How to Beat ‘Lifestyle Creep’ and Take Control of Your Future

Most of us currently working understand that in order to have a sufficient income for retirement you need to be diligent about making annual contributions to your retirement accounts.

These same people however, may balk when you tell them that receiving regular raises — actually earning more money — can instead lead to less money in retirement. Yet a recent retirement investment industry study found that individuals who receive regular raises do actually have less money to live on once they retire.

The idea of actually have less retirement savings from cumulative income raises is counterintuitive. The main reason that increasing income leads to less later on is psychological, not financial.

According to Morningstar, the phenomenon of “lifestyle creep” leads to an expectation of a more enhanced style of living, which then leads inexorably to higher living expenses. Those added costs go unnoticed by most people throughout their working years.

The study also found that the desire to match increasing income from raises with a better lifestyle, that is, with more consumption, is common among those saving for retirement.

“The income rise quickly becomes part of your expenses, and you’re back to living, for many people, paycheck to paycheck,” says Steve Wendel, co-author of the report. “While the expenses leave a lasting trail, the happiness from those changes in your lifestyle often don’t. They become part of the furniture of your life, and you just don’t notice them after a while anymore.”

The report, “More Money, More Problems: How to Keep a Bigger Paycheck From Spoiling Retirement,” urges workers to get in the habit of saving a larger portion of their additional income from raises to help mitigate the negative impact of “lifestyle creep” on retirement.

This is easier said than done. Most workers over time accept additional expenses from their elevated lifestyle and maintain the same percentage rate of savings prior to the raise.

The difficulty presented by lifestyle creep is that individuals may maintain a constant savings rate, prior to and after the raise, but that still will be insufficient to fund for their elevated lifestyle in retirement.

The report notes: “Savings rates … generally need to increase in both relative and absolute terms to account for new retirement needs once a person’s lifestyle adjusts to the additional income, but many people don’t do that.”

The study used data from the Survey of Consumer Finance to determine how much of a 5% raise would need to be saved to match pre- and post-raise retirement standards. The purpose of the model was to determine the additional cumulative amount that needed to be saved to fund the new, more expensive, retirement lifestyles.

The findings suggest that older workers should save more to keep up with their escalating standards of living, regardless of how much they have saved already. One aspect of this analysis is self-evident, as it is a question of simple arithmetic.

The older an individual is the less time he has to play catch up in terms of achieving the necessary rate of savings required to fund an enhanced retirement lifestyle. Additionally, the shorter years to retirement diminishes the compounding period, or number of years to post annual returns or growth in an individual’s investment portfolio

The graph below illustrates the results of the study between three test groups: those who are well funded, average funded and well-funded. The graph shows the percentage of an individual’s raise that needs to be saved to match the heightened standard of living the raise brings, with the expected standard of living in retirement.

Achieving your savings goals

The study presents three guidelines to help savers determine how much of a raise should be saved to insure they secure their goal of maintaining in retirement the standard of living to which they have been accustomed.

  • Spend twice the number of years to retirement. If you are going to retire in 10 years, you should spend 20% of your raise and save the remaining 80% for retirement.
  • Save your current age, as a percent of the raise received: If you’re 50, you should save 50% of the raise.
  • Save at a minimum, 33% of your raise: If your take-home pay increased by $1,000, you should save $333 of that new income for retirement.

The effectiveness of each of the three rules is depicted in the graph below.


As the chart shows, rule number one “spend twice your years to retirement” had the highest success rate across all age groups. The “save your current age rule” is effective until age 45, then it drops significantly thereafter.

Rule three, “save 33% of your raise” begins to decline in effectiveness at approximately age 35.

biden wins

What I’m Telling Investors to Do If Biden Wins the White House

The value of our Bulletproof Wealth Report model portfolio declined modestly over the past several trading days ending Sept. 27, while the Dow Jones Industrial Average fell by 822 points

Options: Meandering Market Tamed by Using a Straddle or a Strangle

When you hear talk of markets trending, people think of uptrends or downtrends. However, markets often get stuck in a trading range. This is the condition where there is no

Warning! Market ‘Death Cross’ Appears

A death cross! According to Investopedia: The death cross is a technical chart pattern indicating the potential for a major selloff. The death cross appears on a chart when a

5 Best Stocks to Buy If Trump Wins the Election

If President Donald Trump wins the election on November 3, 2020, you might want to consider adding these five equities positions to your portfolio: LMT, BAC, AMZN, XLE, TWTR. Why?

5 Best Stocks to Buy If Biden Wins the Election

If Vice President Joe Biden wins the election on November 3, 2020, you might want to consider adding these five equities positions to your portfolio: XLU, TSLA, XLV, MLM, and

TGIF — Ending the Week with a Whimper

Everything is proceeding as I have foreseen. In Monday's "The Week Ahead — 200,000 Deaths Weigh Heavily on the Market," we knew the 200,000th American death would put Covid back

Even If the Overall Market Continues Lower, This Staple Could Maintain Its Upward Trend

Since peaking in early September, the main indices have all three stumbled for the last few weeks with the S&P and Nasdaq falling over 10% from their highs already. Three

tesla stock

TSLA Too Volatile? Two Option Strategies for Tesla Stock

Tesla Inc. (TSLA) is one of the most popular stocks amongst investors. Led by CEO Elon Musk the electric vehicle manufacturer has disrupted the transportation industry, bringing hype to a

pot stock

Pot Stock ‘Blood in the Streets’ Buy Signal Is Here

The cannabis market has been a volatile space in recent years. A wave in legalization, particularly in Canada but also through parts of the United States, led to significant growth

Use Options as Portfolio Insurance in Rocky Times

Since the beginning of September we have seen the main U.S. indices drop. There are a number of possible reasons for the decline, but more importantly I expect the increased

4 Foreign Countries Where You Can Retire On Social Security Alone

Someone once said that retirement is not the end of the road but a highway opening to a new chapter in life. Whoever said that clearly has never experienced a

We’re Beating the Index Off the March Low: Update

The Bulletproof Wealth Report model portfolio is continuing to perform well and is now up 27.4% since the inception of our monthly newsletter on April 13, 2018. Although the value