Lifestyle Inflation Can Derail Your Retirement

As your salary increases, put some of it toward your retirement savings.

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Lifestyle inflation is one of the biggest enemies of retirement. Of course, we will run into other problems such as unexpected health care issues, economic downturns, and our children's education. However, lifestyle inflation is different because it is completely under our control. Most of us can do a better job at minimizing our lifestyle inflation, but it is very difficult to resist the urge to spend more when you make more.

We all want to be comfortable and live a better life. I’m not immune to lifestyle inflation either. When I first graduated from college and earned a good paycheck, my expenses went way up. It’s been trending up slowly since then, but I consciously try to minimize it even as I earn more income over the years. We live in a modest home, drive a regular car, and eat out about once a week. Many of my colleagues purchased McMansions, luxury cars, and spared no expense on entertainment. They are prioritizing luxurious living now over an early retirement, but that’s their prerogative.

Less saving and investing. Lifestyle inflation can be very damaging because as you increase your expenditures, you won’t be able to maximize your saving and investing. Every dollar spent on luxury purchases could go toward your retirement fund or an investment account instead. If you invested the money you spent on an iPad, it could grow to be much more than $500 in a few years. Many young professionals are partial to a brand new car. It’s too bad they don’t realize that a depreciating BMW is taking the place of their future investment earnings.

Difficult to go back. Lifestyle inflation also means you have to save more because you will need a bigger nest egg to maintain the same lifestyle in retirement. Let’s face it, once you are accustomed to spending money on a BMW, it’s difficult to go back to a Hyundai. This is why many retirement calculator results are so inflated. A retirement calculator may use your income as the baseline for how much you’ll need in retirement. Many people think they need $2 or 3 million before they can retire. However, if you control your lifestyle inflation and grow your income over the years, then you should be able to save a large percentage of your income. If you spend only 50 percent of your income, then your nest egg target will look much more reasonable than what a retirement calculator tells you. You can use your expenses as the baseline instead of your income.

Spending habits. In the recent past, many jobs came with a pension and it was easier to spend all your earnings because you’d have a pension to replace that income in retirement. Now, most employers do not offer a pension, but we are still spending most of our income every month. This spending habit needs to change. Living from paycheck to paycheck will derail your retirement saving plans. You might think retirement is a long way off and ignore it, but it will sneak up on you before you know it.

Save before you splurge. Before you splurge on luxury goods and extra items that you don't need, think about how much this will cost you in future earnings. A new BMW can cost $20,000 more than a recently used Hyundai. If you invest this $20,000 and receive 7 percent in annual earnings, then you’ll have over $150,000 in 30 years. In contrast, a new BMW will be a rust bucket in much sooner than 30 years.

Joe Udo is planning an exit strategy from his corporate job by reducing expenses and increasing passive income. He blogs about his journey to early retirement at Retire by 40.