Over the years, on more than one occasion, I have had to read the riot act to clients who make high six-figure incomes about their spending habits. The discussion is almost always in context of their retirement planning and how if they continue their current spending, they will either not have enough to retire on, or will have to sell their house and/or cottage very early in their retirement to fund their future needs.
This issue is not isolated to high-net worth people and those near retirement; it is the same problem for someone who makes $80-$120,000 as for someone who makes $600,000 and the same issue for millennials (although more in context of saving for a home than retirement). If you continually expand your lifestyle to fit your increasing income or current income level, the reality of your retirement or your future living situation, may be far different than you envision it. That being said, obviously if you make $600,000, you have more leeway to catch-up, even if it seems incomprehensible you even have such an issue in the first place.
The term “lifestyle creep” is often used to reflect this worrisome spending issue. Investorpedia defines lifestyle creep as “a situation where people's lifestyle or standard of living improves as their discretionary income rises either through an increase in income or decrease in costs. As lifestyle creep occurs, and more money is spent on lifestyle, former luxuries are now considered necessities”.
If you are in your late 40's or early 50's, the insidious part of lifestyle creep is that your current earnings support whatever you wish to do and thus you carry on without a care in the world. It is only when I force someone to face the reality that once the gravy train (salary or business) stops, their income requirements are so massive, that their current and retirement assets will be insufficient to fund their needs (even if they significantly reduce their costs in retirement) that I get their attention.
From a psychological aspect, some people find it very important to maintain a certain image or lifestyle and/or keep up with the Joneses. However, the Joneses may have way more money than you and it is only your current income that allows you to keep up. The reality is you may be swept aside by the Joneses in retirement, as they may only hang out with those "friends" who can spend with them and who have the capital to continue spending at excessive levels.
For some people, all they need is that sobering meeting and they immediately start getting their act in gear. For others, their spending habits are so entrenched and/or so financed; they need to engage a financial planner or money coach. Most discouragingly, some people just pull an Ostrich and put their head in the sand.
Lifestyle creep is not only an “older person” issue. I observe many millennial's spending their entire salaries on bottle service at restaurants, expensive vacations, cars and costly bachelor and bachelorette parties to exotic locales for their friends.
Fixes and Suggestions
So if you have that sobering moment and come to the realization your lifestyle has expanded to your salary or business income, what can you do? Here are a couple basic solutions:
The first step to tackle this issue is to undertake a detailed review of your spending. Track you’re spending for 2-3 months and add on your large one-time expenses not included in the tracking period. Then analyze the results of your spending review and note your excesses. If you are a reader of this blog, you know I am not frugal and have written many times that in my opinion, it is important to enjoy your life and “knock off” some of your Bucket List items while you can. However, there is a huge difference between enjoying your life and spending excessively. All of us can easily cut-back, especially those of us who spend like there is no tomorrow. The obvious areas are always: restaurants, travel, clothes, cars, nanny’s and cleaning ladies (not saying don’t hire them, you may just not need them as often as you currently pay them for), dog walkers etc.
Once you undertake your review and decide to reduce your expenses, force yourself to do so by having automatic transfers from your bank account into your retirement or investment accounts, or if you are in debt, increase your monthly repayments (I am astonished at how many people who make $500,000 to $1,000,000 are in debt).
As noted in my recent blog post The Victory Lap, working longer or part-time in retirement is not only healthier and keeps you physically and mentally sharp, but it is a way to save you from having to encroach on your retirement capital. For some of us, it may be the only way to fund our retirements.
Financial Planner or Money Coach
As mentioned above, engaging a blunt accountant, financial planner or money coach is a vital step for many “free spenders”, since it provides discipline and structure in getting their finances in better shape.
Here are a few links to articles on this topic for high earners close to retirement, entrepreneurs or millennial's.
How boomers living the high life are at risk in retirement
Top earners not saving enough are in for a Shock
Top earners not saving enough are in for a Shock
Millennials - Are You Showing the Signs of Lifestyle Creep?
Fighting Lifestyle Creep and Saving Money as an Entrepreneur
Lifestyle creep is sinister, as you often do not realize it is an issue until it has already become part of your financial fabric. If you are starting to creep, stop it now. If you are already caught in the spending web, take the steps noted above to get your spending under control.
Note: I am sorry, but I do not answer questions in April due to my workload, so the comments option has been turned off. Thus, you cannot comment on this post and past comments on other blog posts will not appear until I turn the comment function back on.
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