Harold Goldman
Yesterday, 7:51 am

Maybe this is your first career position out of college or perhaps you’ve been promoted and your bi-weekly paycheck is about to get a big boost. Rather than continuing to skimp and save on everyday expenses, limiting your credit use, sharing an apartment to keep rent low or biking to work, you go out and move into a one-bedroom condo, buy a new computer and buy a new car – you can afford the payments now, right?

Lifestyle inflation typically occurs when people spend more each time their income increases, rather than adjust their spending, savings and investments to stay on track for reaching their financial goals. While your new income boost may be able to handle these costs in the short-term, over time you may find that small shopping spree could be costing you more than you think.

What is Lifestyle Inflation?

Inflation is when the price of something increases over time; when the price rises, each unit of currency buys fewer and fewer goods (or services). For instance, in the year 2000 the average cost of bread was $1.90 per loaf, but as prices slowly increased that same loaf now costs $3.20. Lifestyle inflation is when the cost of your lifestyle inflates over time.

Say you make $4,000 per month and spend $3,300 per month. Your company gives you a 3% raise to $4,120 per month. Yay — you suddenly have $120 more per month to use on your expenses, paying down debt, and saving for a future need. In your excitement, however, you start buying a coffee every morning and lunch at the cafe next to the office instead of making your own at home, because you can afford it now.

Soon you notice your monthly spending is up to $3,500 and $100 dollars of that raise is not only gone and spent, eaten up by your lifestyle, but you are now spending $80 more a month than before. That’s how lifestyle inflation works, it is a slow financial killer. It doesn’t matter if you make $20,000 or $200,000 it only matters how you spend and save it.

How to Avoid Lifestyle Inflation and Build a Stronger Financial Safety Net

Avoiding the trap of lifestyle inflation is all about financial planning. Try not to increase your everyday expenditures, instead, you make plans for that extra money and use it to further build your financial safety net. Try to keep needs and wants in mind when making realistic, honest assessments about whether a potential purchase is a good financial decision. Here are a few more ways to avoid lifestyle inflation.

Set Your Financial Goals and Stick to It

Take a minute to re-focus on your long and short-term financial goals. Are you saving to take the kids to Disneyland for the holidays, trying to pay down debt or purchase a home. You are less likely to overspend extra money if you understand how it can help you achieve your goals.

Calculate Real Changes to Budget

Before you can have a real idea of how you extra income is going to be spent or saved, take the time to calculate the real effect the money will have on your tax liability and budget. Once you have done the math, you may find that your raise or windfall is not enough to merit a new car or vacation.

Pay Yourself First: Save for Emergencies or Retirement

Once you know exactly how much you are adding to your budget in real dollars, you can avoid overspending by saving and/or investing a percentage that increase. For example, if you currently save 10% of your pre-tax pay for 401 k contributions you may need to adjust your fund to an extra $12 a month. If the money is gone and saved before it hits your bank account, the less likely you are to make a poor financial decision.

For those that do not have an employer-sponsored pension plan, protect the extra cash by making an automatic transfer from your checking to a savings account. If your needs are being met by your current spending limits, deposit the excess directly into a savings vehicle so you don’t spend it needlessly.

Avoid Thinking You Can Afford New Debt

Racking up new purchases on credit cards, financing a new home or otherwise going into debt when you get a raise could have your budget deeper in debt before you know it. Just because you expect to have more money in the future does not mean you can afford to pile up debt.

Sometimes Spending More Makes Sense but Mostly It Makes Sense to Save

There may be times when increasing your spending makes sense. You may need to update your wardrobe to be presentable for a new job or need to purchase a car for more reliable transportation. Perhaps spending a little extra to improve your quality of life – a cleaning service so you have time to relax or spend time with the family – as long as you can afford it.

A certain amount of lifestyle inflation is to be expected as your work and family obligations evolve, but it is imperative that you understand how each spending decision you make affects your financial situation. Make a monthly financial plan to track your spending and saving, then be mindful to plug any extra income (a raise, a windfall or bonus, an inheritance, etc.) into that plan before a penny is spent.

Stick to the ratios of spending and saving that you have set in your budget to avoid lifestyle inflation so you can start or continue to build a financial safety net which meets your goals for an independent financial future.



