How to turn a high salary into lasting wealth: The HENRY roadmap

[00:00:00:00 - 00:00:05:15]

Speaker 1

You're a high earner and things are looking good right now, but will that lead to long-term wealth?

[00:00:05:15 - 00:00:12:07]

Speaker 10

150,000, 250,000, they're large salaries, but there's an expectation of the lifestyle that comes with that level.

[00:00:12:07 - 00:00:26:02]

Speaker 11

Quite often you find that people in the earmal money, their lifestyle increases, and at the end of the month, the surplus income they have left over can often be the same level as it was ten years ago. If their income suddenly stopped, they don't have the wealth built yet to survive the fall.

[00:00:26:02 - 00:00:30:07]

Speaker 10

We love this, tax bans, thresholds, this is the stuff that we're passionate about.

[00:00:33:10 - 00:00:54:14]

Speaker 1

Welcome to the power of good advice, a series built on a simple belief. Good advice shouldn't be kept behind closed doors. Everyone deserves to have clarity, to feel confident, to build a prosperous future and to unlock the good advice that can lead you there. We believe wealth isn't just about numbers, it's about your goals, the people who matter to you and the life you want to build.

[00:00:55:17 - 00:01:26:15]

Speaker 1

I'm Katie Derham and I'm joined by two leading experts from Evelyn Partners, investment management director Christopher Henderson and financial planning partner David Little. And hello to you both. In this episode, we're looking at those people who've made a strong start to their wealth building journey and who should be able to expect a rosy future. People who are high earners but not rich yet or to give them a snappy a name, Henry's. Listen, tell me what you think that means. What's your definition of a Henry? Let's start with you, Dave.

[00:01:26:15 - 00:01:49:04]

Speaker 11

Henry, again, as you mentioned, the high earner not rich yet. The actual number is subjective. It's not a certain salary or income the person has. It's more that they've grew their career, they've started to earn good money, but the key thing is they're fully reliant on their income. If their income suddenly stopped, they don't have the wealth built yet to survive the fall.

[00:01:49:04 - 00:01:58:06]

Speaker 10

Okay, so would you agree, Chris? Yeah, I would. They would typically feel successful and perhaps not quite secure yet. That's still some more time away.

[00:01:59:08 - 00:02:02:04]

Speaker 1

That's the definition of a lot of people I know. That's true.

[00:02:03:10 - 00:02:10:11]

Speaker 1

Okay, so what kind of are we talking generally about young professionals at this point, do you think? Or, you know, a bit more detail. Go on.

[00:02:10:11 - 00:02:30:21]

Speaker 10

Yeah, so accountants, lawyers, we typically see industries where reward is typically by salary as opposed to having share options or a stake in the business. And it's with the level of taxation on that income. That means that it's actually quite a lot more difficult than it was historically to build that wealth that David makes reference to.

[00:02:30:21 - 00:02:33:19]

Speaker 1

Okay, and what sort of salary would these sort of Henry's be on?

[00:02:33:19 - 00:02:47:07]

Speaker 11

Typically, again, the subjective, I would say in our definition, six figures, £100,000 plus income, that's really tax led to go on. So there's certain tax traps that people can enter when they start to earn those figures above £100,000.

[00:02:47:07 - 00:03:02:04]

Speaker 1

Yeah, that's the classic level in fact, isn't it? Correct. A problematic level in fact. And so in fact, talk about problems now, because it sounds like they're in a nice position. I mean, lucky them to be called a high earner, but presumably some pressures. Let's talk through what pressures they might be under.

[00:03:02:04 - 00:04:01:09]

Speaker 10

We're typically talking about the top one to 2% of earners in the UK. So the expectations of themselves and on them from their businesses is hugely significant. So they really are being pulled in many directions. They have then the guilt of family, whether it be children or parents, and to what extent they balance their time or most really we see have very little option. And so that leads to spending that little bit more, you know, the element of, well, you know, I'm working very hard. I should be able to do this. I should be able to fly the family to whatever their chosen destination, perhaps by business class. And these are all that's where we come to lifestyle creeping and the level of expenditure just gradually arises. Fixed costs can be a nicer house, but it's the variable costs also during the year of those nicer holidays that really add up. And when you're that busy as this cohort typically are, they don't have the time to look. It's simply a matter of is the money there or is it not?

