603-427-8840

 

ANY OPINIONS ARE THOSE OF ROB CARRIGG, JR., CFP® AND NOT NECESSARILY THOSE OF RAYMOND JAMES. KEEP IN MIND THAT THERE IS NO ASSURANCE THAT ANY STRATEGY WILL ULTIMATELY BE SUCCESSFUL OR PROFITABLE NOR PROTECT AGAINST A LOSS. REBALANCING A NON-RETIREMENT ACCOUNT COULD BE A TAXABLE EVENT THAT MAY INCREASE YOUR TAX LIABILITY. THE INFORMATION HAS BEEN OBTAINED FROM SOURCES CONSIDERED TO BE RELIABLE, BUT WE DO NOT GUARANTEE THAT THE FOREGOING MATERIAL IS ACCURATE OR COMPLETE.