Smooth Versus Creep

The title has you thinking this is an article about used car or insurance salesmen, right? You’re in luck—it’s neither. Let’s talk about one of the toughest financial strategic problems to solve: consumption smoothing versus lifestyle creep. Why do you care about this problem? Because it’s the one that decides how fun your life is while you’re trying not to live your senior years in your kids’ basement eating cat food.

Consumption Smoothing 101

Consumption Smoothing is the idea of balancing the following factors over your lifetime:

  • When you’re young you have time and health, but limited income and wealth.
  • When you’re on short final for duty as worm food, you may have accumulated a big stack of dollars, and while you have time in your day, you don’t have a lot of time in your life. And you almost certainly don’t have the health and stamina to max-perform your dollars for bungee jumping, taking kids on spirit missions or buying new bikes so your wife can roll her eyes at you.

Lifestyle Creep 101

Lifestyle Creep is the phenomenon whereby we allow luxuries to become necessities such that we cannot easily live on the level of income that used to comfortably sustain us. When I was a lieutenant, I was just fine with a land line and dial-up internet access.  Today, I tell myself I need iPhones for my four-ship, super-fast home internet, and a Wi-Fi hotspot for travel. As I type, I’m at FL360 direct to a vacation I couldn’t afford 20 years ago but absolutely “need” now.

While I might have a hard time finding a dial up provider, I would have a harder time forcing myself back to that level of what I would now call austerity. My luxuries have become necessities.

The Tension

Lifestyle Creep isn’t inherently bad.  If a major goal in life is to maximize fulfillment over a limited number of trips around the sun, few of us will enjoy those years without sampling and adopting some luxuries. But those luxuries cost.

Too much Lifestyle Creep too soon can prevent us from saving enough to have a dignified retirement. We can end up stressed that we didn’t save enough, that we might burden our kids, and that we won’t be able to pay for our own increasing care costs.

Consumption Smoothing is the great hope against too much Lifestyle Creep. Consumption Smoothing suggests that we pull forward spending into our younger, healthier years such that we’ll enjoy those finite seasons as much as possible without slipping into senior poverty.

Beans and rice senior living isn’t the only risk. Regret is an awful sentiment. If you ring in your 80th New Year’s Eve with more income each year than you can spend, and you don’t have fulfilling gifting plans (that you can enjoy still), then you may realize that you could have done a few extra _______ (ski trips, girls weekends, etc.) or a few less _________ (years working, trips away from home, etc.) and you still would have had everything you needed and most of what you wanted along the way.

If you don’t seek enough Lifestyle Creep, you’ll lose the option to smooth consumption out over all of your years.  You won’t have the health and time to enjoy the fruits of your saving.  If you allow too much Lifestyle Creep, your last years could have more regret and stress than smiles and memories.

How to Balance Dollars Over Your Lifetime

I have a financial planning hammer, so everything is a financial planning nail to me. The video link below shows a quick example.  The key takeaway is this, with some reasonable planning and honest number assumptions, you can make pretty good projections about things like:

  • Is it okay to draw down some of my investments before I retire? How much?
  • Are there inflection points to watch out for, such as times when my spending will probably decline, but my income will increase?
  • How much do I need to leave for my later years?
  • If I pull forward spending, but my investments don’t perform, what might I have to forgo?

Realistically most folks aren’t going to get into this level of analysis without either a serious personal finance hobby or a good financial planner. This creates some risk of the “no-plan-retirement-plan” which can look a lot like the kids-couch-and-cat-food retirement plan, so running some numbers is worth your time.

Cleared to Rejoin

If we don’t enjoy some Lifestyle Creep, we risk regret. If we let Lifestyle Creep slip into a few stages of afterburner, we risk potential for senior poverty. Consumption Smoothing can be the goldilocks path, but it requires analysis to get it right.  Default spending probably won’t be the path you look back on fondly.  What’s your plan—smooth it out or let it creep?

Fight’s On!

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