Lifestyle inflation

In a little over month I will receive a small raise at work to the tune of $2,447. While I’m stoked to be getting any raise at all, let’s be real, it’s not a life changing amount. In fact, it only works out to about a $75 net gain each paycheck. Big Macs on me tonight guys. Wait… too expensive, ninety-nine cent Jack in the Box tacos on me instead 🙂

Since Girl Ninja and I are already able to put a good chunk of our discretionary income into savings each month, we decided to be responsible and increase our retirement contributions. Instead of throwing 5% of my gross income in to my 401K each month, we increased that sucker by another 3%, for a total 8% contribution. My employer matches 5%, so in total 13% of my gross pay will be going in to my 401K plan. Is that hot or what?

So I get a $2,447 raise, and before I even have a chance to see it in my paycheck, we decide to throw $2,200 of it in to our retirement. If that’s not keeping up with the Joneses I don’t know what is. SIKE! I hate the Jones family and everything they stand for.

Since I’m a self-proclaimed PF nerd, I thought I’d run a quick calculation…

If we keep throwing that $2,200 in to our 401K plan for the next 40 years, do you want to know how much extra we’d have come retirement? This example assumes an 8% rate of return.


You can see the decision was easy. Get $75 extra in each paycheck? Or have an extra $765,000 waiting for me when I’m older? I don’t know about you, but I’m picking the latter every time.

Lifestyle inflation is cool and all, but if we are already content with what we have, what else is there to inflate besides our savings, retirement, and charitable contributions? I’m not going to go run out and buy another TV or laptop just for the hell of it (pardon my language).

Last time you came in to a little extra money, what did you do with it? If you had to inflate your lifestyle in one aspect how would you do it? (We would probably dine out a little more, or maybe pay for a maid service).

31 thoughts on “Lifestyle inflation”

  1. Awesome! That is a perhaps lofty investment return projection to be banking on right now, but I still understand what you mean. Save more now, big payoff later. It’s nice that you get the raise near the beginning of the year, too. At my company, performance reviews take place in December and January, you hear if you get promoted in April, and then you get the pay bump in May.

    I have actually done the opposite recently, deflation! When I went to grad school on my company’s dime, my salary got chopped in half, but my daily expenses dropped. To inflate… my stretch budget category would probably be a yoga studio membership right now. And some new clothes – all my jeans recently got holes in them or don’t fit well, and my shoes are falling apart.

    Depending on whether the payroll tax cut gets passed (I have two 2012 mock budgets written out right now), I might drop my 401k % for next year, since it’s currently way above the match level and cashflow will be tighter over the course of the full year than it was this year, and I don’t want to dip into savings if possible.

  2. We put extra money in our savings, either our ROTHS or just another savings account. We have splurged before we went on cruise last year with my husband’s bonus! Otherwise I would use it for a maid service most definitely!

  3. That’s totally awesome that you’re getting a raise! For a second there, I thought you’d said that you were getting a $2200 a MONTH raise.. and I was like.. wow… you’re just going to put it all into the 401K? Then I reread it. I loves compound interest, too!

  4. After my first year at my job, I got a raise that put an extra $52 in my pocket every paycheck. I decided to start contributing to my 401K, so now I put $65 per paycheck in. Somehow I came out cash poorer 🙁

  5. I think you’re doing the right thing. You’ve got perhaps 40 years until retirement and economic conditions could change radically by that point. (Let’s say for example: high inflation, cutbacks in social security, another Great Depression. Not to mention changes in your individual situation.) So it never hurts to put more away. I think your assumption of 8% per year may be too optimistic, however.

    As for lifestyle inflation, nothing wrong either with relaxing a little and splurging here and there. For the past 6 years or so, I’ve had a cleaning service come in once a month to do all my vacuuming, dusting, floors, etc., and it costs me $90 each visit. They do a decent job and it frees up hours of my time on the weekends.

    • What would you use as your rate? 6%? I’m just going with historical averages which would put the s&p around 10%. Minus a little bit because of all the uncertainty with our future. I usually run calculations with three different rates of return, 10%, 8%, and 5%.

      Jealous of your house cleaner. I thought last night for the first time about maybe hiring one to see how we like it.

      • Because you are using an average rate which may or may not apply at the time you retire, you may not be adjusting for inflation, and you may not be sufficiently diversified. The S+P has seen huge gains in certain years as well as huge declines, such as 37% in 2008. Assume you are going to use an annual withdrawal rate of 4% at retirement, a typical recommendation for funding a retirement period of 25 years (4×25=100). If you had retired in late 2008 and you were invested mainly in the S+P 500, your 4% would have been that much less than before that crash.

        • Come one Larry, you picked the worst date in recent history to retire and stated the obvious. You could also take the best date and pretend I retired then, but neither example would be much help.

          While I am all stocks now, as I get older, I will obviously change my investing strategy and make sure I’ve got broader holdings. But for the next 25 to 30 years, I’ll probably stay pretty aggressive. Then in my early 50’s start diversifying my assets.

          I’ll also have a pension (and maybe Social Security…although I’m not counting on it) to provide consistent sources of income in retirement.

          Good points all around and definitely things to consider.

          • “Come one Larry, you picked the worst date in recent history to retire and stated the obvious. You could also take the best date and pretend I retired then, but neither example would be much help.”

            Come on yourself, DN. Sequence of returns risk is important to understand in planning a retirement, and diversification can smooth out volatility. There are a lot of people who just assume they need such-and-such a “number” to retire without considering the details. So you’re what – 25? While I’m in general agreement about being aggressive while you’re young, I think waiting 30 years before diversifying could be dangerous. Having a pension (which I don’t have) and SS (which I will, and I believe you will as well in some form) provides of course a cushion against market volatility.

