5. How Much Lifestyle Creep is Okay? Flashcards
(23 cards)
Who was Cornelius Vanderbilt?
A railroad and transportation pioneer who amassed a fortune of over $100 million.
What was Vanderbilt’s belief regarding family fortune?
That splitting the family fortune would lead to ruin.
How much wealth did Vanderbilt leave to his son William H. Vanderbilt?
$95 million.
What was the worth of the Vanderbilt fortune in 2017 dollars?
Roughly $5 billion.
What caused the financial ruin of the Vanderbilts?
Lifestyle creep.
Define lifestyle creep.
Increasing spending after an increase in income or to keep up with peers.
What are some examples of lifestyle creep experienced by the Vanderbilts?
- Dining on horseback
- Smoking cigarettes wrapped in $100 bills
- Living in opulent mansions.
What is the suggested limit for lifestyle creep to avoid delaying retirement?
Around 50% of future raises.
What is the relationship between savings rate and retirement delay?
Higher savings rates require saving a larger percentage of future raises to retire on schedule.
How much does Annie save annually compared to Bobby?
Annie saves 50% ($50,000) while Bobby saves 10% ($10,000).
What is the retirement goal multiplier based on annual spending?
25 times annual spending.
How much does Annie need to retire compared to Bobby?
Annie needs $1.25 million, Bobby needs $2.25 million.
What happens to Annie’s retirement goal after her raise?
It increases to $2.5 million due to increased spending.
How much of her raise does Annie need to save to retire on schedule?
74% of her raise.
What is the impact of raises on spending for high savers vs. low savers?
High savers are disproportionately affected by increases in spending from raises.
What is the recommended percentage to save from future raises?
50%.
What is The 2x Rule?
Before buying something expensive, set aside a similar amount for income-producing assets.
How does lifestyle creep affect retirement planning?
Excessive lifestyle creep can push back retirement dates significantly.
If a saver currently saves 10%, what percentage of a raise should they save?
36%.
What savings rate should a person with a 20% current savings rate aim for from future raises?
48%.
True or False: A lower current savings rate allows for more lifestyle creep without affecting retirement plans.
True.
What is the significance of the savings rate according to the analysis?
It is the most important factor in determining how much of a raise to save.
What should you do if your savings rate is below 10%?
Consider saving 50% or more of future raises.
