HENRY’s Building Wealth Over Time

Question: I’m in my mid-thirties with a stable career and steadily increasing income. In contrast, my parents will be retiring in a few years and are concerned about having less income and a high net worth. How do we each balance current needs with future goals? 

Answer: It sounds like you might be a HENRY, which is an acronym for High Earner, Not Rich Yet. HENRYs typically pursued higher education, enjoy an income commensurate with that investment, and may have student loans to pay. HENRY’s often pay higher taxes, have a mortgage, are starting a family, and have higher overall living expenses with little savings or investments, making long-term goals feel like a far-away place. Your parents are likely in the DINK or Double Income No Kids category as they approach retirement. 

As a HENRY you could benefit by creating a strategic plan for long-term progress. Simple but effective strategies can allow you to build long-term wealth while addressing your immediate needs like debt repayment and living expenses.

Consider reducing your current tax bill by contributing the maximum to your employer-sponsored pretax 401(k) and consider other tax-advantaged savings vehicles like traditional IRAs and HSAs that can further reduce your current tax burden.

A thoughtful and fearless look at day-to-day fixed and flexible expenses could increase available funds to invest. You may have some “lifestyle creep” in the form of leisure, entertainment and other flexible expenses that may seem like necessities but, upon closer inspection, wouldn’t leave you in a dire situation if they were reduced.

Debt is another area where HENRYs should be mindful. School, auto or personal loans and credit card debt are often the primary areas where you can make changes. In addition, consider asking for an interest reduction from your credit card companies if you’ve been an on-time payer with a long and consistent track record. All this requires is a “goodwill letter” to your credit card company – a sample of which can be found easily online.

High Net Worth Lowered Income

Those with high net worth but declining income, like your parents, are on the opposite end of the spectrum. Some who fall into this category are business owners whose wealth is tied up in their businesses; others may be early retirees who’ve built up a meaningful investment portfolio and own paid-off properties, but no longer receive a steady income from a paycheck. They’re asset rich, but the major issue is the low amount of available reliable income.

The lack of liquidity comes with risks. This can cause problems in a volatile market, or when there are unexpected higher taxes from selling investments or liquidating portfolio assets, for example, or other unforeseen expenses.

Short-Term and Long-Term Plans

Diversifying your assets for more short- and long-term flexibility and reduced risk over time can help meet your cash flow needs. Ideally, if you have a three-to-six-month emergency fund in cash savings, consider where to put money according to liquidity. Your emergency fund, for example, may go into a high-yield savings account or a money market account. Illiquid assets like your house, car or other real estate holdings will be part of your long-term net worth plan and can build your equity.

The bottom line when it comes to balancing your net worth and income throughout your life is that a diverse portfolio with several types of liquidity may be the most appropriate for building long-term wealth, maximizing your cash flow, and creating a life you love. Talk to your CERTIFIED FINANCIAL Planner ™ Professional about where you fall in these categories and how you can move the needle to create a more balanced outlook.

As an aside, a few additional clever financial acronyms besides HENRYs and DINKs include KIPPERS (Kids in Parents Pockets Eroding Retirement Savings), MUPPIE (Middle-aged Upcoming Prosperous Professional) and RINKs (Retired Income No Kids). Stay focused and plan accordingly.