  6. Whenever I come into extra money I use it to pay down debt, pad my checking account if the balance is getting low, or put it in my savings account. I might keep a little extra for me ($20) and splurge on somehting nice for myself but, I have priorities…

  7. Great decision! Actually that’s a pretty good return. I am opening a retirement account in 2012 (hopefully at the beginning – I just need to get some retirucation on, since I don’t know anything about them) and I will only be able to make contributions like that for now so it gives me a little hope.

    Congrats on the raise, no matter how small it is!

  8. Great decision! I’ve done that with my raises, as well, but now I’m maxed out at 15% on my 401k contribution. Next year’s raise will go to the Roth IRA the company offers.

    All my other “extra” money, such as the 2 extra paychecks per year, goes to pay down my mortgage (~4 more years to go), As far as my annual bonus, I made a deal with myself that 75% of it goes to pay down my mortgage, the rest is “fun” money, most likely some type of vacation.

  9. The old lady and I both put most of our raises to retirement (example last year she got a 4% raise, so we had her increase her 401(k) by 3%). I told her since she was fine before the raise she would never miss that money… and shockingly she never has.

  10. Great choice on further funding retirement. I have done the same when getting more compensation. I try to keep an artificial feeling of money being tight by slightly over funding retirement, savings, etc. For example, I put 12 to 15 percent in my 401k, before company matching, another 5 to 7 percent in a stock purchase plan, 25 percent in a money market, and then try to live on what is left. Definitely had to make some adjustments, but the artificial poor feeling has helped us make huge gains over the years.

    I might have to splurge on one of those zunicorns though. Do they come in a miniature size?

  11. Hey – you worked hard for those zunicorns – nothing lucky about it 😉

    Seriously though, wise decision on how to use the extra income. We’ve done the same thing with raises and now we’re sitting on over 250k in retirement without really noticing any difference in our lifestyle. Given that we are on a single income with over 25 years til retirement, I know we’d make the same choice in your place. (Although I do know of some other things we would have done differently… sigh…)

  12. Ninja, you just brought up an interesting point with this post. A lot of financial calculators out there talk about “If you invest ABC dollars and 8% return, you get XYX returns”. The problem with this logic,..where is an 8% return? Seriously. It is a fun mathematical exercise, but where can you get this kind of stability?

    Every single investment I’ve made in the last 3 years is down except for my ING Direct savings account (though they keep lowering the interest rates) and my whole life insurance (not an 8% return either). What say you?

    • First I say “Why the hell are you paying for a whole life insurance policy?” You know they are far more expensive than a term life insurance policy? You could take the difference you’d save with the term policy, invest in the market, and come out ahead of your whole life policy. Craziness.

      Second, while I obviously am not guaranteed an 8% rate of return year after year, it’s way easier to take an average than make random guesses as to how each year (for the next 40 years) will turn out.

      The average rate of return for the S&P 500 over the course of it’s life is 10.62%. So maybe I’m off by a few percent, but the only way to make future predictions is to do just that…predict something. And it’s not that crazy when you start doing a little digging.

      Lastly, you said “Every single investment I’ve made in the last 3 years is down…” Of course it’s down. We are in a tumultuous economic time. But you are being unrealistic and expecting your investments to appreciate every every year. That simply wont happen. Some years you’ll be up 20% other years you’ll be down 20%. From December 2009 to December 2011, the S&P is up 11.75%. Not to shabby.

      Investments are for the long haul, if you are expecting big returns each year, you better get out of the market cause that wont be happening. Look up historical averages for index funds and you will find that the 8% guesstimate I made is not as far fetched as you might think.

      • There are actual reasons to have whole-life insurance. But you’re correct in that using it for investments is not (a smart) one of them.

      • Ninja,

        Whole life insurance is not evil, especially since it is one of the 6 “buckets” I contribute to for my retirement and the returns are contractually set. The other buckets are all doing poorly; (401K, Roth IRA, Stocks, Employee Stock Purchase Plan, and ING Direct savings).

        Everywhere I look I see negative news and negative outlooks. Is it crazy to doubt that we will ever see the returns in the future that we have had in the past?

  13. Your faith in the stock market is disturbing. I always like to remind people that past performance is not guaranteed and losses can happen. I hate posts like these because no one can predict the future yet they try anyways. Then they pass it off as the absolute truth…

  14. 8% interest rate on return is nice, but lets be real after what happened in 2008.
    I would think more around 4% to be safe. While we are here, if you dont max out your 401k, do you contribute to your IRA as well. You should work on 401k, then IRA, then something else.

    • Because of 2008 you are throwing out historical averages? That doesn’t make much sense to me. I don’t invest for short terms, and the average of the s&p is over 10%. Sounds like you view the stock market on an emotional level, I try and look at it on a statistical level. Probably need a bit of both :).

      Oh and yeah. I have maxed out my Roth IRA since I graduated college. Also have a govt pension and may have social security waiting for me. Definitely have other sources of income than just 401k.

      • Probably do need a bit of both, but 10% is a lot and I do not think (im not looking up historical averages) its been 10% every year from the jump.

        I know you have a pension, but as we discussed on twitter, you arent banking on it. Which is smart. As far as social security, I am not planning on it being there, let alone at a reduced rate.

        My point was, work on maxing out your 401k 1st and then move into your IRA/Roth.

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