Is Lifestyle Creep Ruining Your Retirement Plan?
How to adjust spending now so your adjustment to retiring is easier
Retirement planning is often reduced to a singular call and response.
Increasing your savings rate will, obviously, land you in retirement with a bigger nest egg. But it may not be enough. You may also need to reduce spending to both bolster your savings and reduce the ultimate shock of a smaller retirement income.
The high cost of lifestyle creep
If your annual spending grows with your income, you are effectively building a lifestyle that will require more retirement income to maintain once you stop working.
Let’s say that to live your life, you’re shelling out $75,000, after tax, the year before you retire, and your aim is to replace 80% of your pre-retirement income. That means you need your savings, Social Security and any pension to generate $60,000 a year, after tax, when you retire. If your household burn rate is $60,000, you would need $48,000 a year.
Needing $1,000 less a month in retirement can change the calculus of what you need to save today or can reduce the pressure to work longer.
Moreover, spending less today effectively gives you more cash to save or pay down the mortgage or reduce what the kids need to borrow for college, or enables you to downshift from the corporate grind into work that is a little bit less stressful and more enjoyable.
Yet lifestyle creep seems to be a common household habit. The Bureau of Labor Statistics tracks household consumer spending by dozens of categories and breaks it down by pre-tax income levels. As income grows, so too does spending on the same goods.
For example, the average annual expenditure on a new car for households with incomes between $150,000 and $200,000 is 78% higher than among households with income between $50,000 and $70,000. Average spending on meals out is more than double for the higher income household. Average spending on housing is about 80% higher. Even spending on pets seems to be susceptible to lifestyle creep, with the higher income households spending about 2.5x more.
Some options to consider:
Where you live. The physical size of homes has expanded over the past few years, while the average number of people in a given house hasn’t. Less square footage can mean a smaller mortgage, lower property tax and reduced utility bills.
Ten years to retirement? Fifteen? Considering lower-cost housing could buy you a lot of breathing room. It doesn’t hurt to peruse housing costs in major markets or small towns.
Your car. The auto industry is dependent on lifestyle creep, wooing customers with shiny new cars tricked out with thousands of dollars in upgrades that have very little to do with getting you to and from work and soccer practice, safely and comfortably. Don’t saddle yourself with a big car payment. Buying a three-year-old used car and driving it for seven to 10 years, rather than buying a new car, can transform your retirement outlook.
Raises and bonuses. You need to plan ahead for how you will handle every income boost. If you just let the extra cash hit your paycheck, chances are it will get spent on upgrading your lifestyle. Committing to saving a big chunk of every raise is how you avoid lifestyle creep. Aim high: Earmarking 50% of every raise for saving or paying down debt is a minimum. If you’re extra-motivated, push that to 75%.
Devotees of the Financial Independence, Retire Early (FIRE) movement would tell you to save every penny. If that floats your boat, fine. But most of us do better working toward goals when we give ourselves a bit of room to relax and enjoy ourselves. Think: cheat day on a diet. Same goes with lifestyle creep. If giving yourself 10% or 20% of every income boost to spend helps you save the other 80%, that’s a winning game plan.