Keep Your Savings on Track

Morningstar’s Investor Success Project published a paper More Money, More Problems: How to Keep a Bigger Paycheck From Spoiling Retirement, which besides being an good excuse to watch The Notorious B.I.G. provided great insight on how to keep your savings on track and avoid lifestyle creep.

The content is gated, but it’s a worthwhile free download. It goes beyond the typical article imploring you to save more and shares research on how getting raises can be counter-productive to your retirement planning if you’re not careful.

Key takeaways:

• Raises are great news. But they have a downside. They create lifestyle creep, a phenomenon I explained in Avoiding Lifestyle Creep. Lifestyle creep hurts you in two ways. You save less now, and you’re building a more expensive lifestyle which will make retirement harder in the future.

All too frequently, sufficiently high income earners prefer to emulate the rich’s spending habits, spending more as their income grows. You can call it ‘keeping up with the Joneses’ or ‘lifestyle creep’, but whatever you call it, you should avoid this pitfall.

Avoiding Lifestyle Creep

• Pre-commit to increasing your savings rate (not just dollars saved, but percentage of pay) whenever your pay goes up before getting used to the new money in your paycheck.
• The older you are, the more important this savings rate adjustment is.
• Of the rules they tested, the most effective was to take your new raise and spend the percentage of it that is twice your years to retirement and save the rest. For example, if you’re 15 years away from retirement, spend 30% of the new money and save 70% of it.