Combat Lifestyle Inflation: Save Half of Every Raise for Retirement!

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I decided I was going to be prepared for retirement after seeing all of the headlines in the news of people not having nearly enough money for retirement. Obviously you have to have enough money saved to cover your income needs while you’re retired. Something a lot of people don’t think of is the fact that the lower your income needs are the less money you have to save for retirement.

Lifestyle inflation, or the increase in consumption that normally comes along with an increase of pay, is a choice and not a requirement. If you aren’t paying attention it can sneak up on you before you know it. Instead I have decided to fight lifestyle inflation in a way that will actually help my retirement in two ways!

I Plan to Save Half of Every Raise for Retirement

The first way this is going to help me be prepared for retirement is pretty obvious. If I save more money now I will have more money at my disposal when I retire. The best part is that I’m not just increasing my savings rate for a short period of time. Instead I plan to permanently increase my savings rate for the foreseeable future every single time I get a raise.

My thought process here is that if I haven’t adjusted to having the money it will be like it never existed. While it is tempting to celebrate I’d rather not spend quite as much and instead prepare for my retirement. I am already saving a healthy percentage of my income but it wouldn’t hurt to sock away a little bit extra every year. If I save enough I may even be able to retire early!

The Less Obvious Advantage: Combating Lifestyle Inflation

Combating lifestyle inflation is a great advantage of saving half of every raise for retirement. Instead of increasing my expenses by the full amount of my raise I’ll only be increasing them by half of my raise at most. In fact, my lifestyle will probably stay close to the same if my raises stay around the rate of inflation or a bit above it.

I don’t really have a need to live a fancier lifestyle than I already live and honestly the spending would probably become routine. I would just expect the little things that once brought me joy. This is a common occurrence when lifestyle inflation kicks in. Once you get above a certain level the additional money and things it buys just doesn’t add as much happiness as you think it will.

The best part of combating lifestyle inflation is that your overall expenses are lower. When it comes to retirement you only need to replace your expenses, not how much money you made every pay period. If you keep your expenses low that means you don’t have to save quite as much to replace a now lower amount of expenses.

If you’ve been diligent in your saving for retirement, applying this principle could allow you to retire earlier than you originally had anticipated prior to applying it. The other option would be to retire at the same time and have more of a buffer in your budget.

So would you consider saving half of every raise for retirement? Which effect do you like better, saving more for retirement or combating lifestyle inflation?

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About Lance Cothern

Lance Cothern, a Certified Public Accountant (CPA) licensed in the Commonwealth of Virginia, is the founder of Money Manifesto. You can read more about him here or connect with him on Facebook, Twitter, Google+ or Pinterest.

Comments

  1. Very good point! My wife and I used to do that… after the celebratory steak dinner, though! :)

    It works.

  2. We use the automated increase on our 401Ks to absorb all of our COL raises – actually wrote a little bit about that today. Raises and bonuses beyond COL are going directly toward debt payment for the next couple of years, though.

  3. Jason Clayton | frugal habits says:

    Sounds like an excellent way to increase your retirement savings over time. It does box you into the same salary for life as 50% of your raise will probably go to cover inflation – but if you’re ok with that, more power to an awesome retirement! (And maybe an early one to boot!)

    • Early retirement would be awesome. I also expect to get some raises well above the rate of inflation so my lifestyle will be able to increase a little bit, just not the same amount as it would otherwise.

  4. This is actually a really simple and wonderful idea! I wish I would have thought of it first:) I’m sure there will have to be adjustments made along the way, but I’m sure you’ll be happy with the end result.

  5. We try to keep our expenses the same and just increase all of savings or debt repayment for now. It has worked out pretty well for us. It’s one of the ways we’re able to pay for our own wedding without debt.

  6. I like the idea of saving at least half of each raise. I’ve also read about increasing your contribution 1% each year until you’re maxing out your 401k. There seems no better time to do that when you’re getting a raise as you won’t even feel the loss of the extra contributions and you’ll still come out ahead with the pay increase!

    I like the thought of saving for retirement more than combating lifestyle inflation. They’re both important though.

  7. I used my raise last year to pay off my credit card debt, and hope to use my one this year to max out my Roth. Great post!