Andy Landis
December 27, 2016


Social Security has a number of offbeat “quirks.” Here are the top 10, including how to turn your payments into zombies. Quirk No. 10: Your birthday isn't your birthday Federal law says you "attain" any age the day before your birthday. So if you're aiming for a critical birthday — like 62 for Social Security or 65 for Medicare — you actually reach that age a day early. Quirk No. 9: Your birth month isn't your birth month Social Security says that you must be eligible "throughout a month" to receive payment. For example, if you want Social Security at 62 with a June 15 birthday, you're eligible in July, the first month you're 62 throughout the month. If your birthday is on the first of the month, you'd attain your age the day before (Quirk No. 10), and be eligible throughout your birth month. Born on January 1? Then your birth year would be changed. Note: Medicare is different. You're eligible for Medicare on the first of the month you attain age 65. That would be your birth month for most, or the preceding month if your birthday is on the first. Quirk No. 8: Your payment month isn't your payment month Social Security payments are "for" the previous month. So if your birthday is on June 15, your eligibility month is July, and your payment will come in August. Quirk No. 7: Your death month isn't your death month You must be eligible "throughout a month" to be paid (Quirk No. 9). For a midmonth death, the next Social Security payment must be returned. For example, if death occurs on July 15, the July check — paid in August, under Quirk No. 8 — must be returned to SSA. Quirk No. 6: Your full retirement age isn't the same as everyone else's Social Security's "full retirement age," or FRA, is moving from 65 to 67. New FRAs are being phased in over many years, based on your birth year. If your birthday is Jan. 1, your birth year is the previous year. (Quirk No. 9). The earlier birth year determines your FRA. Quirk No. 5: Your FRA might not be your FRA If you have lost a spouse, the FRA chart for widow(ers) is slightly different from the FRA chart for retirees. Therefore you might have two different FRAs: One for survivor benefits and one for retirement benefits. Quirk No. 4: Your ex-spouse might not be your ex-spouse Social Security pays former spouse benefits if you were married at least 10 years before divorce. If you divorced just before your 10th anniversary, SSA can't recognize your former spouse. Quirk No. 3: A stranger could be boosting your future Social Security If someone accidentally or intentionally works under your Social Security Number, all their earnings go to your record, increasing your future payments. Correct that by contacting SSA. Really. Quirk No. 2: SSA tells you not to photocopy your documents, then they do it The Social Security Administration won't accept photocopies of documents like birth certificates. They need the official "certified" copy with an authentic stamp or seal. But when you provide the official copy, SSA photocopies it for your file. (You get your original back). Is that hypocritical? No, the SSA employee certifies that the photocopy is a true copy of the official document. That's different from homemade photocopies that could be, well, questionable. Quirk No. 1: Turn your payments into ‘zombies’ From FRA to age 70 you can voluntarily suspend your retirement payments for any month. Then your record is like a zombie: Alive (active on the computer) but dead (not paying anything). Since it's alive your qualified spouse can get a spousal payment. But since it's dead your payments get higher until reanimated (resumed). For more quirks about voluntary suspension, read my column on “even more ways to profit by suspending Social Security.” This is offered to help you plan your Social Security, not to bad-mouth SSA. Knowing SSA's quirks will pave the way. All these quirks and more are detailed in my book, “Social Security: The Inside Story.” Always consult SSA for official information.

Andy Landis
December 27, 2016
The Social Security “main highways” are popular routes. But a lesser-known byway might fit you better…and pay more. Social Security’s main highways are the basic benefits for Worker and Spouse. Most people take the earliest onramp at 62, but you’ll get more per month—and possibly more total lifetime payout—by waiting until Full Retirement Age (FRA, currently 66), or even until 70 for Worker payments. Byways There are several lesser-known Social Security byways: • Divorced spouse benefits, if married to a worker at least 10 years. • Payments for an eligible worker’s child. • Disability payments for a worker, widow(er), or adult child. • Survivor payments for a deceased worker’s widow(er) and child. Explore these alternate routes for possibly higher payments. Off-road excursions There are at least three “roads less traveled” that could benefit you: • U-turn (withdraw, repay, and refile). You can “undo” your claim and return to your starting point by withdrawing your claim and repaying all benefits. A U-turn can correct a mistake, like filing on the wrong record or too early. A more intriguing use is to “purchase” higher Social Security payments. After you withdraw and repay, you can refile your claim. Since you’re now older, your payments are higher. So paying back the benefits is like “investing” in a higher Social Security payment, something like purchasing an immediate annuity. Withdrawal rules are strict. Check with SSA at http://ssa.gov/planners/retire/withdrawal.html for details. • Red light, green light (suspend payments). You can suspend any or all payments from FRA to age 70. There are three advantages: 1. Your payments grow while suspended. 2. Your spouse can get spousal payments on your work record, even while suspended. 3. You can later choose to receive the suspended payments. See http://www.marketwatch.com/story/even-more-ways-to-profit-by-suspending-social-security-2014-09-15 for details. For example, suppose Bill could get $2,000 per month at 66. He plans to wait until age 70, to get 32% more--$2640 per month. Sure he can wait. But if he files at 66 and suspends his payments, his spouse Molly, also 66, can get spousal payments of $1,000 per month on the suspended record. That’s $48,000 they would have missed out on, had he waited until age 70 to file. • Dualie Detour(spouse-only or widow-only payments). You’re a “dualie” if you’re dually eligible—as a worker and as a divorced spouse, for example. That allows you detour to another payment type, later returning to the main highway. See http://www.marketwatch.com/story/rules-of-the-road-for-social-security-dualies-2014-12-04 for more. For example, if you’re a dualie who first files at FRA, you can choose to claim only your spousal benefits, holding your own payments in reserve. (Widow(er)s can do so as early as age 60.) Your own payments increase even while you receive the spousal or widow(er) benefits. Taking this detour brings in some Social Security until your own payments hit the jackpot—the 132% payments at age 70. An example yielding a $60,000 “bonus” appears here: http://www.marketwatch.com/story/social-security-bonus-for-married-retirees-2013-10-17. Learn more in two steps: 1. Set up your “My Social Security” account at www.ssa.gov/myaccount. 2. Input your data into one or more free online calculators—find them by searching for Social Security calculators by AARP, Financial Engines, T. Rowe Price, or others. All these byways are detailed in my book. This is a quick introduction. Always consult SSA for official route information. And as always, keep on planning.

