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Life Style Inflation’s Less Talked about Downside

So, we all know that life style inflation can kill your savings rate. If you increase your expenditures at the same rate as your income, then you’ll likely never increase your Net Worth to where you need to be to retire. However, life style inflation does not only impact you in the accumulation phase. People tend to forget its impact on your post retirement phase. This is Life Style Inflation’s less talked about downside.

Net Worth and Safe Withdrawal Rates

Early Retirement Now has a great series of articles released a few weeks ago on what withdrawal rates are safe to maintain your financial solvency throughout your lifetime. In general, it is somewhere between 3-4% depending on your time horizon.   We talked previously about how to calculate whether your Net Worth would cover these withdrawal rates as well as the pitfalls of putting your trust in those calculations. The key takeaway from those posts is the question of what happens to your expenditures over time and will your nest egg cover those expenditures.

Life Style Inflation’s Less Talked about Downside

If you haven’t guessed by now, the issue with Life Style Inflation is with the amount of expenditures you must cover. If my pay were to increase 5% a year and I increased my expenditures by 4% a year, my savings would rise by 1%. However, the amount I need to retire would also raise by 4% assuming I maintained my expenditure rate into retirement. That 4% increased need may take a long time to cover with the 1% increased savings depending on what your overall savings rate is. Here you would be patting yourself on the back for increasing your savings rate by 1%, but you may have just added years onto your working life.

The Take Aways of Life Style Inflations Impact on Retirement Requirements

On its own what this means is you should cut out all life style inflation. However, we’ve discussed previously the aspects of marginal utility. I.E. that your existing savings rate should define the value of increasing that additional​ 1% in savings. There are points on the curve, say you are already saving 55% a year, where reducing savings to 50% or increasing it to 60% is probably a pedantic exercise. Sure, there might be a year or 2 difference between 50-60%, but when you are talking about 15 years to retirement it’s not that huge a deal. This is of course provided you are enjoying the money you spend in those 15 years. After all retirement doesn’t bring happiness, it brings more options to indulge in the things that make you happy. It does however mean that you should not increase expenditures simply because you increased your income. Always consider the value of that expenditure.

The second takeaway I noticed was referenced by Route to Retire a few weeks ago. Just because you spend what you do today does not mean that will be your spending rate in retirement. Studies have shown that normal retirees tend to decrease their expenditures after taking the leap. There is a possibility you are not average. Say you plan on retiring early and traveling the world or moving to your dream location. In those cases expenses might increase in retirement. That means when calculating when is enough to stop working, you need to determine and plan what your expenditures will be post retirement.

My Retirement Needs

Take me for example. My wife and I plan on traveling the world once we finally retire. The current plan has us using travel trailers to crisscross various countries for 6 months at a time. However, given we have children, I also expect that we will maintain a base of operations somewhere. That base of operations will likely be a downgrade in size from our current home. Also, I doubt we’ll be staying at the Ritz Carlton for these types of trips. Still, I do expect costs will rise from where we are today by as much as 10 percent. As such my net worth goals consider a need for 10 percent more funds than my current expenditure rate.

Now I’m honestly still at least a decade away from any planned retirement. My plans could change or I could let lifestyle inflation creep in which would change my end Net Worth Target. It’s ok if that were to happen, but I realize if either does I need to adjust my plans per everything I’ve spoken to above. That realization will allow me to make those types of decisions fully aware of their impact. After all, if I want to live a more expensive life now or live a more extravagant life in retirement in exchange for a few more years of work that is my families’ decision to make.

Have you accounted for any change in potential expenditures either from lifestyle inflation or retirement plans in your Net Worth Targets? If so by how much did you adjust and how did you determine the adjustment amount?

17 Comments

  1. The Green Swan
    The Green Swan March 29, 2017

    We’ve been taking a close look at our current and planned expenditures in retirement in a series of posts recently. It’s important to dispell the expert advice and take a close, individualistic look at our expenses and plans like you folks have done to determine a more accurate estimate! And like you folks, we’re planning for a slight increase in cost of living in retirement.

    • fulltimefinance@fulltimefinance.com
      [email protected] March 29, 2017

      I saw those posts, very thorough analysis and illustrates the point well.

