From doctors, lawyers and business owners to real estate professionals, consultants and entrepreneurs, retirement planning can be more complex for your high-earning clients who have large, but inconsistent incomes. Fortunately, I have some simple strategies to share that may help you maximize savings and prepare for a comfortable retirement.

Three-bucket strategy

I like to think in terms of three distinct “buckets” or asset pools. Each bucket serves a different purpose (e.g., short-term cash needs, intermediate-term growth needs and long-term growth).

Bucket 1: Shorter-term for your immediate needs: Here your client should hold enough cash to fund up to two years’ worth of living expenses (i.e., their emergency cash or “rainy day fund”). It’s also where they want to have enough cash for pending purchases, low-risk investments and other short-term cash needs. This short-term bucket can typically contain short-term fixed income, money market funds, short-duration CDs and immediate annuities. Each client’s risk tolerance and cash flow situation will vary. There’s no one-size-fits-all formula for determining how much in liquid assets to keep in Bucket 1. Clients who work in real estate and business brokering, for instance, may earn just a few very large payouts a year after closing their deals. They might need a bigger cash reserve than an entrepreneur who has monthly fluctuations in their income, but not the same variability as the high-end real estate or business broker. Meanwhile, there are other high earners with inconsistent incomes who don’t want to fund large reserves. With their higher risk tolerance, they’re comfortable selling stocks or bonds from time to time when they need to raise cash for large expenditures. With this strategy, they know they’ll occasionally have to sell assets during market downturns to meet their needs.

Note: Whatever your risk tolerance and cash needs, make sure Bucket 1 is filled up first, before you move on to Bucket 2 and Bucket 3 (see below):

Bucket 2: Intermediate-term for future lifestyle needs: Here you want to continue to grow your client’s wealth to keep pace with inflation and to fund their future lifestyle needs five to 10 years out. This is also where we want short-term liquidity. We want to avoid investing in high-risk assets in Bucket 2 because they don’t want to get caught underfunded if a market downturn occurs right before they need the money. This mid-term bucket is where we typically include a balanced mix of traditional stocks and bonds, and opportunistic fixed-income strategies using CDs, preferred stocks and  convertible bonds.

Bucket 3: Longer-term for your dreams and legacy: This long-term bucket is where clients want to achieve long-term growth to fund their long-term cash flow needs (10 or more years into the future). Here’s where we’ll utilize a mix of annuities and stocks with higher potential return, which means they tend to be more volatile and less liquid. These assets can help you outpace inflation while also allowing your client to refill their immediate and intermediate buckets (i.e., Buckets 1 and 2 above). Bucket 3 is also where you may want to consider including assets that are not correlated to stocks and bonds, such as alternative investments (i.e., private equity, private debt, hedge funds, real estate), plus other deferred compensation strategies. 

Aim for consistency

Even during your client’s lower-income years, it’s very important that they keep contributing to their retirement account(s) to maintain consistent saving habits and to benefit from dollar-cost averaging.

That’s why we encourage many higher earners with inconsistent incomes essentially to create their own pensions. Doing so provides consistent, predictable cash flow throughout their lifetime — and their spouse’s. This is where annuities can come into play. 

Maxing out tax-advantaged accounts 

I always want my high-earning clients to contribute as much as possible to their retirement accounts, especially during their high-income years. That way, their money can grow tax-free for decades until it’s time to withdraw it in retirement. 

Other tax deferred compensation strategies

I’ve found that many entrepreneurs and other high earners with inconsistent incomes, either do not have traditional IRAs or 401(k)s — or they’ve maxed out their IRA, SEP or 401(k) and need a tax-advantaged way to sock away much more for retirement than the annual limit for 401(k)s and IRAs (age 50+). 

The key for high earners with inconsistent incomes is to take advantage of high-income periods to save and invest aggressively while maintaining discipline during leaner times. Teaming up with a qualified financial advisor can help create a personalized retirement plan and cash flow plan for your clients to help them navigate the complexities of irregular income.