Many of our retired clients have decades of disciplined saving behind them and a comfortable nest egg. But we’ve noticed a common challenge that affects both retirees and pre-retirees alike: spending creeps up over time, and we don’t even notice. This is known as lifestyle inflation, and it’s particularly problematic in retirement.
What is Lifestyle Inflation in Retirement
Lifestyle inflation is when our spending increases because we have more money. During working years, this happens with salary increases. In retirement, it happens when we first access our superannuation or retirement savings, and we feel temporarily wealthy.
We recently had a couple, both 67, come to us worried about their retirement savings. They had $800,000 in retirement assets, which should have been more than enough for comfort, but their spending was creeping up each year. New hobbies, dining out more, and generous gifts to the grandkids slowly but surely increased their withdrawal rate beyond sustainable levels.
Why Lifestyle Inflation Matters More in Retirement
Unlike during your working years, retirement brings unique financial challenges:
- Your income is fixed or has limited growth potential
- Market downturns can wipe out your investments
- Healthcare costs increase as you get older
- Your retirement savings need to last for an unknown period
Financial Complacency
Having a big retirement balance can create a false sense of security. Just as high-income earners can’t rely on their salary for long-term security, retirees can’t assume a healthy super balance means lifelong financial security. Without proper planning and monitoring, even big savings can be depleted faster than you think.
How to Keep Your Retirement Spending in Check
1. Retirement Budget Framework Rather than tracking every dollar, we recommend categorising your spending into three tiers:
- Essential expenses (housing, utilities, healthcare)
- Lifestyle choices (travel, hobbies, dining)
- Discretionary spending (gifts, luxury items)
2. 24-Hour Rule: Before making any big purchase or financial commitment, wait at least 24 hours. This cooling-off period helps you distinguish between needs and wants.
3. Regular Financial Health Checks: Quarterly review of your spending and investment portfolio. This helps you catch lifestyle inflation early and adjust in time.
4. Emergency Buffer: Even in retirement, we recommend having 1-2 years of living expenses in easily accessible, low-risk investments. This gives you peace of mind and prevents you from having to sell investments during market downturns.
Finding the Balance
You should enjoy retirement – you’ve earned it. The goal isn’t to restrict your lifestyle but to make sure your resources last through your retirement years. Try these balanced approaches:
- Alternate between big and small purchases
- Look for senior discounts and off-peak travel options
- Focus on experiences, not status
- Think about the long-term impact of your financial decisions on your retirement plan.
Case Study
One of our clients, Margaret, retired with a big balance but found herself spending more than she had planned. Through our quarterly review process, we helped her identify where spending had crept up and developed a plan that allowed her to enjoy retirement while ensuring her savings would last.
What to Do
If you see lifestyle inflation in your retirement spending, try:
- Review your spending over the past year
- Identify any big changes or trends
- Is your current withdrawal rate sustainable
- Where can you adjust
How We Can Help
As retirement planning experts, we help clients balance retirement enjoyment and financial security. Our services include:
- Retirement spending reviews
- Investment portfolio analysis
- Withdrawal rate calculations
- Strategy updates as circumstances change
Get in Touch
Don’t leave your retirement to chance. Book a free consultation with our retirement planning team to discuss your situation. We’ll help you create a plan that lets you enjoy retirement and keep lifestyle inflation at bay.
Remember it’s not just about how much you’ve saved – it’s about how you use those savings in retirement.
Contact us today to schedule your retirement strategy review.
