{"id":56130,"date":"2025-04-26T16:50:39","date_gmt":"2025-04-26T16:50:39","guid":{"rendered":"https:\/\/prosfunds.com\/?p=56130"},"modified":"2025-04-26T16:50:42","modified_gmt":"2025-04-26T16:50:42","slug":"income-replacement-or-lifestyle-spending-method","status":"publish","type":"post","link":"https:\/\/prosfunds.com\/?p=56130","title":{"rendered":"Income Replacement Or Lifestyle Spending Method?"},"content":{"rendered":"
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Retirement planning usually starts with a simple idea: save enough money to replace your income. But there\u2019s one big problem. As you grow older, your income likely increases. For some professions, this may follow a predictable growth pattern of say 2 to 4% per year. For others, the pattern may be more sporadic, especially if one pursues higher education such as a Masters, Doctorate, MD, etc. When your income rises, many increase their lifestyle spending, with little thought of how sustainable this may be beyond your working years.<\/p>\n

Many Americans take on debt to support lifestyles beyond what their income supports. If you don\u2019t adjust your retirement planning variables, savings rate, target return rate, and time horizon, to keep up with your dream retirement life, that life could become unattainable. Let\u2019s break this down.<\/p>\n

Why Traditional Retirement Planning Falls Short<\/strong><\/h2>\n

Traditional retirement planning strategies are based on \u201cincome replacement.\u201d This means the goal is to replace a percentage\u2014often 60% to 80%\u2014of your final working income.<\/p>\n

But what if your income grows a lot over time? Here\u2019s a simple example of income growth where the income doubles every ten years compared to one at 3% annual growth<\/p>\n

Age \/ 3% Annual Growth \/ Sporadic Growth<\/u><\/p>\n

25 $30,000 $30,000<\/p>\n

35 $40,317 $60,000<\/p>\n

45 $54,183 $120,000<\/p>\n

55 $72,818 $240,000<\/p>\n

65 $97,861 $480,000<\/p>\n

This highlights two different planning scenarios. The 3% growth scenario with its constant flows allows for more systematic planning. In fact, it falls neatly inside of a structure where Social Security makes up a large portion of retirement income.<\/p>\n

The sporadic one requires a completely different approach. While it may start with the traditional approach at age 25, you can see that it quickly varies from the 3% annual growth. Most people I know did not pursue higher paying jobs to be able to save more for retirement. I\u2019ve found that they wanted to upgrade cars, home, vacations, and day-to-day spending. That said, they also didn\u2019t want to suffer a drop off from enjoying these things in the future.<\/p>\n

This is the danger of lifestyle inflation\u2014spending more just because you earn more. Suddenly, your retirement plan\u2014based on your old lifestyle\u2014won\u2019t support your new one.<\/p>\n

Smart Retirement Planning Starts With Real Life Numbers<\/strong><\/h2>\n

Instead of planning to replace a fixed percentage of income, base your retirement planning on the lifestyle you want to live in the future. When there is a spouse, what do you both want? I have seen disagreements in the $100,000\u2019s between spouses. Let\u2019s say that one is happy with living on $120,000 annually and the other wants to live on $240,000 annually. How much do they need to save and in what savings vehicles- 401(k), Roth, IRA or brokerage account?<\/p>\n

Ask yourself:<\/p>\n