[00:04:01:09 - 00:04:14:12]

Speaker 1

It's often a stage of life thing as well, isn't it? If you're at that stage in your career where you're beginning to earn that sort of money, it's often not always, but it might be the time when you're thinking of starting a family, for example. So just those, as you say, those fixed costs as well as the variable costs, they just go sky high or they could do, couldn't they?

[00:04:14:12 - 00:04:14:21]

Speaker 11

Correct.

[00:04:14:21 - 00:04:15:10]

Speaker 1

Yeah.

[00:04:15:10 - 00:04:37:03]

Speaker 11

It's quite often you find that people in the earn more money, the lifestyle, as you mentioned, increases. And at the end of the month, the surplus income they have left over can often be the same level as it was 10 years ago because the lifestyle costs have increased. So we say that a temporary increase in income can sometimes lead to a permanent increase in expenditure because the lifestyle does jump up a stage.

[00:04:37:03 - 00:04:39:06]

Speaker 1

And it can be a bit of a trap then, can't it?

[00:04:39:06 - 00:05:09:04]

Speaker 11

It can. And this is the issue and it leads on to the pressure because we have quite a few clients they are earning good money with a fortune, a bit of promotions, a bit of exams, whatever it may be. And suddenly they realize that their lifestyle has crept up. Often, ones are fixed costs like they've moved house, they have an increase in their mortgage, or they've taken out that second car that seemed affordable when they perceive their income to be high. But in reality, after taxation, after general living costs, the surplus income isn't as high as what they thought it would be.

[00:05:09:04 - 00:05:24:15]

Speaker 1

Yeah. And again, all this does come into, from some people's perspective, that I'm going to play on my tiny violin, nice problem to have. But it is a problem. People do get into a bit of hot water sometimes, don't they? So how can you help people at this stage of their financial lives?

[00:05:24:15 - 00:06:04:19]

Speaker 11

I think the key thing is trying to make them realize where they are just now and where they want to be and trying to project that path for them, model that path. We use our software program, Cashflow Modeling, and it's based on Crystal Ball, a financial crystal ball. It takes people's circumstances today, all the financial facts and the family, and it projects every year of their financial life up to age 100. And it's quite key because it shows them if nothing changes and they keep going the way they're going, this is how the financial life is going to look, particular retirement. And it allows us to hopefully identify the sooner we start to identify the issues, we can plan to change that and improve things as we go forward.

[00:06:04:19 - 00:06:07:09]

Speaker 1

Yeah. So what sort of response do you get from people?

[00:06:07:09 - 00:06:10:23]

Speaker 10

Yeah, it really is hugely helpful that dispels certain myths.

[00:06:12:07 - 00:07:04:07]

Speaker 10

150, 250,000, 300,000, they're large salaries, but there's an expectation of the lifestyle that comes with that level of expenditure. And that does not take into account how inflation has changed even over the last five years. What those amounts give you in terms of a lifestyle is really far reduced in comparison to say pre-COVID as an example, house prices have gone up, energy prices have increased. And although yes, earnings have increased, our understanding of what you can buy for a certain level of income has not increased. And that really has adjusted people's expectations. The casual planning and forecasting helps to adjust, give them that realization that 250,000 is a lot of money. But actually when you have two children at private school, for example, a large mortgage, three holidays a year, it really doesn't go far.

[00:07:04:07 - 00:07:24:09]

Speaker 11

There's also the core misconception that, for example, if you earn 50,000 a year, which is a really good salary, people think if you earn 150, you have three times the level of income, it doesn't quite work that way. The taxation structure in the UK is designed where the broadest show does pay the most tax, which does mean that it's certainly not three times income if that's the case.

[00:07:24:09 - 00:07:42:22]

Speaker 1

Yeah. And as we mentioned before, there are various cut off points, aren't there? There are. I remember people in the past, they'd say, "A hundred grand, that's absolutely arrived." And now you read articles going, "No, a hundred grand, you almost don't want to get there because you'll suddenly tip into another band of tax, won't you?"

