Do you get regular raises at work? When you get one what is your immediate reaction to the new-found money? For some, they decide to spend it on items that they may not have been able to afford before the raise. For others, they sock that extra money away in retirement accounts. What you do in these situations could make or break your retirement and could be the difference between a retirement that covers all your needs or one that leaves you wanting for more.
So, there is actually a term for those of you who get that coveted raise and spend it on items you may not really need. Desire that big screen TV? Go out and purchase it as a just reward. Want to visit a site on your bucket list and fly off to Machu Pichu to see some amazing ruins and an ancient civilization? Go to AAA or Expedia and book that well-deserved trip before it is too late. When we spend our raises in such a manner, we call that lifestyle inflation or an easier term money in and money out. And this mentality can lead to some serious and potentially huge missed opportunities when it comes to your retirement.
This mentality can also be considered one of that I must keep up with my friends who are spending freely on all the things that I desire as well. Social media is a key component to this way of thinking as we see everyone’s posts with the latest fashion or at the trendy social spots. And we automatically think that is what we must do as well to keep up with our friends. But is that the correct approach to the subject matter of spending your hard-earned money? I think not.
Where We Stand
As a country, we are not saving nearly enough to support us in our retirement years, and while it is not too late to start, you must take action now, not tomorrow. Vanguard released a report in 2017 that found that the median retirement account for people across all ages was just a little over $26,000. And yes, that means as a whole we are not saving anywhere near enough for retirement, and we need to take action now before we get any further behind. Unless you are one of the lucky people who still work somewhere that offers a pension, it is estimated that you will need about ten times your annual salary saved for your retirement. And your time frame to get that much saved is by the time you reach your mid-sixties and your retirement age.
Where to Start
To resist the urge to spend your raise immediately on something that will ultimately add little or no value to your retirement accounts try this. If you get a 2% raise automatically increase your 401(k) by 2%, so you never see the extra money in your paycheck. This is a great way to maintain your living standard while easily increasing your retirement savings. For 2019 the 401(k)-contribution limit is $19,000 with an additional $6,000 for those workers over the age of 50. And if done correctly you may be able to reduce your tax liability considerably as well depending on your tax bracket. And once you have maximized your 401(k) do not stop there and contribute to your IRA up to the maximum of $6,000 and an extra $1,000 for savers over the age of 50. And if you maximize those as well contribute to a taxable brokerage account as well. This way you will have multiple income streams in retirement.
Then once you decide to save for your retirement and not live in a cycle of lifestyle inflation, you will be better off in the long run. But do not just come up with a plan and leave it at that. Write it down and make it something that you will be held accountable to and even share the plan with others. By doing this, you have expressed to others your desire to break a negative habit and put yourself on a course that will enable you to retire in comfort. And by telling someone else, they can act as your sounding board and help guide you when you go astray and slip from time to time. After all, we are all human and will make mistakes, and with someone helping us maintain our plan, we will be more likely to succeed.
If you have any questions or need any additional information, please feel free to leave a message here or contact me directly. And for my free PDF on financial planning sign up for my email newsletter on the form below.
