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?