[00:07:42:22 - 00:07:45:08]

Speaker 11

It's the one realization I've had when you speak to clients.

[00:07:46:13 - 00:08:22:02]

Speaker 11

It's not really publicized very often. There's a tax band issue over £100,000 of income. Because when you read the newspapers and listen to the news, they always talk about basic rate, higher rate and additional rate tax. However, there's the tax trap over a hundred thousand where there's a band where you basically lose your personal allowance, which can be quite a hefty tax bill to pay. And on top of that, over £100,000, you'll lose child benefit as well. So those two facts combined, we've actually had clients that have actively tried to avoid tipping over on gross income. And there's various mechanisms we can use to help them with that. Yeah.

[00:08:22:02 - 00:08:51:14]

Speaker 10

We love this. Tax bands, thresholds, this is the stuff that we're passionate about. But most clients will come to us, particularly in this Henry cohort, after they received a bonus or a pay rise, that has taken them over the hundred. But where's it gone? My pay slip, they've taken 60% of my increase. And that's when they become aware because most people, it passes them by, the salary they receive after tax just provides for the fun and the good life that they hope to enjoy.

[00:08:51:14 - 00:09:03:22]

Speaker 1

That's true. So at what point then do you think you can really step in and help? Let's talk about the relationship that you've got with Henry's. Is there a point where you kind of go, right now, okay, this is when we can really start adding some value.

[00:09:03:22 - 00:09:33:21]

Speaker 11

With the majority of planning, the sooner you plan, the better the outcome. It's about raising awareness to allow people to realize that although they're high earners, at some point in time, they're going to retire, that's going to happen, and they need to plan for the future. So it's just trying to realize that if you make small adjustments just now, start saving through pensions or investments or rises, that nest egg at the end will be something a lot greater than what it would have been if you continue to, your expenditure, meet your outcome and rises in line with that.

[00:09:33:21 - 00:09:44:00]

Speaker 1

Trying to work out what slack you've got in the system, to be clever with it. How about you, Chris, where do you really feel you can start adding value with the Henry?

[00:09:44:00 - 00:10:12:17]

Speaker 10

Yeah, one of the persistent challenges we face is Henry's who we ask, what do you have on your pension? How much is usually a question that some can answer? If we then go on to ask what's it invested in, fewer still ask what the contribution rate is from their employer, also less again. People are just not engaged in their pensions because they feel so remote and retirement feels such a long time away.

[00:10:12:17 - 00:10:29:04]

Speaker 1

To that same point, really, the difference between somebody who has managed to take the time in their busy lives to go, okay, I might still only be in my mid 30s, say, but I am going to think about 30 years hence and what's going to happen when I retire, and somebody who doesn't, like, let's spell out the differences, the best and worst case scenarios here.

[00:10:29:04 - 00:11:34:16]

Speaker 11

There's a few elements to that. The bulldozer plan early can be more tax efficient. The way that really comes in, we all have an annual tax statement about how much tax we pay to HMRC and where it's been spent. There are certain pensions that are a good example and investors, we can actually bring down someone's annual tax bill. If you think about it, if you're saving in tax annually and you're investing that, you're growing a pot of money for the future. And I guess in short terms, those who plan for the future will have a lot of the glide path to retirement is smoother, rather cliff edge, which some people, you generally find Henry's who haven't put money into a pension above the minimums, they have to at the workplace, and they haven't tucked away money for the future. Retirement keeps up quicker than what they expect to do, because to be a Henry, you generally find you're a business owner, you're a professional, you're busy, so you don't have time. Again, time seems to flash past rather than crawl past. So retirement hits you quicker than you expect. And if you haven't planned for the future, there is that cliff edge where your income will suddenly and naturally drop downwards, but the lifestyle expectation of what you're used to and more important what your family's used to is still high.

[00:11:34:16 - 00:11:50:21]

Speaker 1

At what point can somebody in the situation come and see you guys? Because obviously you've got loads of information and loads of such useful tips and advice for them, but if they haven't got much in the kitty, stashed away to invest, you know, how can you help?

