“How You Can Still Be Broke with $500,000 in Income”
In my Retirement Planning Courses, a topic I touch on regularly is – know your numbers! At least do a ballpark spreadsheet of monthly fixed expenses versus discretionary. Yep . . . it sounds like a diet – track everything you eat – and we all hate that. However, the exercise of tracking can be very illuminating. Wow! Had no idea I was spending that much on eating out! Because, realistically, how will you know what you can afford in retirement, if you don’t know what you’re spending now?
Today, at MarketWatch, a very interesting article caught my eye, which I’ll rephrase: How can you possibly be broke with $500,000 in income?
Kari Paul, the reporter, does a good job of explaining:
“These days, even $500,000 per year doesn’t go far in some cities. Not even a high six-figure salary is enough to keep New York City families out of the red. But spare a though for the average American family, whose costs easily outpace the average income.
A recent analysis from an advisor, Sam Dogen [ . . . ], showed how difficult it is for high earners to escape the rat race in NYC – one of the priciest places to live in the world. He analyzed a mock budget for an imaginary family of four in which the two 35-year old breadwinners each make $250,000 a year. After factoring in taxes, 401(k) contributions, home and child care costs, the family was left with just $7,300 for the year! As if they were living ‘paycheck to paycheck’. (More on cost of living later)
Perhaps nobody is crying for lawyers making $500,000 a year or even $250K, but the analysis shows just how easy it is for spending habits to take a high salary and turn it into table scraps. Dogen said pressure from peers to spend more is a big contributing factor, adding “everywhere I go, and I’ve been all over the world – high income earners are secretly feeling the same squeeze.”
How about a comparison chart?
“They’re unhappy, getting divorces, and always comparing themselves to wealthier and wealthier people,” he said. “Heck, even a friend who is worth over $200 million, after founding and taking public a company feels like he needs to continue working because he has to ‘keep up with the Zuckerbergs!”
So, how would the average American family fare by the same lifestyle? MarketWatch crunched some numbers. . . and found they would be racking up approximately $27,000 in debt a year if they spent the average of what Americans spend on the same activities. This chasm in economic stability comes ever after adjusting for cheaper housing costs and lowering the number of vacations to one a year – the average in the U.S.
Most Americans aren’t racking up more than $20K in debt a year – the average credit card debt is about $16,061 – which is up 10% from 10 years ago.
The NYC family takes 3 vacations a year and they’re paying significantly more in property taxes on a $1.5 million home. [Although, as a caveat, since I was doing some research this past weekend on this very topic – states with no income tax tend to hit you hard on property tax. For example, in MD, you’ll pay about $19-20K on a million dollar home, versus Dallas, Tx – you’ll pay about $30K. ]
Then there is a the usual outflow for music lessons, sports and private schools. Children cost a lot these days, especially if you’re succumbing to the pressure to get your kids in private schools in NY and LA; you’ll sink a lot of money into extracurricular activities. If children continue ‘on the payroll’ into college and beyond, that comes at a cost to what is left for your retirement.
Bottom line: people at every income level can have money problems if they don’t budget well (and have a hard time staying in their ‘financial lanes’).
According to Mark Hamrick, Washington bureau chief for personal financial site Bankrate.com: “Many Americans, no matter where they live or how much they make, maintain their finances precariously close to the edge of break-even. We’re reminded of the high percentage of lottery jackpot winners who go bankrupt. The problem wasn’t too much money. The problem was a failure to make a realistic budget and stick to it . . . [or even to be realistic in various financial decisions]. This why maintaining an adequate savings cushion is critically important.”
The east coast, from D.C. to NY and into Connecticut, can be about as expensive as it get in the U.S., aside from LA. It’s worth remembering that for every aspiring/would-be millionaire in the city, there is a cast of thousands working in restaurants and elsewhere making significantly less than 6-figures. Some of these folks have learned to squeeze a dollar (used to be a penny) till it squeaks. They even take their lunches to work! Perhaps revisiting the idea of frugality and discipline, especially in today’s sometimes excessively materialistic environment, would prove beneficial in the long run.
Back to cost of living. Home prices can be a determinant of purchasing power wherever you go. I spent quite a bit of time over the weekend helping our daughters, one in Austin, TX and one in Lake Oswego, OR look for housing. I was shocked! to say the least. The median home cost in Howard County is now in the low $400s, give or take $20K. The median home in Lake Oswego is roughly $500+K. A ‘tear down’ is priced in the $400s. California has come to the Northwest. In Seattle, it’s in the mid $600s. In Austin, it’s roughly in the $300s . . . and the home you can get for $300K is significantly bigger/nicer than in the other places.
When you start looking for places to retire, housing will be an important component, as will how that state and locality tax. Tread carefully. Get your budget spreadsheets up and running.