Text

Physicist, Startup Founder, Blogger, Dad

Sunday, May 15, 2011

Scraping by on $250k a year?

Is a family of four barely making it on $250k per year in a high tax/cost-of-living city? I haven't looked carefully at the numbers in this calculation, but the conclusion doesn't strike me as implausible.

I'm glad I live in an eco-hippy college town :-)

Related posts: Working class millionaires , Banker pay , Manhattan blues , On $500k a year

Fiscal Times: ... But just how flush is a family of four with a $250,000 income? Are they really “rich”? To find the answer, The Fiscal Times asked BDO USA, a national tax accounting firm, to compute the total state, local and federal tax burden of a hypothetical two-career couple with two kids, earning $250,000. To factor in varying state and local taxes, as well as drastically different costs of living, BDO placed the couple in eight different locales around the country with top-notch public school districts, using national data on spending.

The analysis assumes that this hypothetical couple – let’s call them Mr. and Mrs. Jones – are each on the payroll of companies, with professional positions. They take advantage of all tax benefits available to them, such as pretax contributions to 401(k) plans and medical, childcare and transportation flexible spending accounts. They have no credit card debt, but Mr. Jones racked up $40,208 in student loan debt in undergraduate and graduate school, and Mrs. Jones borrowed $22,650 to get her undergraduate degree (both amounts are equal to the national averages for their levels of education). They also have a car loan on one of two cars, and a mortgage for 80 percent of the value of a typical home in their communities for a family of four, which includes one toddler and one school-age child.

The bottom line: It’s not exactly easy street for our $250,000-a-year family, especially when they live in high-tax areas on either coast. Even with an additional $3,000 in investment income, they end up in the red — after taxes, saving for retirement and their children’s education, and a middle-of-the-road cost of living — in seven out of the eight communities in the analysis. The worst: Huntington, N.Y., and Glendale, Calif., followed by Washington, D.C., Bethesda, Md., Alexandria, Va., Naperville, Ill. and Pinecrest, Fla. In Plano, Texas, the couple’s balance sheet would end up positive, but only by $4,963.

... Being in the red on a $250,000 annual salary may still seem surprising. But taking responsibility for their retirement and their children’s future is costly. They are maximizing contributions to two 401(k)s--advice that's championed by almost every financial advisor in the country--and all flexible spending accounts available to them, and they are squirreling away $8,000 a year for their kids’ college educations. Their spending is conservative, based on national averages for professional couples with two kids. Not included are those hefty run-of-the-mill payouts for charitable deductions, life insurance premiums, disability insurance, legal fees – or monthly sessions at the hair colorist, or membership at a gym.

As educated professionals, they buy books, newspapers and magazines; they own computers and pay for Internet access. But the Joneses don’t take lavish vacations, don’t belong to a country club, don’t play golf, don’t drive luxury cars, don’t have a swimming pool, don’t buy designer clothes, don’t own or rent a second home, and don’t send their kids to private school. They don’t even shop for groceries at high-end markets. (They spend what the United States Department of Agriculture defines as a “moderate” amount on food for the average family of four.) In short, they’re not “wealthy,” even if they’re in the top 5 percent of earners. ...

25 comments:

esmith said...

All numbers seem badly inflated to me. It's more like an exercise to see "can you spend 250,000/year by splurging on everything" than a serious analysis.

4213/year in health insurance premium & 5000/year out of pocket on medical expenses, for a working-age couple, seriously? Does that include one liposuction per year? The reasonable number should be about half.

15,000/year on full-time child care for the toddler? In Plano??? I'd agree on $8,000/year. And the toddler will grow up soon.

5,000 on cleaning??? Even if they absolutely refuse to do any housework by themselves, 3,500/year should be more than adequate to pay for a maid and a gardener.

7,085 on gas and 1,555 gas taxes? At 3.50/gal and 25 mpg that works out to about 30,000 miles per year per car. Are they delivering pizza in their spare time?

Car loan payment of 650/month "on one of two cars" and insurance of 300/month on two cars would be compatible with two recent model year entry luxury cars such as  BMW 335.

I can't imagine how they could rack up 2,220/year in parking fees. I live in Southern California and I don't recall having to pay a parking fee anywhere in the last two years.

