There is a level on Super Mario 3D World (it’s a Wii game for those of you without small kids) where the flagpole that usually marks the end of the level is visible at the very beginning. However, as soon as Mario starts moving, so does the flagpole. In fact, even if you run as fast as you can you cannot catch it until it slows down slightly just before time runs out.
That’s a bit how I feel with respect to financial independence. Despite running as fast as I can, the closer I get, the faster the flagpole seems to move. Why is that? Lifestyle creep.
My wife and I have tracked every penny we’ve made since we were married in 1999. That habit is particularly useful when it comes time to look at something like lifestyle creep. I was able to find copies of our budgets going back as far as 2003, the year I graduated from medical school. So I compiled the data to see just how much lifestyle creep we have had. I decided to take the budget spreadsheet from each October, from 2003 to 2015, and see how much money we spent in that month.
To keep things simple and most meaningful, I did not include taxes, retirement savings, large purchases such as cars or expensive vacations, charitable contributions, 529 contributions etc. I did include mortgage payments, rent payments, utilities, insurance, groceries, gifts, clothes, gas, regular vacations, road trips etc. Here’s what I found:
Let’s analyze this just a little bit. In October 2003, I’d been a resident for 3 months. We had no children and had a dual income. We spent about $2000. That gradually increased as a child was born in 2004 even though our income went down as my wife stopped working for pay. It continued to increase in 2005 and again in 2006 when I graduated from residency and went into the military.
Things leveled off for a bit but increased slightly throughout my four years in the military despite having two more children, although much of that increase was actually extra mortgage payments as we saved up a downpayment for our fancy mansion.
[Update for 2018: I put this post originally in 2016,that’s why the chart ends in 2015. Since then, our spending has actually trended up a bit more, but it’s actually a fair bit different. We’ve paid off the mortgage and I just dropped my disability insurance, but all of that (and a little more) has been replaced with travel costs and additional fun stuff. The good news is our income has gone up dramatically, dwarfing the minor increase in spending.]
2010 is the year I left the military and started making quite a bit more money. The end of 2010 was also when we deliberately upgraded our lifestyle as we felt 4 years of “living like a resident” was enough. You can see that huge spike in 2011. 2012 was a little bit lower, but mostly that just reflects the fact that I took the expenses for the home we couldn’t sell in Virginia out of our budget since we turned into an investment property. In mid-2012 I made partner and had a big rise in income. In 2014 and 2015 we deliberately loosened the purse strings, but that was primarily in the purchase of big-ticket items, not the categories tracked by this chart.
What About Inflation?
When I first looked at this chart, it really bothered me. Not that we’re spending more than we can afford to spend, but that the trend is up, up, up! Project that out far enough into the future and we’ll never be financially independent.
However, some of this increase is simply due to inflation. Perhaps we ought to factor that out before we spend too much time discussing lifestyle creep. Inflation over that time period has been low, averaging 2.33% and ranging from -0.34% in 2009 to 3.85% in 2008. Just to keep things simple, I’m just going to take the average, apply it to each year, and put everything into 2015 dollars.
That makes me feel a ton better for several reasons. First, it shows that despite the upward trend, we did a really good job of living like a resident for four years out of residency. We were living on <$4K a month as residents and basically only increased that 25-50%. Second, I’m proud at how well we did dragging our feet with the increases.
Third, I’m proud that only really large jump (at least when adjusted for inflation) was a deliberate increase in lifestyle associated with buying a much larger house (with all the necessary expenditures there) as well as a getting a second car (and two SUVs to boot.) And finally, what I am most proud of, is the fact that, at least adjusted for inflation, we’ve managed to keep our expenses mostly level since that large jump, despite a dramatic increase in gross income.
Has there been some lifestyle creep? Absolutely. But are we keeping it under control enough that we should still meet our financial goals? Of course.
Has Your Lifestyle Creep Gotten Out of Hand?
So, why does all this even matter? Certainly blowing even $120K a year on living expenses isn’t particularly noteworthy for a doctor of any specialty. It is a small fraction of my income, especially my gross income. But I suspect our experience is fairly rare among doctors. I would bet if the average doctor did this exercise there would be quite a steadily rising trend. The worst part, however, is that the doc and his family probably aren’t any happier, and don’t feel any better off despite spending more and more each year.
When we wrote our first financial plan back in 2006 or so, the plan was to save up enough money that we could spend $80K a year (in 2006 dollars) in retirement. Using the 4% rule, that means a retirement portfolio of about $2 Million. If you factor in inflation, that figure is now $108K, or a portfolio of $2.7 Million.
