The Dangerous Reality of Lifestyle Creep
Lifestyle creep is a dangerous phenomenon that can slowly but surely erode your finances. It occurs when you gradually begin to spend more money on unnecessary things until your original budget is completely blown.
This can happen in small increments, or it can happen suddenly after a big life event. In this blog post, we will discuss the dangers of lifestyle creep in regards to your retirement and how you can avoid it!
Keep in mind one of the biggest dangers of lifestyle creep is that it can cause you to delay retirement. If you are constantly upgrading your lifestyle, it will become more and more difficult to save enough money for retirement.
Lifestyle Creep and Retirement
Sit down and really think about how much monthly income you want to have in retirement. Do you want to maintain the lifestyle you have now or have a smaller lifestyle. As your income grows make a plan and instead of absorbing the increase into your budget invest it instead.
It’s hard to forgo a lifestyle you know you can afford, but think about the overall cost of that larger lifestyle. Ask yourself, am I sacrificing my retirement by living to the maximum of my means? If the answer is yes, start to make changes immediately.
Let's look at the 2022 social security
$1,440 is the average MONTHLY social security check
Subtract from this:
($170) the average Medicare cost
($32) the average prescription drug coverage plan
($140) the average price for gap insurance for traditional Medicare
After subtracting these expenses you will have:
$1,098 remaining for your MONTHLY expenses.
How much are your current MONTHLY expenses?
My monthly expenses are about $3,000 and I don’t have a car payment, mortgage payment, or any debt. This number includes money I spend on household utilities, food, insurance, property tax, holiday’s, giving, etc.
If I had to make basic cuts then I can get this number down to $2,500 a month. If I make extreme cuts I can get this number down to $2,000 a month.
In all of these cases my expenses per month are way over $1,098 monthly income that I would receive from social security to live on.
How much do I need from investment income to cover my expenses?
Let’s plan for retirement on my monthly expenses above $3,000, $2,500, and $2,000. How much investment income do I need per month to cover my monthly expenses in retirement at each of these levels?
Monthly Invest Income Needed + Social Security = Total Monthly Income
|Monthly Investment Income Needed||Social Security||Total Monthly Income|
|$2,000 +||$1,098 =||$3,098|
|$1,500 +||$1,098 =||$2,598|
|$1,000 +||$1,098 =||$2,098|
How much do I need to invest monthly starting now?
I don’t want to work in retirement or run out of money. This means I need to make a plan and start investing so I can supplement my social security with investment income. I would like my investments to generate income for 35 years.
I picked 35 years because if I retire at 65 and add 35 years that is 100. I do not think I will live past 100.
I am almost 40 so lets say I have 25 years to invest and I am starting at NO retirement savings. If I put inflation at 5% and my investment return at 10% then the dollar amount I need to invest monthly:
|Monthly Amount to Invest now for the next 25 years|
Monthly Investment Income
from 65 yrs to 100 yrs
Of course all of this is a best guess. I have no idea what inflation will do or what the market return will actually be. This is my best guess and a plan. Try it out yourself by using this retirement calculator.
Evaluate where you are and what kind of plan you need for a comfortable retirement lifestyle. Don’t measure your happiness based on someone else’s retirement image or you might never be satisfied. Keep it real to you.
Don't forget to account for inflation
In planning for retirement don’t forget about inflation. You might want to save more money monthly because your dollar today is not going to stretch as far in 25 years.
A good example of that is the McDonald’s hamburger:
- 25 years ago it costed about $0.85
- 2022 it costs about $1.55.
I personally use 4% when factoring for inflation. The Federal Reserve Board has a goal of maintaining about 2%. Sometimes they are over or under. In 2022 we are at about 8.6% which is very high. I don’t expect inflation to stay at this rate for a long period of time.
How to scale back to meet your retirement goals
Depending on your lifestyle creep you might have to scale back in order to meet your retirement goals. Start small and gradually reduce your expenses over a year so it does not feel so painful.
If you are living way beyond the means of your current income then you might need to reduce your expenses drastically in order to meet your retirement goals.
I like to begin by reducing my monthly budget expenses with a percentage such as 1% or 5%. I like to cut in areas such as dining out, entertainment, clothes, etc. then I place the 1% or 5% in my retirement account instead of my checking account.
I still have this money but now I am living on less and growing funds for my retirement. I will keep reducing my lifestyle by a reasonable percentage every 3~6 months until I hit my monthly investment saving goal. To help more with budgeting read my series on how to budget
If making cuts is not an option for you then you may need a second job. Take advantage of a side hustle such as delivering pizzas, Shipt shopper, Uber driver, etc.
If you reach 62 and start drawing your social security benefits early, keep in mind there is a maximum yearly income you can earn before penalties will affect you.
In 2022 the maximum yearly side hustle income is $19,250 if you are drawing social security. As soon as you start earning more than this amount you will get deducted $1 for every $2 earned. This income limit restriction will go away at age 67 which is considered full retirement age for most as of 2022.
Lifestyle creep happens to everyone
Some people might think that they don’t need to worry about lifestyle creep because they will be able to adjust their lifestyle when they retire. However, the reality is that lifestyle creep can be very dangerous and can prevent you from being able to retire comfortably or at all.
It’s not too late to change your lifestyle and make adjustments. Small changes now can have a large impact on your retirement later. What are some changes you can make today to help make your retirement more affordable? Go on and get started you can do it!