  2. Leo T. Ly @ isaved5k.com
    Leo T. Ly @ isaved5k.com March 29, 2017

    Currently, lifestyle inflation is not a huge issue for me, but the housing market is. In the area that i live in, housing price just pretty much doubled within the last five years. While I am happy about the increase in the worth of my home, however, the property tax is also increasing. Though the rate of increase is not as fast, but it’s catching up. I would like to stay in my current home during retirement, but these cost are cutting into my retirement budget.

    • fulltimefinance@fulltimefinance.com
      [email protected] March 29, 2017

      Ouch. Not much can be done there unless they give you tax cuts beyond a certain age. We live in a low property tax state (one of the lowest in the US) which might be your best option, move.

  3. Mr Defined Sight
    Mr Defined Sight March 29, 2017

    Currently, we are envisioning retiring somewhere much warmer than where we live now. We are doing the traveling now so perhaps we won’t do as much when we do retire. I can foresee the monthly budget dropping when the house is paid off and instead of traveling somewhere warm during winter, we can live in that climate full time.

  4. Wall Street Physician
    Wall Street Physician March 29, 2017

    The challenge with projections is that your retirement net worth is so dependent on stock market returns. The best-laid plans can be wrecked with a stock market crash right before a planned retirement. Ultimately, the decision to retire is often made within a few years of the actual date, once you’ve already accumulated or are near your retirement number.

  5. Wall Street Physician
    Wall Street Physician March 29, 2017

    Right now, for simplicity, I project the same spending in retirement as before retirement. I’m so far away from retirement, I really don’t know what my spending wants will be.

    • fulltimefinance@fulltimefinance.com
      [email protected] March 29, 2017

      We’re quite a ways off as well so we definitely plan to remain flexible. Plans do change. Still it’s nice to know what’s possible. It’s a good feeling knowing baring major changes in the economic trajectory of the country the desired limiting factor on my currently planned retirement 😆(19 years from now) is not financial.

  6. Chelsea @ Mama Fish Saves
    Chelsea @ Mama Fish Saves March 29, 2017

    We have tried to map out what our expenses will look like in retirement, but being so far from that point makes things more difficult. Healthcare cost is a total wildcard at this point. For now, we are assuming spend is about the same (higher healthcare and travel expenses offsets the benefit from no mortgage, etc). I view increasing savings as a double down benefit by keeping our lifestyle in check for an eventual retirement.

    • fulltimefinance@fulltimefinance.com
      [email protected] March 29, 2017

      I use something very similar. We assume HSA plus mortgage roughly equates to health care. Will it be true? Who knows, but I don’t have anything better.

  7. Mustard Seed Money
    Mustard Seed Money March 29, 2017

    The hardest thing for us right now is determining where my special needs sister in law is going to live. If we’re required to stay close that will require us to spend more since cost of living costs so much more here.

    If we have the ability to travel around the world, well then I think we can do it much cheaper and keep costs to a minimum 🙂

    • fulltimefinance@fulltimefinance.com
      [email protected] March 30, 2017

      There are definitely aspects of life that necessitate a certain expense level. I trust things will work out well with your sister in law.

  8. Finance Patriot
    Finance Patriot March 30, 2017

    I think we’ll continue to travel hack to keep travel costs reasonable. I can’t see us going on a spending spree when I retire at 41.

    From my experience, over time, my forecasted retirement age has gone down and down over the years. I think you’ll experience the same.

    I just can’t see our expenses gone no drastically up in early retirement. We are too careful and conservative.

    • fulltimefinance@fulltimefinance.com
      [email protected] March 31, 2017

      I doubt we’ll go on a spending spree either. That being said I expect some increase courtesy of health care. I do not expect other things will change much. Thanks for the insightful comment.

  9. Amy @ Life Zemplified
    Amy @ Life Zemplified April 1, 2017

    We got over the lifestyle inflation a few years ago and attempted to go in the opposite direction with less expensive vehicles and some other frugal moves to help boost our retirement savings.

    We hope to retire shortly after my step-son graduates from high school, sell our main home and travel. We do have a small home in Florida that will be our nest. While some expenses will be gone or reduced in retirement we know that others will develop or increase so we haven’t planned a vastly different spending budget. We will adjust as needed of course with the market and such.

    I do keep a couple of different spreadsheets where I play around with the figures from time to time, but the annual expenses stay about the same (+ or – $10k) usually.

    • fulltimefinance@fulltimefinance.com
      [email protected] April 2, 2017

      Sounds like you have a pretty good handle on the expenses side. Any particular destinations in your plans?

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