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Lifestyle Creep – Can Getting a Raise Hurt You?

Lifestyle Creep
Key Points
  • Retirement goals should be updated with each raise
  • Lifestyle Creep can turn a raise into a problem
  • Preparing for retirement is an ongoing process

What Is Lifestyle Creep?

Getting a raise is a cause for celebration. It usually means you’ve been promoted or done a good job. What you don’t want it to mean is that your retirement goals have gotten further out of reach. And getting that raise can negatively influence you if you keep your level of savings steady but begin spending that raise and more money. You’re increasing your standard of living but your retirement is not prepared for the new level of spend. What is this phenomena? Lifestyle Creep.

Lifestyle Creep is what happens when your income goes up – but your retirement savings doesn’t. It sounds simple enough – you get a raise, so you save some more automatically, because you’ve set up an automatic deduction to put money in your 401k. But it’s not quite that easy. Theoretically you receive a number of raises over the course of your working life. And if you have a corporation you work for that matches your retirement plan contributions, you’ve done the smart thing and maxed that out. But you can still be saving more, and to avoid Lifestyle Creep and the attending problems it brings, it is important that you do so.

Say, for example, that you were making $80,000 per year, and you get a raise to $85,000. You’re saving 4% for retirement because that’s what your company matches. First, it’s not enough to retire on. Second, your spending will likely go up because you’re making more money now. So if your previous level of savings wasn’t enough for the less expensive lifestyle you were living, it won’t support your living at a higher level.

Needs vs. Wants

To put it in practical terms, there are necessities and there are luxuries. Only you can decide what falls into each category, though, so this is very personal. Your corporate job may require you to have a manicure – in that instance it may be a necessity. Or you may have a city apartment with two roommates, neither of whom you particularly care for. With your raise you can afford an apartment on your own. Is the peace of mind worth it? Would that money be better spent in your retirement fund, earning you a return so when you reach retirement you can keep the lifestyle you’re accustomed to?

For some, there are other considerations as well. For a first job out of college, the difference between making part-time money in your hometown and a bigger salary in the big city is overwhelming. But that money can come with pitfalls, because more is demanded out of the “grown up” lifestyle. You’ll have more bills, from utilities to a business wardrobe, likely some student loan debt, and you’ll be feeding and caring for your own needs.

But temptations can come when your officemates invite you out for happy hour drinks and snacks and it becomes a weekly standing date. Or you start buying breakfast and/or lunch just to get away from your desk for a few moments. That’s a level of expenditure you didn’t have before, and it can take away from your savings for the future. Your new higher income may make things that were previously out of reach seem more affordable.

So congratulations on your raise! Just remember that if you’re increasing your spending all the way up to your new income, the savings level you were previously storing away may not be enough to keep you satisfied at the same level when you retire. So talk with a professional and make sure you’re saving enough money to keep yourself happy!

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