Can a Raise Undercut Your Retirement?

November 18, 2021
If you’ve received a raise or stockpiled some savings, don’t neglect your future self.

There are now more job openings in the U.S. than there are workers to fill them, which has pushed wage growth to its highest levels in more than a decade.1 But how’s this for a paradox? Getting a raise could make it harder to maintain your living standard in retirement.

That’s according to a 2020 study by Morningstar, which pins the blame on “lifestyle creep,” or the tendency to spend the majority of one’s salary increases (or bonuses) on lifestyle upgrades, such as dining out more frequently or moving into a costlier home.2 “As expenses grow, retirement savings often don’t keep pace, making it harder to sustain that higher standard of living in retirement,” says Mark Riepe, head of the Schwab Center for Financial Research.

Lifestyle creep can be especially pernicious for older workers, who may discover too late that they haven’t socked away enough to maintain their current standard of living. “That can be a difficult pill to swallow,” Mark says.

You should be equally cautious when spending any savings you might have amassed because of COVID-triggered lockdowns and travel bans. “After more than a year of restrictions, some may feel they’ve got money to burn, but it’s important not to go overboard,” Mark says. “A single expenditure, within reason, is one thing—but adding significantly to your recurring expenses is where you can get into trouble.”

The solution? Pay your future self first. “Before committing your raise to any new expenses, review your retirement plan and consider upping or even maxing out your 401(k) and/or IRA contributions,” Mark says. “Once you’ve done that, you can treat yourself to something special, secure in the knowledge that you’re not putting your retirement at risk in the process.”

1Trading Economics with data from the U.S. Bureau of Economic Analysis, as of 06/2021.

2Samantha Lamas, “Controlling Lifestyle Creep: How to Advise Clients When They Get a Raise,”, 01/23/2020.

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