Twanji Kalula, communications manager at Allan Gray

Landing that new position with a higher salary, receiving a long-awaited promotion, or celebrating a well-deserved bonus are exciting career milestones for any working professional – especially when it provides an opportunity to build wealth. But it also introduces a common temptation – the urge to upgrade one’s lifestyle, warns Twanji Kalula, communications manager at Allan Gray.

“While a salary boost can lead to more disposable income, and fund necessary lifestyle upgrades as our personal circumstances change, the temptation to increase our lifestyle costs can undermine long-term financial stability,” says Kalula. “To secure wealth for retirement, it is essential to resist the urge to up our base living costs significantly just because our income has increased,” he cautions, adding that as lifestyle creep increases our spending during our working years, it raises the amount of money we will ultimately need to support a similar lifestyle in retirement.

“When deciding how much we need to save for retirement, it is crucial to consider our personal circumstances, such as our current spending habits and future lifestyle expectations, to ensure that our retirement savings are adequate to meet those needs,” he suggests. “If we consistently upgrade our living standards and increase our expenses, we’ll need a larger retirement reserve to maintain that lifestyle once we stop working.”

As a rule of thumb, Kalula says we should aim to build a nest egg that is large enough to replace 60-70% of our income in retirement.

“This will ensure that we will be able to sustain a comfortable retirement, bearing in mind that the nature of our expenses is likely to change as we get older. Too often, we only calculate how much we will need to accumulate for retirement when we first start investing. If we fail to revisit this calculation over time and do not account for the effects of lifestyle creep, we are likely to end up not having enough.”

Kalula suggests five strategies to help manage lifestyle creep:

1.        Manage overheads: Good financial planning should balance present needs with future wants. By tracking expenditure, interrogating expenses on a monthly basis and comparing costs from month to month, you can monitor how significantly your expenses are escalating.

2.        Use windfalls wisely: Windfalls can trigger lifestyle creep when they are used to make purchases that increase our base costs. For example, getting a new car when receiving a bonus may seem like a once-off expense, but a new car may significantly increase ongoing fuel, maintenance and insurance costs.  Consider using a windfall to improve your financial position by paying off debt, saving and investing: Build an emergency fund, make an additional contribution to a retirement product, such as a retirement annuity, or contribute to a tax-free investment.

3.        Revisit retirement savings targets: Regularly recalculate how much you need to save for retirement. This exercise ensures that you remain on track to draw a retirement income that can support a comfortable lifestyle.

4.        Increase savings rates: Increases in your income can meaningfully impact the rate at which you achieve your long-term financial goals. Consider using increases to account for inflation and increase investment contributions.

5.        Invest in a fund that beats inflation: Retirement investments need to target and keep pace with inflation. Investors should select a fund that has a proven track record, takes on sufficient risk to generate above-inflation returns, and manages this risk appropriately across a range of asset classes and regions.