Can we have the comfortable retirement we seek on $108K? Well, if you take our current spending, and subtract out the $2400 a month mortgage principal and interest, the $400 disability insurance premiums, and the $100 life insurance premiums, we’re currently living on $7100 a month, or about $85K a year, well less than the $108K. So far so good, especially since we’re currently clothing, housing, and feeding four extra mouths.
However, we’ve got to add a few things back in. Remember my figure doesn’t include taxes (there will be some in retirement as a big chunk of our income will come from tax-deferred accounts,) charitable contributions (we don’t plan to stop those in retirement), and large purchases. Will $23K cover all that even with the kids gone? Probably not, so it looks like we’d better adjust our goal retirement stash accordingly. Perhaps another $500K-$1 Million.
A little more with a super early retirement (since we would still have child-related expenses. No big deal, as we’re clearly still well on track, especially if we keep earning and saving like we have the last couple of years.
The more important question relates to your own situation. Has your lifestyle creep gotten out of hand? Is it now outpacing your ability to generate the portfolio needed to support it?
Stopping Lifestyle Creep
So what can you do to stop lifestyle creep, or at least minimize its effect on your life?
# 1) Recognize it
Step one is to recognize it for what it is. It is natural and normal. If you just do what feels right and what everyone around you is doing, you will have lifestyle creep, and perhaps more than you can handle.
# 2) Start really low
As you’ll notice, we were spending the equivalent of $3-4K a month in residency. Upon graduating from residency and getting the big bucks (in my case, a USAF captain’s salary, allowances, and medical “special pays” totaling about $120K) we were basically still living on $4K a month. Rent in residency was $800. The mortgage in our townhome was in that same ballpark.
We drove the same car (notice the lack of an “s” at the end of that word.) We used the same phone (although I confess we splurged on a second flip phone upon graduation.) After six months or so, we did buy a second car. It cost $1850 and was sold four years later for $1500. Guess what? When you’re living on $4K, even spending $500 more a month feels like you have money coming out of your ears!
# 3) Slow it down
The slower you grow into your income, the better. Remember the difference between your income and what you spend is what gets invested. For us, there was nearly a million bucks between those two figures in the first seven years out of residency. Just because doctors earn a lot of money doesn’t mean they have to spend a lot. You aren’t what you drive, live in, drink, eat, wear, or do. Like a pressor or other dangerous medication, starting low and going slow is usually the right move.
# 4) Remember taxes hate you
Our progressive tax code rewards those with a low income. The lower your income, the bigger the reward. Increasing lifestyle expenditures have an accelerating, perhaps even exponential, effect on the amount of money you must earn and save. In most states, if you’re in the top bracket, if you want to or need to save another $100K a year you must earn another $200K a year.
That’s not an easy feat for most docs who are usually already running as fast on the hamster treadmill as they can. At typical doctor incomes, it is way easier to cut expenses than to increase income, and due to the tax code, it has a larger effect anyway.
# 5) Bake inflation in
I was amazed at the effect inflation has already had on our required portfolio. In just a little over a decade of what historically has been very low inflation, our required retirement nest egg has increased by $700,000. If you fail to account for the effects of inflation on the size of your nest egg and on your investment returns, you are likely to end up with much less than you planned for in real terms, even if you still hit your nominal goal.
# 6) Watch out for red flags
In medicine, we often take a red flag approach toward working up symptoms. For example, if someone comes in with low back pain, red flags that might trigger ordering an immediate MRI (instead of waiting 4-6 weeks to see if symptoms resolve on their own), include weakness, numbness, bowel or bladder issues, a history of cancer, trauma, fever, or IV drug abuse. Likewise, there are red flags for lifestyle creep. They include a dropping savings rate.
If you used to be able to save 20% of your income, but only saved 10% this year, that’s a problem. Increasing debt is a problem. Difficulty coming up with your quarterly estimated tax payments is a problem. Your spouse expressing a desire to own a wakeboat is also a problem.
# 7) Spend deliberately
Each time you weigh an increase in lifestyle, just like a one-time expenditure, evaluate it for the happiness factor. How much happier will it make you to spend $8.54 a month on Netflix? How much happier will it make you to store your boat indoors? How much happier will it make you to fly to Asia for vacations instead of camping in the woods near your home? Is that sweater or pair of shoes going to make you any happier than the four you already own?
# 8) Win the big battles
You don’t have enough psychological willpower to deny yourself all the lattes in your life. Concentrate it for when you buy the big items, like a house, a car, a private high school education, a college education etc. Win the major battles and you’ll win the war, even if you lost dozens of skirmishes along the way.
In short, lifestyle creep happens to the best of us. If you’re not careful, it will move your retirement goalpost faster than you can run toward it.