What is lifestyle creep and how does it affect your retirement planning?

From Investopedia, lifestyle creep can be defined as:

“A situation where people’s lifestyle or standard of living improves as their discretionary income rises either through an increase in income or decrease in costs. As lifestyle creep occurs, and more money is spent on lifestyle, former luxuries are now considered necessities.”.

The concept is easy to understand and I’m sure all of us have experienced lifestyle creep at some points in our lives. For instance – as we earn more, we may spend more on eating out or decide to buy the nice coffee at your local spot. It is extremely easy to have your lifestyle expand over the years and thus, managing lifestyle creep is an especially important financial consideration for those approaching retirement.

Why is lifestyle creep associated with retirement?

Lifestyle creep is not always associated with retirement. In fact, it happens commonly across most segments of the population. It is a well defined component of Keynesian economics known as the Marginal Propensity to Consume, and it makes sense. When you have more money, you want to spend more of it.  However, while it happens to almost everyone, it is especially important for those planning for retirement for a number of reasons.

The 10 years before retirement are typically your peak earning years. At this point, you are an expert in your field or your business is well established and profitable. Simultaneously, your costs are almost at an all time low – mortgages and major expenses have been paid off at this point and your future holds few important or mandatory big-ticket purchases.

Based on this, your income is at an all time high while your expenses are at an all time low. Your disposable income is at its peak, and it becomes easy to ramp up your spending in the last 10 years of your life. With this extra income, it is common to want to buy things like nice cars, vacation homes or other luxury items. This expands the lifestyle – for instance, the vacation home comes with the added cost of maintaining a vacation home. While it was purchased with a large cash surplus, this large surplus is a short-term event. Following retirement, the large surplus of disposable income no longer exits (because it has been spent on cars, homes or other things) but the lifestyle associated with these items remains.

The video below does well to describe how lifestyle creep can sneak into your life as you near retirement, and provides some practice advice on how to avoid it.

My advice for avoiding lifestyle creep?

By no means do I suggest not indulging with your wealth. You have earned it and you should enjoy it. That being said, it is possible to enjoy it in a conscious and deliberate manner. However, there are ways you can enjoy it and ensure comfort throughout your life, post retirement.

As mentioned in previous articles, tracking your net worth over time will allow you to pinpoint your lifestyles growth. Watching your budgets and tracking their growth over time will allow you to benchmark your lifestyle, and set it as a target for retirement. Buying a house to reward your self after a long career can even be a great investment if measured properly. It all comes down to diligence and commitment.

Thanks for reading!

If anything on this blog interests you further, please do not hesitate to reach out to me via email at [email protected] I’d love to talk about my financial services and advice in Vancouver, British Columbia’s lower mainland, and Canada in general.

  • Brad Blair, CFP, CIM, FCSI, CHS.