[00:11:52:04 - 00:12:24:03]

Speaker 11

Simple changes, even small changes. Again, if you start young enough, see you come to us early to mid thirties, and we do the modelling. So we say this is where you are just now, this is how the future looks. And we can do what we call what if scenarios. Say for example, you saved an extra £200 a month from your salary into your pension. For a Henry, that's a small part of normal, their normal expenditure. The difference of that is huge. And those small changes can actually make a big impact going forward. The key thing is it's planning early, don't leave it to the last minute if you can avoid that.

[00:12:24:03 - 00:12:27:07]

Speaker 1

Do people generally respond quite well, Chris, when you give them this information?

[00:12:27:07 - 00:12:57:10]

Speaker 10

They do. It's a feeling you see it in their faces, sort of feeling of relief, because there's this sort of slight low level anxiety in the background of most of those that do come to see us that they have been thinking about it, but they should have been thinking about it a little bit earlier. And actually having conversations as a sort of, I suppose the swallowing the frog, it's never quite as difficult as feeling of a real relief, because it's, you know, the outcome is not simply financial.

[00:12:58:14 - 00:13:47:17]

Speaker 10

Really quite a pertinent example just last week, speaking to a couple who have looked after, not for very long, just a couple of years now. And he is a prolific spender. He works very hard and really loves to live life. And she is also incredibly a high achiever, but has the low level anxiety in the background that they haven't been thinking about the future. And our most recent meeting, as I say, it was just last week, she relayed the joy to be able to spend without any guilt, because they knew that the longer term was settled and planned. And they had a structure, spending that they did do, which is still extravagant, by some measures, was far more enjoyable, because there wasn't any element of sort of conscious guilt or anxiety associated with it.

[00:13:47:17 - 00:13:50:02]

Speaker 1

And what sort of advice had you given them? What had changed?

[00:13:50:02 - 00:14:25:14]

Speaker 10

It was using David's financial forecasting or cash flow planning to give them a window into the future. And what small changes they were in this particularly painful above 100,000 and significant tax being paid, just by making some one off pension contributions and building up their pension, but ultimately saving significant funds tax, they were able to be quite comfortable that what there was coming in could be spent, and what was already sort of automatically set up to be saved, and was all settled and set up for the future for the long term.

[00:14:26:21 - 00:14:35:23]

Speaker 1

It's trying to have a crystal ball, isn't it? I mean, obviously, none of us do, but you can go a little way, can't you, to prepare for unforeseen eventualities?

[00:14:35:23 - 00:15:40:23]

Speaker 11

I think that's exactly it. It's just, it's assessing where you are just now. Sometimes things don't need to change. Some Henry's we've came across have actually diligently saved, it's just part of the DNA that's maybe installed into the parents or through a young education. My grandparents encouraged me to save my pocket money, for example, as I was growing up. So some people have that saving mentality. It's not every Henry looks at and goes, I've got a cliff edge coming. Sometimes we can assess the future, we can model different projections and say what you're doing just now, you're on track for X amount of spending in retirement. Whereas equally, some people are used to earning good money, and they want that to continue into retirement. That's the difficulty because if you look at how much money you need as a pot at retirement to replace or replicate the income you're used to, it's bigger than most people think it's huge, especially because this generation don't really benefit from what are called defined benefit pensions as the more the older generations. So you have to save that money and build that pot up to create an income for you in retirement. So it's when people realize that pot of money, what they actually require to replicate their net income just now, they can sometimes go white.

[00:15:40:23 - 00:15:43:10]

Speaker 1

Yeah, I mean, so can you give a rough idea?

[00:15:43:10 - 00:16:16:17]

Speaker 11

True. I mean, a working example to have an income, a net income, about 50,000 pounds a year, you need a pot approaching a million pounds. That's a lot of money to save. And again, if you start saving when you're young, and you diligently put some money away from your pension, and other different jigsaw pieces of wealth, it's not unachievable, especially for a Henry. It's when you leave it to your mid to late 40s, early 50s. And the sudden realization happens that I'm retiring, hopefully 15 years, I don't have much of my pension. That's when the panic starts. So again, it's plan early and you'll succeed.