Andy Landis
December 27, 2016
Avoid retirement surprises by understanding the Social Security computation. Let’s go back to school to study the math behind your Social Security. A little understanding of the numbers goes a long way to avoiding retirement surprises and shortfalls. Like other pension systems, your Social Security is based on three factors: eligibility, earnings, and age. SSA puts its own twist on each factor. Math 101: Compute your eligibility To be eligible for Social Security retirement payments, you need 40 Work Credits (WCs). You can earn up to 4 WCs per year, so they’re sometimes called quarters. In 2015 you earn one WC for each $1220 you earn anytime in the year. So if you earn 4 x $1220, or $4880 in 2015, you get all 4 WCs for the year. (Only work where you pay Social Security taxes counts. The cost per WC generally increases annually with inflation.) 40 WCs ÷ 4 WCs per year = 10 years of part-time work needed for a retirement payment. Math 102: Compute your average earnings The second factor is your lifetime average earnings. Many pensions are computed on your best 5 years of work. Not Social Security. It’s based on your best 35 years of work. Here’s how: • SSA records each year’s earnings subject to Social Security taxes. • When you hit 62, every year is multiplied by an inflation factor to make it more comparable to today’s pay level. • The top 35 years of inflated earnings are selected and averaged together. The years need not be contiguous (in a row or block). That 35-year average determines your Social Security payment—a higher average means higher Social Security. 35 years are used, even if you don’t have 35 years of work. Missing years post as zeros, reducing your 35-year average. A little math hocus-pocus (see http://www.socialsecurity.gov/OACT/COLA/piaformula.html) converts your 35-year average into your Social Security payment. Avoid two mistakes here. • First, high late-career earnings don’t always mean high Social Security, if you had low earnings earlier. It’s a lifetime average. • Second, retiring a few years early after lifelong work won’t drastically reduce your Social Security. A few zeros have little impact on your 35-year average. Math 103: Compute your age The third factor is your age when you start payments. That’s based on your Full Retirement Age (FRA). Your FRA is between 65 and 67, determined by your birth year. (See http://www.socialsecurity.gov/OACT/ProgData/nra.html) Whatever your FRA, you can start payments any month from 62 to 70. Start payments at your FRA and you get a 100% payment. Start payments earlier and you get a small reduction for each reduction month. For example, if your FRA is 66, and payments start at 62, your 48 reduction months yield a 75% payment. Start payments after your FRA and you get a raise for each month’s Delayed Retirement Credit (DRC). For example, if your FRA is 66 and payments start at 70, the 48 DRCs yield a 132% payment. Age factors top out at 70; don’t delay filing after that. An SSA calculator at http://www.socialsecurity.gov/OACT/quickcalc/early_late.html#calculator figures the percentage for any month from 62-70. More schooling • Get SSA’s estimate of your future payments at www.ssa.gov/myaccount. • Math nerds: See a sample computation dissected by SSA at http://www.socialsecurity.gov/OACT/ProgData/retirebenefit1.html or in my book, available at http://andylandis.biz/index_files/Page403.htm. • Compute your own estimate at www.ssa.gov/pubs/index.html. Type “your retirement” in the lower search box (under the “Publications” headline), and select your birth year in the “PDF” button. It all adds up. So as always, keep on planning.