Could “lifestyle creep” affect your retirement plans?

When you received your last promotion or pay rise, your first instinct might have been to celebrate by splashing out on a new gadget, booking a holiday or allocating more of your money to your disposable income. However, if you overlook reviewing your finances, “lifestyle creep” could affect your ability to reach long-term goals, including your retirement plans.

Lifestyle creep leads to your regular expenses rising

Lifestyle creep refers to your regular expenses rising in line with your income. So, after you’ve received a pay rise, your outgoings would start to creep up.

It can be more difficult than you expect to spot lifestyle creep. It might be as simple as choosing a more expensive bottle of wine when you’re at the supermarket or stopping by a café on the way to work each morning to pick up a latte. It could include larger expenses too. Perhaps you start to upgrade your phone every year instead of every three years, or eating out becomes a regular habit rather than a treat.

Over time, lifestyle creep can lead to former luxuries becoming your new essentials. If you don’t keep an eye on your budget, the amount you spend could rise much further than you expect.

According to a survey carried out by Aqua, 89% of Brits say they exceed their social budgets every month. The average person is spending around £61 more on social activities than they plan for.

When you consider how lifestyle creep could affect other areas of your spending, it’s easy to see how it could lead to your regular outgoings rising by far more than you initially thought.

On the surface, lifestyle creep might seem like it’ll have little impact. After all, the £3.50 you might spend on a coffee during your commute is small change. Yet, grab a coffee three times a week, and you’ve added almost £550 to your expenses over a year.

Increased spending means you can become dependent on a higher income. Once you’ve established a habit of spending more, it can be difficult to go back to your original budget.

Lifestyle creep could mean you don’t save as much for your retirement

Small rises in your regular outgoings might seem relatively small in isolation, but when they’re combined, they could add up to thousands of pounds unwittingly spent every year.

As a result, you might divert a smaller portion of your new income to your retirement. Contributing less to your pension, investment portfolio, or savings could have a much larger effect than you first believe, especially once you calculate the returns you’ve potentially missed.

Another way lifestyle creep could affect your future is by changing your desired retirement income.

According to a 2022 survey published in FTAdviser, the top retirement aspiration among those nearing the milestone is to maintain their standard of living. If your regular expenses have crept up during your working life, your pension might need to provide a greater income than you’ve previously calculated.

As a result, some retirees could find they face an income shortfall in retirement or risk using their pension too quickly and running out of money later in life.

A financial plan could help you strike a balance between enjoying today and securing your future

While lifestyle creep may be harmful to your long-term plans, you don’t have to put all your new income to one side for the future – it’s about striking a balance that suits you.

From planning an annual holiday to an exotic location to days out with your family, there are lots of ways you might plan to spend a pay increase. Making these expenses part of your overall financial plan could help you assess what’s right for you.

It may be worth considering which expenses add joy to your life when you’re prioritising them. For example, a cup of coffee on the way to work might become a habit that doesn’t improve your mood or outlook. On the other hand, regularly buying a coffee as you catch up with friends could be an important part of your social routine that you look forward to.

Creating a financial plan and being aware of lifestyle creep is about more than cutting back your expenses. It’s about being intentional with how you use your wealth now and in the future.

Contact us to talk about your finances and how to avoid the negative effects of lifestyle creep

If you’ve received an income boost or would like to review your finances, we could assist you in formulating a financial plan that could help secure the lifestyle you want. Please contact us to arrange a meeting.

Please note:

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of investments and any income from them can fall as well as rise and you may not get back the original amount invested.

Approved by The Openwork Partnership on 15/08/2024.

News

Stay in the loop

Keep up to date with industry insights and company developments by signing up to our free bi-monthly newsletter.

    The internet is not a secure medium and the privacy of your data cannot be guaranteed.
    News

    5 useful tips for talking about mental health with your loved ones

    Read more
    News

    Fiscal drag: How threshold and allowance freezes affect you

    Read more
    News

    5 useful allowances and exemptions that will reset at the end of the tax year

    Read more
    News

    Research: Financial stability could be the key to retirement happiness

    Read more
    News

    The compelling benefits of building a tailored financial plan

    Read more
    News

    Behavioural finance: How established habits and experiences could affect your decisions

    Read more
    News

    Guide: 5 key financial planning steps to consider during a divorce

    Read more
    News

    8 practical tips for setting new year resolutions you’ll stick to

    Read more
    News

    How creating a care fund could provide you with essential protection later in life

    Read more
    News

    Research: The perils of chasing stock market “winners”

    Read more
    News

    How the A Christmas Carol ghosts could help you build an effective financial plan

    Read more
    News

    Financial fears could be holding back millions of retirement dreams

    Read more
    Contact us

    We’re here to help

    Leave us a message and we’ll be right back in touch.

      The internet is not a secure medium and the privacy of your data cannot be guaranteed.

      Get in touch

      01252 979673 admin@johnsonwealthsolutions.com
      11 Kings Rd,
      Fleet,
      Hampshire,
      GU51 3AA