[00:16:16:17 - 00:16:24:14]

Speaker 10

And by that point, you have far less time to enjoy compounding. The Sims Wonder of the world was growing, growing those contributions.

[00:16:24:14 - 00:16:28:08]

Speaker 1

Yeah. Go and give us a couple of examples of great compounding stories.

[00:16:28:08 - 00:17:36:12]

Speaker 10

I have a particular gentleman who has lived a very modest life, has earned well, but expenditure has been really, really very low. And in comparison to many, he lives in a rural area. So perhaps the opportunity to spend is more limited to the local pub, I think probably is the height of entertainment. But by simply saving the excess and not through any simple thought other than he was advised at the time and had a good conversation at the right opportunity to set things aside. And since then, over a career of sort of 34, 35, 40 years, he's gradually built up from not a, his income was not significant, maybe sort of 30,000 pounds a year. We're talking about positive 3 million pounds, just simply through saving, having such low expenditure. And this really is the balance is if you can fix your expenditure whilst your income is growing, you have such enormous potential to put funds aside and grow. But of course, you know, the here and the now is a real temptation, particularly when you're working incredibly hard as Henry's are.

[00:17:36:12 - 00:17:49:00]

Speaker 1

Yeah. Do you find yourself quite evangelical when you meet youngish people in the pub or in the supermarket shop and going, have you thought about a pension? How are you doing? It must be tempting. It's true.

[00:17:49:00 - 00:18:24:03]

Speaker 11

I'm famous with it with my friends and not in a good way. So they say they've had a promotion, I've got a new job. And often my first question is, what should additional income? And if because they know it's there's a tax planning angle there. So again, the big one is the tipping point of 100,000 pounds. I had a friend to promote it, which is lovely to hear. And he's saying his salary is just over 100,000 pounds and he has children. I said, I need to talk to you. There's a couple of things you need to do and you can see them glossing over thinking, you know, just be happy for me. I'm earning more money. And I'm instantly thinking, right, you're tipping over into the dangerous spot. So you can do sometimes. Yeah.

[00:18:24:03 - 00:18:26:05]

Speaker 1

What do you advise them to do?

[00:18:26:05 - 00:19:07:07]

Speaker 11

Well, again, it's a really good question. If people are just tipping over at 100,000 pounds and it's been a relatively new increase in their income. So their expenditure hasn't technically risen yet. I always say to them, try and maximize your pension contributions. Because again, as a working example, if somebody was earning 110,000 pounds a year, if they put 10,000 pounds of that salary into their pension directly from the employer, it takes an under taxable income of 100,000, which retains the personal earnings, it retains the child benefit, etc. So there's that, a small simple change can have quite a big massive impact to not only their current taxation, but it's an additional 10,000 pounds compounding for the future pension port.

[00:19:07:07 - 00:19:10:15]

Speaker 1

And it's at that point you just say, and don't tell anybody you've had a pay rise.

[00:19:10:15 - 00:19:11:06]

Speaker 11

Exactly.

[00:19:11:06 - 00:19:15:12]

Speaker 1

You know, in fact, not even to yourself. Try and pretend you've not had one, you know, we'll just stash it away.

[00:19:15:12 - 00:19:45:03]

Speaker 11

That's actually a fantastic point. Again, the key takeaway, and this is difficult, because it's natural human instinct. When you earn more money, you want your lifestyle to to increase, everyone does it. If you have the discipline is to take that extra additional income and pretend you never actually had that and instead talk it way into investments. It could be pension, it could be ISIS, it could be something that is talking away savings for the future. So your lifestyle doesn't technically increase, but you know, you've got in the back of your mind, you're thinking, I've got my future self, thank me for this.

[00:19:45:03 - 00:20:14:04]

Speaker 10

And it does take us back to the pressures we spoke about earlier, that there is an element of when your salary increases, and you sort of, in many cases, it's publicized and the extent to which your family and friends sometimes can change and the expectations of who's covering the family dinner, for example, can change and all of these expectations that comes in. Sometimes it's from one side from a family side, but other times it's the individual themselves thinking, I've done really well, I should be doing these things.

