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Later this month, I will have been in the financial industry for 25 years.
What started as a college internship giving investors stock quotes on demand over the telephone has turned into a fulfilling and enlightening career. And just like in life itself, the greatest lesson I’ve learned in the financial business is how little I really know. Frankly, it’s why I love my job. Of all the strange personal/professional discoveries I’ve made, there’s one that still gets weirder the more I think about it:
A pay raise is more likely to make retirement harder, not easier.
I’ll get to the confusing part in a moment, but let’s first explore the pragmatic and obvious. As we learned over the last couple of years, inflation can cause some significant cash flow challenges. For many employers, the annual cost-of-living pay adjustment is supposed to lessen the sting of inflation. These small but important pay increases aren’t what make retirement more difficult. Instead, these modest pay increases prevent life from getting more difficult in the now.
To better understand the point I’m trying to make, let’s create a quality-of-stuff scale. On the 1 end of the scale, you’ve got the least-expensive and lesser-quality stuff. On the 5 end of the scale, you’ve got the most-expensive and higher-quality stuff.
There are several reasons why people gravitate toward nicer stuff, including taste, appreciation for craftsmanship and various reasons rooted in materialism. The more income you earn, the more likely you are to convert all the items in your life into items higher on this quality-of-stuff scale.
For instance, let’s say that, at the beginning of your career, you had the taste and financial ability to have a 3-level TV, a 2-level car, a 2-level wardrobe, a 2-level home and a 1-level relationship with food and drink. Not to mention the dozens of other expenditures and decisions that fell at various places on the quality-of-stuff scale. Let’s also concede the point that you had some level of financial stability via short- and long-term savings vehicles. We’ll call this your baseline of financial stability. It’s neither good nor bad. It’s just your baseline.
If your raises early in your career were at or below the rate of inflation, as they often are, then any increase on the quality-of-stuff scale actually took you backward in terms of financial stability. Taste and awareness alone can lead to this scenario. Not to get weird, but even micro-decisions—like what brand of deodorant doesn’t irritate your skin and what garbage bags don’t tear—are enough to tip the scales in your disfavor.
Now stack on the serious raises throughout your career. What do you notice? Unless you’re uniquely utilitarian, a vast number of your expenditures and decisions rocket up the quality-of-stuff scale. Personal finance experts sometimes call this lifestyle creep.
Remember that baseline you had at the beginning of your career? The one that had some particular level of both short- and long-term financial stability? What I’ve learned is, the more we convert higher up the quality-of-stuff scale, while not also proportionally strengthening our short- and long-term financial stability, the harder it is to successfully execute an income-replacement plan (a.k.a. retirement).
Our parents and grandparents didn’t struggle as badly with this as we do. It might be because they were more closely impacted by the lessons of the Great Depression, depending on their age. Yet it’s not uncommon to see a current retiree come to the realization that he or she over-converted up the quality-of-stuff scale, and that lifestyle is no longer sustainable. Unfortunately, discovering this phenomenon too late is, well, too late. So goes the power of habit.
You should, of course, check yourself along the journey, but around about 50 years old, or when your last child leaves the house, you should deeply consider how your changing tastes and expectations have impacted both your short- and long-term stability. And if this deep philosophical exercise doesn’t appeal to you, take a moment to consider what your parents’ and grandparents’ standards were when they were your current age. You got to see that play out, and you can better judge what worked and what didn’t.
Anyway, these are the sorts of things that constantly run through this brain of mine. Thanks for reading and allowing that to continue.•
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Dunn is CEO of Your Money Line powered by Pete the Planner, an employee-benefit organization focused on solving employees’ financial challenges. Email your financial questions to askpete@petetheplanner.com.
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