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Bigger and Bigger

How earning more money can hurt your retirement savings

According to a study from Vanguard, in 2017, the median retirement account balance for adult Americans was a mere $26,331. If that seems low to you, that’s because it is. Experts often suggest stockpiling at least 10 times your income for a proper retirement nest egg. (Or, if you’re a proponent of the FIRE — Financial Independence, Retire Early — math, 25 times your annual expenses.) What’s keeping people from saving more? Perhaps it’s triggered by having more money.

As odd as it sounds, making more money could be a key component in failing to save enough for retirement. The scenario is as follows: You finally get a big raise, or land a new job that comes with a nice pay increase. You celebrate having more money by… spending more money. The process of spending more when you earn more is called “lifestyle inflation,” and as Money reports, it could seriously hurt your retirement savings. Instead of saving that additional cash, you spend it. That great new job allowed you to buy an even bigger home, which costs even more to maintain, which essentially nullifies your extra income. When you fall victim to lifestyle inflation, you end up on the exact same “not saving enough” path you were on before you started earning more.

The solution? Flip the switch. The next time you get a big raise or a new job that bumps your pay grade up, increase your 401(k) contributions immediately. This way you won’t notice the extra pay and start spending it. If you’ve already maxed out your 401(k), make sure your emergency fund is flush and increase your IRA or discretionary investing deposits. The key is to increase your savings before you have the chance to get attached to that extra cash. You’ll be happy you did when it comes time to retire.

Chris O'Shea

Chris O'Shea