  8. This is actually something that my mom did when she was paying off her mortgage, but I think she was able to put the full raise towards the mortgage. It definitely makes a lot of sense. I’m interested in how you will be treating your blog income. Would that technically count as a raise with your plan?

    • That is another option. I think I’d get a better rate of return in my retirement accounts though.

      I’m not touching my blog income right now. It is completely separate and just for the business at this point.

  9. It seems to make sense that just as you would gradually increase 401k contributions you could also save half of your pay increases. Why not?

  10. Well there are a few problems with this:

    1) The assumption that you will never make LESS than you are right now

    2) That new expenses won’t arise that require you to spend more (serious health issues, a switch in careers that require you to find your own health insurance, children, more children, an unexpected house repair, etc.).

    So overall I agree but it is somewhat of an oversimplification. If I was getting a raise today then yes I would consider saving half of it for retirement, so I suppose in the end I agree with you basic premise ;)

    • 1) Obviously if things change you need to reassess your situation
      2) If new expenses pop up you do need to account for them. This is more of an in general statement. Also, you might need to shuffle your budget around but I think retirement is one of the few things I’d like to never touch.

  11. While not 1/2, I do save ~1/3 of every raise for retirement. My company gives out raises in April. They are usually around 3%. So I have my 403(b) set to increase my savings by 1% every April, as well. That way, I’m growing my retirement savings, but I also still see some kind of a raise. And honestly, emotionally, it’s nice to have a slightly larger paycheck, even if the extra money is going into one of our many savings accounts.

  12. Two points:

    Because I save a percentage of what I make, with raises I do increase the absolute amount that I save – though certainly not close to half of the increase.

    Right now the only raises I get are yearly ones designed to offset inflation. I wouldn’t consider saving more than my normal rate of those raises as it would amount to a lifestyle deflation, not stasis.

    For when I get merit-based raises though, I would definitely consider increasing my savings rate with each one, though not necessarily for retirement.

    • Everyone gets different types of raises but if you raises are truly in line with the inflation rate that makes sense. I just like saving a lot for retirement as it will get me to financial freedom earlier!

  13. I’m obsessed with saving! It gives me the illusion of some sort of control. In reality, it’s the key to wealth building!!! Great advice.

  14. I did exactly that 40 years ago. I also saved half of the additional money earned by promotion and bonuses too. Savings more than anything else helped me achieved financial freedom

  15. Edward Antrobus says:

    I’d put raises towards retirement once or twice, but after that I would just be saving more money than I need. That said, I’ve never actually gotten a raise since getting out of college.

    My wife’s income has gone up 50% since we got married. It all went into lifestyle inflation. We inflated our lifestyle from too poor to afford groceries to lower middle class. I can live with that.

  16. We haven’t been doing much towards retirement because we’re focusing on paying off our debts first but I see your point. It’s good to keep a tight budget in this economy but you have to enjoy once in awhile too, don’t deprive yourself :)

  17. I don’t expect to get any huge raises, especially with working less. We’ve already tried the lifestyle inflation and it didn’t work out so well. So living below our means is where we’re at now.

  18. I’m a-okay with lifestyle inflation if I can afford it. My goal is to save as much for retirement so I can lifestyle inflation forever!

    • Lifestyle inflation is definitely nice but right now I’d prefer to lock down my retirement savings so I can make sure I can retire when I want to :)

  19. I like this idea. We are in super frugal mode, so we would probably save ALL of my raises and put it toward our monthly budget, because it’s negative right now.

    But Once we’re above water, I like the idea of keeping lifestyle inflation to aminimum by automatically saving that money, not letting it hit our checking account. If I don’t see it, it doesn’t exist ;)

  20. Lifestyle inflation is human nature right? Since I started working 3 years ago, I have been taking all my raises and increasing my 401k by that amount. I’m now maxed out in 401k, roth and hsa so I’ll probably start some kind of automatic deduction into a savings only type account so that I won’t touch that money. I like my life and how much I spend, I do all the things I want to do every month, year, etc and I’m trying to avoid lifestyle inflation. For now at least, if my income quadruples I’ll probably buy myself a nice watch or something haha

  21. We don’t get raises very often but we do hit a point every year where we are done paying our government deductions and our paychecks get bigger. We always invest this extra amount into our retirement savings. It works out really well.

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