Worth vs. Income

Paul Miller |

Some people assess their financial worth based upon the income they receive. Your worth is more about how you spend your money than how much you make. Yes, you could be making a lot of money right now, but if you are spending a lot of money, then you might not have a high net worth. Conversely, you could be making less money, but by spending less, you will also have more, thus raising your worth.

As people approach retirement, they more often than not see their income dwindle as they remove themselves from the full-time workforce. Just because your income is going down, does not mean your financial net worth has to go with it.

Decrease of Income in Retirement

As you move out of the workforce during your retirement, your income is going to naturally decrease. Without steady work, there is no constant stream of cash from a biweekly or monthly paycheck. However, this does not have to doom your wealth. Spending less money during retirement can ensure that your net worth actually increases. How is this possible?

Most individuals entering retirement use basic strategies to improve their overall wealth after leaving the workforce. This includes developing a strong cash-flow model that provides some level on income during retirement, maxing out your retirement accounts prior to retirement, and minimizing the taxes you pay on those funds during retirement.

Spend Less

It is always a nice feeling to have a higher income during your productive years in the workforce. However, that high income does not necessarily guarantee that you will enjoy immense wealth overall. Some statistics show that the average millionaire's annual income only accounts for 7% of overall wealth, meaning that a job itself and the accompanying paycheck are only a small fraction of the equation that is wealth.

An individual can make a lot of money with each paycheck that comes in, but with reckless spending, and poor savings and investment strategies, that same individual can end up with lower net wealth because their spending habits are out of control or difficult to curb once they are retired. A strong focus on long-term financial goals is necessary to help many people protect net worth during retirement.

Change your Life

One lifestyle adjustment that sinks the net worth of most retirees is an inability to adjust to the new financial realities they face. Millionaires often live under a heavy debt burden because, even though they make a large income, they do not protect that income. They live in big homes, buy expensive cars, and spend lavishly on wardrobes and vacations.

Even if an individual saves money while in the workforce, poor lifestyle choices that directly impact finances can carry over into retirement. If you fail to adjust your lifestyle to the new reality of a lower monthly income, you will see your net wealth evaporate in the blink of an eye.

Make Smart Moves

Protecting your wealth should not be focused solely on making more money in the here and now. Yes, greater income now can lead to the ability to save more for the future and build wealth. Without the right long-term goals and spending controls though, that wealth can disappear quickly in retirement as you struggle to support your pre-retirement lifestyle on a new post-retirement income. For more information, please contact Indian River Financial Group.