According to some surveys (like this one and this one), workers spend more time planning vacation than working on their finances.
If you ask me, getting your finances organized doesn't need to be on par with getting a root canal done. But still, there’s a lot involved for sure.
For starters, you have to get your finances organized – gathering documents and statements and whatever else, and making sense of them all. Yeah, it’s like spring-cleaning but much less enjoyable.
Then you’ll need to ask yourself questions like how much to sock away in your 401(k), Roth or pre-tax, what investments to choose, saving for college, when and where to retire, whether to downsize, keeping pace with inflation, whether you have enough insurance....
I understand. It could be daunting.
With all the number-crunching and soul-searching, there is this one thing that often gets glossed over.
It’s called lifestyle creep – the ever-increasing lifestyle costs.
Let me explain.
When you are young and starting out, you are content with an old beat-up car, a modest apartment and an occasional ramen dinner (at home, not at that trendy ramen restaurant).
But as you progress in life, things start changing – your income goes up, you buy a house, maybe you start a family and buy an even bigger house. Your 2-door hatchback and studio apartment just won’t fit your whole family.
You begin appreciating finer things in life like good wine and travel abroad. Maybe you send your children to a private school, not to mention soccer, gymnastics, violin lessons, and highly specialized (and very expensive) summer activities.
It’s all well and good. But these activities do cost money – sometimes a lot of money.
And the thing is, these changes creep up on you gradually and slowly.
Before you know it, you have a house with a 3 (or 4)-car garage (crammed with stuff, not your cars), you have a television set in each bedroom and a family room, you have to take family trips every year (each better and more expensive than the one before), you have a country club membership….
Well, you get the drift.
So your monthly spending goes up ten-fold, even twenty-fold. You are making more money than you ever dreamed you would, but you haven’t been saving nearly as much.
See, the spending creeps up on you so slowly and gradually that you don’t even know it’s happening – dollar by dollar, inch by inch.
Call it lifestyle creep.
I (and you?) may be inclined to talk about more glamourous stuff like asset allocation, tax minimization strategies and the like.
But there are simpler, more basic things we should be discussing: committing to keep your lifestyle expenses to a reasonable amount. It will go a long way in helping your money last during retirement.
It’s common sense. Simple math. It takes less money to support a modest lifestyle than an extravagant one.
But it’s nearly impossible to turn on the switch and go from extravagant to modest on Day 1 of retirement.
If you are younger, we suggest you be more intentional about increasing your lifestyle spending. Keep in mind that your earnings will likely not keep increasing in perpetuity. Maybe you don’t really need that European SUV. If you get a substantial raise, perhaps you want to sock away most (like 50%) of it in addition to what you are already saving instead of expanding your lifestyle.
If you are approaching retirement, perhaps you can start simplifying life. You might start by going through your possessions and throwing away or donating things you don’t need anymore. As empty nesters, your house might be too big, so maybe it’s time to downsize (or right-size). You might consider de-cluttering your life by becoming more focused and cutting off excess (and expensive) activities.
Remember, reasonable lifestyle in retirement means your money lasting longer in retirement.
We do not provide legal or tax advice. Readers should consult their own legal or tax advisor. There is no guarantee investment strategies will be successful. Investing involves risks, including possible loss of principal. There is always the risk that an investor may lose money. A long-term investment approach cannot guarantee a profit. Investors should talk to their financial advisor prior to making any investment decision. This information is intended for educational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services.
Cultivant team &