Maximizing Your Peak Earning Years to Achieve Financial Independence

Maximizing your peak earning years is a delicate balance between addressing your current needs and goals and planning for the future.

For years, Americans worked tirelessly with one goal in mind—to save enough money to retire comfortably and never work again. And if they were lucky enough to retire with a pension, even better.

Indeed, our parents and grandparents likely followed this path or one similar. But a traditional retirement is increasingly becoming a thing of the past.

Today, pensions are all but obsolete, and staying at one job for 20 or 30 years is unfathomable. Meanwhile, few workers want to wait until age 65 to enjoy themselves. And some people never want to stop working.

No matter your goals, true freedom means having the financial resources to give yourself options. If you want to achieve financial independence and live life on your terms, maximizing your peak earning years is key.

Consider these 6 tips for maximizing your peak earning years:

The average worker’s earnings tend to peak between the ages of 45 and 64, according to data from the Bureau of Labor Statistics. These tips and strategies can help you make the most of your high-earning years, so that your hard-earned money continues to work for you well into the future.

#1: Make the Most of Tax-Advantaged Accounts

Whether you plan to retire or not, taking advantage of tax-deferred retirement accounts is essential for maximizing your peak earning years.

As your income grows, consider contributing as much as you can to employer-sponsored retirement plans and/or individual retirement accounts (IRAs) each year. In 2022, you can contribute up to $20,500 to a 401(k) plan, or $27,000 if you’re 50 or older. You can also contribute up to $6,000 to an IRA, or $7,000 for those 50 and above.

A health savings accounts (HSA) can also be beneficial if you have a qualifying high-deductible health plan. HSAs are unique in that they offer three tax advantages. First, you contribute pre-tax dollars to an HSA. You can then invest your funds and let them grow tax-free until you need them. Lastly, your withdrawals are tax-free if you use them for eligible healthcare expenses. And since you own your HSA funds indefinitely, you can continue to draw on them for as long as they last.

#2: Prioritize Tax Planning

In some cases, maximizing your peak earning years means minimizing what you pay Uncle Sam. In other words, as your income grows, careful tax planning becomes increasingly important.

There are a variety of tax planning strategies that can help you preserve more of your wealth. While the following is not a comprehensive list, here are a few examples to consider:

Roth Conversion or Mega Backdoor Roth

In your peak earning years, you may not qualify for a Roth IRA. Yet you can still take advantage of the benefits of a Roth IRA with a Roth conversion.

Sometimes called a backdoor Roth, a Roth conversion is when you convert all or part of your traditional IRA balance to a Roth IRA. This is a taxable event, so you’ll pay your ordinary income tax rate on the amount you convert. For this reason, spreading your conversions out over several years or converting to a Roth in a down market can help minimize the tax consequences.

After converting to a Roth IRA, your future withdrawals will be tax-free (if you’re at least 59 ½ and meet the five-year rule). Plus, unlike traditional IRAs, Roth IRAs don’t have required minimum distributions (RMDS)—a feature that can help further reduce your taxable burden down the road.

Meanwhile, you may also want to consider a mega backdoor Roth if you’ve already maxed out your 401(k) and IRA contributions for the year and still have plenty of extra cash to put to work. To take advantage of this strategy, you must be enrolled in an employer-sponsored traditional 401(k) plan that permits after-tax contributions and in-service withdrawals.

Here’s how it works:

• You contribute after-tax dollars to your 401(k) plan above the pre-tax limit, up to the maximum amount that year.
• Then, you take an in-service withdrawal and roll your after-tax dollars into a Roth IRA.

Keep in mind that Roth conversions can be complex and don’t make sense in every situation.¹ If you’re considering either of these strategies, be sure to consult a financial planner or tax expert first.

Donor-Advised Funds (DAFs)

Donating to a DAF is another way to reduce your tax bill in your high earning years. When you donate money or non-cash assets to a DAF, you can take an immediate tax deduction in the year you make the donation.

However, you don’t have to decide which charities benefit from your donation right away. This can be especially helpful if you want to spread your donations out over time but bunch your charitable deductions together in the same year.

Front-Load a 529 Plan

Lastly, if you’re a parent or grandparent, contributing to a 529 plan can be an effective way to fund education expenses while realizing a meaningful tax benefit depending on the state you live in. Moreover, you can front-load a 529 plan by paying up to five-times the annual contribution limit at once.

This strategy can be particularly helpful in years when you receive an above-average bonus or other windfall that may push you into a higher tax bracket. In addition, it may save you from needing to contribute to your children or grandchildren’s education later, when you may not have as much free cash flow.

#3: Be Mindful of Lifestyle Inflation

It’s natural for your spending to increase alongside your income. Yet it’s also important to remember that income alone doesn’t make a person wealthy.

As you strive for financial independence, be careful not to fall into the trap of lifestyle inflation. Instead, maximizing your peak earning years means being mindful of your spending while staying focused on your long-term goals.

If you’re having trouble striking a balance between your present lifestyle and future goals, consider spending more intentionally on items and experiences that are aligned with your values. This can help you spend money only on what matters most to you, so you can stay on track towards the future you envision.

#4: Make Sure You’re Properly Invested

Over the last 20 years through 2021, the average annual return of the S&P 500 was 8.91%—or 6.40% when adjusting for inflation. If an investor had contributed $1,000 to an S&P 500 index fund every month over this same 20-year period, they would have ended up with approximately $607,755. This compares to the $240,000 they’d have if they had contributed the same amount to a savings account that pays no interest.

Of course, these returns aren’t guaranteed. However, since its inception, the S&P 500 has never lost money over a 20-year period.

Meaning, when it comes to maximizing your peak earning years, investing is key. Having the right mix of investments in your portfolio can help you grow your financial resources faster and outpace inflation, so your dollars don’t lose value down the road.

#5: Manage Your Risks

Maximizing your peak earning years is as much about protecting your assets as it is growing them. As your net worth increases, careful asset protection and estate planning strategies are essential.

First, make sure you have the right insurance coverage. Beyond basic coverage like health, auto, and homeowner’s insurance, be sure to consider your longer-term insurance needs.

For example, if you have loved ones who depend on you for financial support, you may want to consider purchasing life insurance. In addition, you may want to add an umbrella policy to your existing coverage to protect your personal assets if someone takes legal action against you.

Meanwhile, strategic asset location and titling can help you avoid paying unnecessary taxes and may even protect your family from excess personal liability. A financial planner or estate planning attorney can help you determine which strategies make most sense for you and your family.

Lastly, don’t forget to take care of your physical health and wellbeing. While these may not seem like financial risks now, they do affect your ability to earn a living. Plus, large medical expenses in the future can quickly deplete your assets.

Maintaining a healthy lifestyle now can help you preserve more of your wealth long-term. It also increases the likelihood that you’ll be able to enjoy your hard-earned money for years to come.

#6: Consider Working with a Trusted Financial Advisor to Continue Maximizing Your Peak Earning Years

Maximizing your peak earning years is a delicate balance between addressing your current needs and goals and planning for the future. As your wealth grows and your financial needs become more complex, you may have less time and energy to manage the details of your financial life yourself.

Fortunately, you don’t have to go it alone. SageMint Wealth is a wealth management firm for high-net-worth individuals, families, and business owners with a passion for supporting women, the LGBTQ+ community, and individuals in the technology space. If you’d like to speak with a member of our team about developing a plan for your future, please contact us. We’d love to hear from you.

1. Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IR. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA.