Buzz
The traditional advice of "Save 10 percent of your income" is a staple of retirement planning. However, certified financial planner Michael Kitces highlights a significant flaw in this rule: it overlooks the impact of lifestyle inflation.
On his blog, Kitces elaborates:
Saving just 10% of your income essentially means you're spending the remaining 90%. Over time, this not only keeps your savings rate at 10%, but it also gradually increases your standard of living by 90% of each future raise you receive. As a result, your standard of living grows in parallel with your retirement savings...
This suggests that the amount you’ll need for retirement continues to grow, adjusting to your changing lifestyle. As Kitces explains, the target you aim for keeps expanding, outpacing the savings necessary to reach it.
As an alternative, Kitces recommends allocating 50 percent of each salary increase toward your retirement and using the other half for personal expenses.
The outcome of this approach is that the rise in your standard of living is more gradual, savings increase significantly over time, and you may even retire earlier... all while feeling like your lifestyle is improving as you continue to spend more each year, but not as quickly as if you saved 10% of your income (while spending the remainder)!
In simple terms, it's a balance between lifestyle inflation and long-term retirement objectives. Kitces provides examples in his post demonstrating how this strategy can work effectively in the long run. Your retirement goal and lifestyle align more closely, and, in theory, this method could help you retire earlier.
For more details and precise numbers, check out the full post.
Photo by papagaio-pirata.
