In a perfect world, we all would make more money each year. Each of us would receive raise after raise compounding to a salary with plenty of money to live on while saving for retirement, the kids’ college, buying a home, and any other financial goals you may have, essentially the American Dream. Unfortunately, most people will see their incomes peak long before they retire.
In real life, most people will see their incomes increase in spurts and jumps, sometimes even moving backwards. For example, the millions of Americans who saw their incomes drop (or raises not materialize) thanks to the Coronavirus recession. While some highly skilled workers may see their incomes increase over their entire working lives, others may see their incomes peak years or even decades before they plan to retire.
For most people, their biggest wage increases happen in their twenties and thirties. As they age, many tend to receive more modest gains, and there is the potential for income drops later in their lives. This is according to a 2016 study of Social Security earnings records, which was underwritten by the Federal Reserve Bank of New York. I should point out that Social Security income records would only include income up the Social Security limits. So, Lebron James would show the same Social Security income as a Tesla engineer making $137,700 (or more). In 2020, just the first $137,700 of income is subject to Social Security payroll taxes.
Picture your first job out of college; you were likely paid a low entry-level salary. Hopefully, as your career progressed (and you became more skilled and more valuable), your income jumped and jumped over the years. For my self-employed readers, remember your first few years running a new business; your income likely paled in comparison to what you made as the business matured and became more profitable. The study found that most peoples’ incomes peak by age 45. But, for those in the top 20% of earners, their wages did not peak until they were in their fifties. I hate to say it, but as you age and your income increases, your odds of getting laid off increase, which can dramatically change the upward climb of your income.
Studies like this highlight why it is important to start saving for retirement as young as possible. There will never be a better time than today to plan for your financial future. The earlier you get started, the easier it will be to invest for a secure retirement.
Expect the Biggest Income Gains Early in Your Career
All the statistics above are just averages. Obviously, some people will see their income peak early, and others may never see their income increases end (at least until they stop working). Understanding the patterns can help you make smarter financial choices along the way. The good news is the more education or specialized skills workers have, the more money they will likely make over their working lives. Likewise, they will, on average, see the peak of their incomes later.
Work to Avoid Lifestyle Creep
I may just be getting old, but couch-surfing was much more appealing in my twenties than it is today. Where we shop, what we eat, and the hotels we stay in often improves, aka become more expensive, as we age.
People tend to put off saving for retirement, with excuses like- “Once the kids are out of the house,” “Once I get the next raise, I can save,” “We can save for retirement once we remodel the kitchen.” Whatever the excuse for not saving, there will always be an excuse until it is too late to really let compounding interest make retirement saving easier.
Waiting until your forties or fifties, without saving much for retirement, may mean you will need to work longer or make more drastic spending cuts so you will be able to save enough to maintain your standard of living in retirement. Rising incomes can help make saving more manageable, but they can also mean you will need to replace a larger income once you retire. That is assuming your income continues to increase over time.
You may be tempted to show your success with major purchases like leasing a fancy car, buying a bigger home, and taking more expensive vacations. If you find yourself out of work or facing a stagnant income, going back to a more basic car, house, or mode of travel can be quite painful. To be clear, for those who are saving enough to achieve their dream retirement, the rest of your money is yours to enjoy on whatever brings you the most joy. If that is a bigger or just nicer home, go for it! Luxury travel, do it! On the other hand, if that bigger home means you will have to work past 90, you may want to reconsider.
I hope I am wrong for everyone reading this post; I hope you are the exception, and your income goes up every year. I also hope that you absolutely love what you do for a living and could not see doing anything else. Regardless, plan for a secure financial future, so if for some reason, your income does not increase as much as you expected, you can still afford the lifestyle to which you have grown accustomed. Now, I am going to go back to dreaming of the day Americans can travel interna