[00:20:14:04 - 00:20:31:04]

Speaker 1

Yeah, yeah. I mean, Henry's is quite a new acronym, isn't it? I feel like it's not been around that long. I mean, obviously, this sort of stage in somebody's financial life has been around forever. But I mean, do you feel people are changing their attitudes? Do you feel when young people are coming into or you're chatting to them generally, are people better educated about this stuff? Now, do you think or do you think it's still quite a long way to go?

[00:20:31:04 - 00:21:24:10]

Speaker 11

It's actually one thing, if I was ever in government, which is not going to happen, it's the one thing I would change. And it's the one I normally in our education system from a young age, we are taught various different subjects, which are all relevant in their own purpose. The one thing we're not taught, I certainly wasn't taught, is financial education. If I was in charge of the education policy in the UK, I would actually have a subject a week, an hour a week, to talk about what is a mortgage, what is an interest rate, credit card debt, the dangers of being in debt, and also the power of saving. And just educate people on the advantages of that. Because before I started my career or education in financial services, I was unaware of the dangers of debt and mortgages. But the one thing that did happen, my 18th birthday, my bank kindly sent me a credit card to them, unprompted, which again, you're thinking, oh, this is wonderful. Because if you don't have the education, you don't realise how expensive credit card debt can be.

[00:21:24:10 - 00:21:32:14]

Speaker 1

You've already mentioned you see people feeling relieved when they realise they're taking control a little bit more. I mean, that must make you feel very happy.

[00:21:32:14 - 00:22:16:23]

Speaker 11

One of the best examples of that is I had a lady come in, sadly recently divorced, very, very nervous about her financial future. And she thought she's going to have to extend her retirement a further 10 years than what she was planning. And again, I sat down, I went through the modeling with her, showed her the crystal ball into the future. And she realised that she could actually retire a lot quicker than what she thought she could. And she burst into tears in my office. It was a good few years ago now, but it stuck with me. It was really hard. Because one of those things you realise the impact you can have on people's life, we sometimes forget how powerful financial planning and investment management or wealth management combined can actually be, and the difference we can actually make to people's lives. So when it does, the realism hits you, it can be very powerful.

[00:22:16:23 - 00:22:26:06]

Speaker 1

Yeah, no, I can imagine. So for people watching this, or listening to this, who might come into the category of being Henry, what's the one message you'd like them to take away?

[00:22:26:06 - 00:22:27:09]

Speaker 10

Have a look at that pension.

[00:22:29:20 - 00:22:55:11]

Speaker 10

It's the single largest asset typically after someone's home. And it's one that is surprisingly really forgotten in the background. So just take a moment when that next statement comes through, once a year, usually, and just have a look and see what's the investment option? What what sits there? What is it? Is there a default in the title or lifestyle or something along those lines? And have a look at what the alternative options are.

[00:22:55:11 - 00:22:58:10]

Speaker 1

Okay, very good advice. How about you, Dave?

[00:22:58:10 - 00:23:20:10]

Speaker 11

The one takeaway I would recommend, or a bit of advice, is the increase in income you have. Try and save half of it before you're used to having it. So spend half of it because you need to celebrate your success, your family, your friends, you want to have more income to spend. But if you can possibly save half of that bonus, save half of the income, and just see the compounding effects, you put yourself with thank you for it.

[00:23:20:10 - 00:23:25:00]

Speaker 1

Amazing. Really, really great chat. Thank you so much, Chris and Dave.

[00:23:25:00 - 00:23:25:08]

Speaker 11

Thank you.

[00:23:29:07 - 00:23:53:04]

Speaker 1

Thank you so much for joining me for today's conversation. And thank you to my guests, investment management director Christopher Henderson, and financial planning partner David Little from Evelyn Partners. If you'd like personalised guidance or want to explore your own wealth management plans in more detail, then the team at Evelyn Partners are here to help. Just follow the link in the description below. Thank you for watching and goodbye.