Lifestyle creep can happen when you dedicate increased income to increased spending. This can be almost imperceptible during your working life; it ‘creeps’ up on you. You get a promotion with higher pay, and understandably you splash out on some extra luxuries. You get used to these luxuries, and you begin to consider them necessities. Your ‘essential’ spending grows faster than the rate of inflation. Meanwhile, you continue to grow your discretionary spending over and above this ‘essential’ level. As you approach retirement it gets harder to see how you’ll be able to maintain your growing standard of living.
Some examples of lifestyle creep
So long as your spending on luxuries fits into a sustainable discretionary spending budget, there’s no lifestyle creep. But there are some things that you might be tempted to gradually shift from discretionary spending to essential spending. Some examples are:
- Meals out
- Holidays
- Subscriptions
- Hobbies
- Luxury cars
- Second homes
None of these things are inherently bad for your financial health. But treating them as essential rather than discretionary may cause problems later on. Of course, a multi-millionaire would have more ‘essential’ spending than someone on the minimum wage. But what if you’re on a modest income, and are upwardly mobile? That’s when lifestyle creep is most likely.
Consequences of lifestyle creep
If you’re within a decade of your planned retirement age, you’re probably in your peak earnings period. During this time it’s very tempting to keep improving your lifestyle as if such a high income will continue forever. You may be lucky, and have resources that will sustain such a lifestyle indefinitely. But more likely you’d find you’d need to make major spending cuts at retirement to be sustainable. Alternatively, you may feel forced to delay retirement for several years. This may present challenges, as you may find you have less energy, or maybe you won’t be able to command the same earning power. Either way, unchecked lifestyle creep may cause your retirement plans to become derailed.
During the earlier years of earning, lifestyle creep is less of an issue. After all, at the start of your career the only way is up. It makes no sense to peg your lifestyle to that of a student for the rest of your life. For example, it’s perfectly reasonable to take out a mortgage to buy your first home. When you’re young, driving an old banger may be all you can afford. But as you get a bit older and wealthier, you’ll probably want to drive a more comfortable car.
So it seems that the consequences of lifestyle creep gradually change from good to bad, the further along your career you are. And once you’ve retired, you really can’t afford any lifestyle creep at all. But how can you manage your lifestyle sustainably, without foregoing the rewards you’ve earned?
How to avoid lifestyle creep
The first thing you need is a budget. Without one, you’d be spending from paycheck to paycheck. Whatever age you are now, you need to have some kind of plan for your income and outgoings, from now until retirement and beyond. Your plan may well need to change, but without a plan you’d just be guessing. Your budget will distinguish between essential spending and discretionary spending.
If you have many working years ahead of you, you can plan to gradually increase your essential spending. But it may well be prudent to plan for your essential spending to plateau quite a few years before you retire. The reason for this is that you may need your last few years of high earning to build up your retirement fund to the point where it can sustain your improved lifestyle.
As for discretionary spending, it’s important not to include anything that you’d be unwilling to treat as flexible. By definition, your discretionary spending is not strictly necessary to maintain you core standard of living. But you need to be honest with yourself as to what’s core. Treating too much as core is a prime cause of lifestyle creep.
How EvolveMyRetirement® can help
Our Intelligent Retirement Planning Calculator is primarily designed to find sustainable spending. You can enter your essential spending, including any planned future changes to it. You can optionally enter your current discretionary spending, but if you do, it will only be used as a benchmark as it may or may not be sustainable. Once you’ve completed entering the rest of your plan, the program can generate an optimised strategy, which includes a sustainable level of discretionary spending. If you’ve previously entered your current discretionary spending, the level in the optimised strategy overrides it in all projections.
It’s possible that you might find that the most sustainable level of discretionary spending is very low, but still results in an unacceptable risk of failure. This might be a symptom of lifestyle creep. If so, you can address this by recategorising some spending as discretionary. In this way you can nip lifestyle creep in the bud.