"Save 10 percent of your income" is the retirement savings standby. But certified financial planner Michael Kitces points out an interesting issue with this rule: it doesn't account for lifestyle inflation.
On his blog, Kitces explains:
...saving something like 10% of your income also implicitly means you're spending the other 90%, and continuing to do so over time means you'll also be saving (only) 10% and implicitly increasing your standard of living by 90% of ever raise you receive in the future. As a result, your standard of living rises as fast as your retirement savings…
This means the amount you need in retirement will keep getting larger, considering your lifestyle changes. As Kitces puts it, the goal continually outpaces the savings needed to reach it.
As an alternative, he suggests spending 50 percent of each pay raise and putting the other half toward your retirement goals.
The end result of such an approach is that increases in the standard of living are more controlled and rise far more slowly, savings grow exponentially, and you can even retire early… all while feeling like your lifestyle is steadily rising as you're still committed to spending more every year, just not increasing as rapidly as saving 10% of your income (and spending the rest)!
Simply put, this is a trade off between lifestyle inflation and your future retirement goals. But Kitces gives examples in the post that show just how effective this method can be over time. Your goal and your lifestyle are more closely matched, and, theoretically, this method can help you retire sooner.
Check out the post for more detail and some hard numbers.
Don't Save 10% Of Income, Spend (Just) 50% Of Every Raise And Systematically Save More Tomorrow! | Kitces
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