Considering the Impact of Lifestyle Inflation on Retirement Savings

by Kaylie Phelps

Lifestyle inflation can have a huge impact on your standard of living during retirement. Many investors understand the importance of starting early and making consistent contributions, but fail to account for (or underestimate the impact of) lifestyle inflation.

What is lifestyle inflation?

Lifestyle inflation is essentially the increase in your standard of living over time. Price inflation is associated with the decrease in the purchasing power of your money as prices increase. You can maintain your standard of living as long as your salary increases at the same pace as price inflation. If your salary increase exceeds price inflation then your standard of living may increase accordingly. This, of course, will raise your cost of living. It is thus important to take future price and standard of living increases into account when investing for retirement.

Does a large salary mean an easy retirement?

It’s pretty easy to get used to the new lifestyle that usually accompanies a pay increase and it is this lifestyle that you will wish to maintain going into retirement. If you haven’t accounted for this lifestyle when planning your retirement savings then an increase may have a significant impact on your existing savings and the contributions you need to make moving forward.

As an example: Consider a person who started working at the age of 25 and hopes to retire at 60. Their salary increases have matched inflation throughout their career and they have contributed 10% of their salary to a retirement plan. At this rate (assuming a 6% inflation, an 11% return and 70% salary replacement ratio) they could maintain their standard of living to the age of 94. If they now get a 60% increase at age 45 then they would only be able to maintain their lifestyle to age 79. Due to their more demanding goal and time constraints, they now require an increase of at least 8% to their contributions or they need to defer their retirement by 4 years.

Whether the increase in your standard of living is gradual or once off you will find that the results are similar.

Accounting for lifestyle inflation

Every cent you spend on improving your lifestyle will eventually need to be funded by your retirement savings. You are more likely to achieve goals if you account for any future increases to your standard of living, consider your position at each increase and match your goals and risk appetite with the appropriate asset allocation.

If you feel a bit overwhelmed by all of this then increase your investment understanding by regular reading of investment news articles and consider consulting an independent financial advisor to help you formulate the appropriate
plan.

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Mr. Money Lost His Job

by Mrs Money

88 Days ago, Mr. Money accepted a new position after he was contacted by a company numerous times offering him an Executive Chef position. He had turned down the company twice before he decided that he was going to seriously consider working for them. He had an interview where they talked with him, he performed a cooking challenge (similar to Chopped!) and they told them they would be in contact with him if he was going to get a job offer. They called the next day, offered him a salary of $5,000 less than what he was willing to accept, so he declined their offer. A few days later, they called back and offered him the amount that was acceptable and he told them he’d talk with me and let them know. We discussed the positives, (it was closer to home- a ten minute drive, the health insurance cost was half of what we were paying, and it was a smaller facility than what he had been managing). The negatives were that he still wasn’t going to be making as much as he was but the job he had was not stable so he felt like he needed to make a change. We ultimately decided it was a good idea and he accepted the position.

As soon as he started working at the facility, they were having him come in at either five or eight in the morning and he was working until nine or ten at night. He was working sixteen hour days- all salaried. He was told that once they were fully staffed this would be “a cakewalk”. He kept waiting for them to get fully staffed, all while hearing about lawsuits against the facility, how labor needed to get cut, the facility was on the verge of closing, etc.

On Friday morning (his 88th day of employment) he went into work, got called into the office and they proceeded to tell him all these things he was doing wrong. When he rebutted, they said that even on his days off he was still responsible and basically too bad. He asked why this wasn’t a first warning and they responded that since he was within his first 90 days of employment they really didn’t have to have a reason and they were letting him go. But! He would be eligible to apply for positions within the company.

We’re both so mad that they did this. With all the talks about budget cuts and the place closing, we’re figuring they did it because of the money. Why didn’t they just tell him they couldn’t pay him enough in the beginning? That would have saved us so much stress and heartache. Now we’ve got to figure out so many things- how are we going to make it without his income, what are we going to do for health insurance, what kind of a job is he going to get? I’m hoping and praying he can get some type of job that is not in the food industry (he’s hoping the same thing). I think as long as he’s not without a job for many months we should be okay. Our plan is to live as frugally as possible, try to figure out some alternative sources of income, and keep on keeping on. With as many hours as he worked the last few months, we’ve been enjoying having him around the last couple days! Of course, that may all change if I start freaking out more about him being unemployed.

I feel like this is just a hiccup in life. A really sucky hiccup but one nonetheless. I’ve been very thankful lately that we have lived frugally for so many years. We won’t really have to change too much because we don’t live extravagantly so that’s a good thing. I am hoping this will be a short season in life and a blessing in disguise.

Have you ever gone through a season of unemployment? Do you have any good tips for us?

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5 Great Ways to Fund Your Master’s Degree

by Kaylie Phelps

For many jobs, an undergraduate degree simply isn’t enough. In some fields, an employer will not even consider your application without further education. But, while a master’s degree is clearly worth it in terms of employability and future earning potential, there’s no denying that it’s expensive. If you’ve just finished college and you are in huge amounts of debt, you might find the idea of further education terrifying. However, if you are sensible, you can fund your master’s degree without any further debt. Here are five ways to do so.

Study Abroad

In the USA and UK, a graduate degree can cost thousands. However, in many countries, studying for further education is either free or very low cost, even for international students. Scandinavian countries, Germany, France, Spain, Singapore, Brazil, and Mexico are great places to look. Many of these countries also have much lower costs of living and some even have a considerably higher minimum wage. In many cases, host countries are keen to keep talented young professionals and may even offer you a great job opportunity once you have graduated.

Study Online

There are many advantages to studying an online master’s degree, such as a masters in social work online. One of them is definitely the cost. Online programs of study can be much cheaper and have more payment options. Studying your MSW online also means you will be able to study around work without needing to take time off or reduce your hours.

Scholarships

Many people incorrectly assume that scholarships and other forms of financial aid, such as bursaries and grants, are only available to undergraduate students. This isn’t the case. Many companies, corporations, and institutions are willing to sponsor the education of post graduate applicants. Check with your college and look online to find out what is available to you.

Research Grants or Assistants

Another option for post graduate students is applying for a research grant. This would mainly apply for those looking to go into an academic or research career. The first thing you should do is check with the institution that you are applying for to see if there are any research or project grants available. You should also ask professors to see if they have positions available for research assistants. This option has the added benefit of helping you to gain some valuable work experience while you study.

Work

If you study part-time or online you may be able to study around a full-time job. This could be even more beneficial if you manage to find work related to your field of study, which could eventually lead to a well-paid position. However, any job would provide a valuable income. If you do choose to study around work, try to take time off during exam times or when you have assignments due and remember, for your master’s degree to be a worthwhile investment, you need to be committed to it. Even with these funding options, it’s important to be frugal while you are studying. Make a budget and find ways to save money or earn extra to make sure you can pay for your tuition while also enjoying yourself and having some fun.

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    Welcome! I'm Mrs. Money and I lead a frugal, simple, and debt free life on a modest income. I make money online to help support our family. I believe in saving money, living green, and enjoying life!

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