Lifestyle Creep vs. Inflation

I used to be a pack rat. For years I was single and had adequate storage space, so I saved things. I’m now married and live in a condo with very little extra room, so hoarding old treasures is no longer an option. I had to sort, scan or trash boxes of stuff I had kept for so long: 2nd grade get well cards, love letters from old girlfriends, high school baseball stats, newspaper clippings and more.

For years, I kept old keepsakes in this box that I made in High School Shop Class.

Being forced to sift through all of these things did result in a great find – I had print-outs of all of my income and living expenses from the mid-1990’s!! To most, this discovery would have been met with a quick toss into the circular file, but not for me. Finding these dot matrix-printed pages recapping my cashflow was like finding a long lost treasure! In our work, we preach every day about the financial impact lifestyle creep and inflation have on one’s spending. Now I actually had personal proof of my own (see below).

Reviewing my income & expenses from 25 years ago, it really hit me how lifestyle creep and inflation can be so impactful over longer periods of time. For instance, my annual mortgage payments are more now than what I used to spend in total on everything! Think of that - one line item, my annual house payments, is now more than what my entire annual spending was in my 20’s.

Lifestyle creep occurs when your standard of living improves as discretionary income rises and former luxuries become new necessities. If you have more discretionary dollars to spend, you tend to buy more things and/or more expensive things. You tend to travel more, you tend to eat out more. In short, your expenses go up irrespective of inflation.

Inflation, on the other hand, is defined as the loss of purchasing power over time. Because we live in the now, increases or decreases in our expenses are typically not that noticeable year-over-year. However, if you were to track the cost of items over longer periods of time, the impact of inflation can really be eye-opening -- the differences become much more profound.

If a gallon of milk cost you $1.50 in 2009 and costs $2.50 today, that’s inflation at work. If you got a promotion at work and now buy grass fed, organic goat’s milk that costs $7/gallon, that’s lifestyle creep.

The Implications For Retirement Planning

Seeing inflation on paper can be startling when we run retirement projections for our clients. We get responses like, “There is no way we will spend $209,000 a year when we are 65 years old”. Well, if you are 40 years old, spend $100,000/year right now and you plan on retiring at Age 65, this equates to $209,000 in future dollars after factoring in a 3% inflation rate.

From 1993 to 1998, I averaged income of $35,452/year and $31,199/year in living expenses (excluding taxes). If I look at these numbers without factoring in inflation, it seems inconceivable that I was able to live off of such meager amounts. But when I factor in a 3% inflation rate, my average income would approximate $66,000 in today’s dollars and my spending would approximate $58,000/year. Do I think I could live off of these amounts today?? Possibly. But I think the bigger question is would I want to live off of these amounts today? Definitely not!

Inflation has a definite impact over time, but it generally isn’t noticeable because it creeps along slowly. By contrast, lifestyle creep has a much bigger and faster impact on our spending and livelihood. It’s also much harder to measure and plan for. Lifestyle creep is also hard to reverse. Think about how hard it would be to go back to a flip phone that only makes phone calls (using actual buttons) when you’ve grown accustomed to a smartphone. We typically don’t see people roll back lifestyle creep unless it’s forced due to a traumatic financial situation, like a job loss, a divorce or a business failure.

Focus On What You Can Control

You’ve probably heard the mantra, ‘Focus on What you Can Control’. We think this applies here as well. There isn’t much you can do about the cost of a gallon of milk going up, but you can control whether or not you let your lifestyle outpace your income and your assets.

So as you look forward to your own retirement, be mindful that inflation is a factor, but lifestyle creep must be given greater consideration. If you can control the cost of your necessities and limit luxury spending to those things that really matter to you, you will have a much greater chance of enjoying a successful retirement. Take it from someone who has the data to prove what impact lifestyle creep has had on his own spending.