Retirement planning is often reduced to a singular call and response.
Increasing your savings rate will, obviously, land you in retirement with a bigger nest egg. But it may not be enough. You may also need to reduce spending to both bolster your savings and reduce the ultimate shock of a smaller retirement income.
The high cost of lifestyle creep
If your annual spending grows with your income, you are effectively building a lifestyle that will require more retirement income to maintain once you stop working.
Let's say that to live your life, you're shelling out $75,000, after tax, the year before you retire, and your aim is to replace 80% of your pre-retirement income. That means you need your savings, Social Security and any pension to generate $60,000 a year, after tax, when you retire. If your household burn rate is $60,000, you would need $48,000 a year.
Needing $1,000 less a month in retirement can change the calculus of what you need to save today or can reduce the pressure to work longer.
Moreover, spending less today effectively gives you more cash to save or pay down the mortgage or reduce what the kids need to borrow for college, or enables you to downshift from the corporate grind into work that is a little bit less stressful and more enjoyable.
Yet lifestyle creep seems to be a common household habit. The Bureau of Labor Statistics tracks household consumer spending by dozens of categories and breaks it down by pre-tax income levels. As income grows, so too does spending on the same goods.