Annie in 8 years and Bobby in 49 years).īut, now let’s say they both get a raise of $100,000 a year to increase their earnings to $200,000 annually (after-tax). They are both still on track to retire on their original schedules (i.e. After 10 years of saving (with a 4% inflation-adjusted return), Annie will have accumulated $600,305 while Bobby will have $120,061. With a 4% real rate of return and no changes in their income/savings rates over time, Annie will be able to retire in 18 years while Bobby will take 59 years. If we also assume that each investor needs 25x of their annual spending to retire comfortably, then Annie requires $1.25M, while Bobby will require $2.25M to retire. lifestyle maintenance), then Annie will require less money to retire than Bobby. If we assume that Annie and Bobby both want to spend the same amount of money in retirement as they did while working (i.e. By definition, this means that Annie spends $50,000 and Bobby spends $90,000 a year. Annie saves 50% of her after-tax income ($50,000) each year, while Bobby only saves 10% ($10,000). Both of them earn the same after-tax income of $100,000 a year, however, they save different amounts annually. To start, imagine two different investors: Annie and Bobby. Why High Savers Need to Save More of Their Raises
Once you understand why this is the case, then the 50% limit above will make a lot more sense. In fact, people with higher savings rates have to save a larger percentage of their future raises (if they want to retire on the same schedule) than people who have lower savings rates. It might seem odd that earning extra money without saving enough of it can force you to delay your retirement, but I will demonstrate why this is true. Once you spend more than 50% of your future raises, then you start delaying your retirement. Where is that limit? Well, technically it varies based on your initial savings rate (we’ll get into that later), but for most people the limit is around 50%. After all, what’s the point of working so hard if you can’t enjoy the fruits of your labor?īut, I do agree that there is a limit to how far your lifestyle can “creep” before you start affecting your financial future. In fact, I believe that some lifestyle creep can be very satisfying. So that new raise quickly becomes a fancy new object or an expensive new habit, and it’s gone.įor this reason, many personal finance experts will tell you to avoid lifestyle creep at all costs. Lifestyle creep is when someone increases their spending after experiencing an increase in income.
No matter what you decide to do with your newfound cash, you’ve just fallen victim to lifestyle creep. After all, you’ve worked hard and you deserve something nice, right? Maybe you want a new luxury car? A better place to live? Or, maybe, you just want to dine out more often? Imagine that you just received a raise at work and now you want to go out and celebrate.
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