Penney B said...

According to wikipedia, median income for a family in Alexandria is ~100k.  For Hunington, its 110k.  It seems a little silly to pretend a family making 250k can barely afford to live there, when apparently the bulk of families that do in fact live there make less then half of that.

David Stern said...

Remember that household averages include all the single person households including young renters and retirees who bought a house decades ago...

esmith said...

It varies greatly depending on personal preferences. But, using that table as the basis, for a working couple with two kids, getting rid of the most egregious items like dry cleaning, maid, and a car loan on a BMW, and using more conservative numbers in other places, I arrive at total expenses of 105K/year (out of which approximately 45K would be tax deductible or could be spent on pretax basis) in Glendale CA , or 80K (30K pretax) in Plano TX.

In Glendale, I think it means that a family that makes 160-170k before taxes will be able to max out their allowed contributions to their 401K plans (currently $33,000/year for a couple), maintain decent lifestyle including most of the stuff mentioned in the article, and stay in the green at the end of the year.

Penney B said...

Which is why I didn't use the household income figures but the family income figures, which only includes households of two or more related people.

Víctor Sánchez said...

 It is happening in more and more countries in the so called first world. Top 10% earners stop living with ease since they have childs. Not a good way to promote educated people to bring children to their country.

David Coughlin said...

A $2k mortgage+interest payment is like a $450k house.  $450k in the Dallas area is a VERY nice house.  I have a friend who live 30 miles away in Tarrant County, in a lake community, on 3/4 of an acre, 5BR/3BA on 3/4 of an acre.  He paid $275k for it in 2007 [and lost $15k when he moved back to NJ]. [40 minutes from downtown Dallas]  Collin County is chi-chi and might be the nicest part of the Metroplex.  The alternatives on the list are nice but not the same caliber relative to their city.

I have trouble believing that their electric and gas, and phone+internet+TV are both 2x what I pay.

David Coughlin said...

Now I'm even more suspect of the Plano Joneses.

I recall that my friend had to pay $9.1k in annual property taxes, on his $275k house.  The Plano-Joneses pay $11k, which makes their house about worth $360k by proxy.  That makes their mortgage and interest payment align with their taxes if their mortgage is 100% LTV [not the 80% the article says].

Their student loan payments line up correctly if they *just* came out of deferral and have a 10 year term.  If they are making $250k/year, they have to be somewhere in the 'mid-career'.  Have they not paid their student loans at all since they left school?  Only 'he' went to grad school so what was 'she' doing?  If she had more debt, her payment should be higher, and if they had more debt, their payments should be higher.

The article smacks of hypotheticals, not actual research.

Zhengzheng Zhou said...

$4000 vacation for 4 people? Sure if they drive everywhere and cook themselves.  $4000 for after school activities? There are two hours after school before mom gets home; how many hours a year is that? I guess no piano lessons or soccer for these kids. But what does little Johnny do for the summer? Also, where is the $2000 for video games and toys? Or did furniture & electronics just show up in their house? Do they ever remodel? And just one car payment, with no repairs for the other, older car? BMW 335 is entry luxury, but few parent with 2 kids would be driving one. And are these people allowed to have any hobby other than running? This family is doing OK but nowhere near wealthy. In their situation they are saving way too much and as a result their living standard is depressed unnecessarily.

One can make ends meet with $250K if the wife does not work and 401K is not maxed out; or if there is only one kid who's old enough to take a part time job.

esmith said...

$4000 gets you a nice 7-day cruise for 4 people. I'm not closely familiar with prices of after school activities, but our local YMCA apparently has a soccer league for teens for $30/month. Remodelling is well accounted for by allowing $5000/year for "housing/maintenance", and repairs for the second car are accounted for by allowing $1,000/year for car maintenance. You are presuming that the second car is older. This is not reflected in the insurance estimate ($3548/year). I have a '06 Vette and a '07 minivan and my full-coverage insurance costs less than $1800/year. The only way to reach $3548/year in car insurance is to drive two new BMW's.

Jacqueline said...

Take a look at the data.  All expenses were vetted by BDO and government averages, including food, typical mortgages, health care costs, etc..  There's a chart on page two.  Also, the minimum wage in this country applies to housekeepers and child care workers, as much as some would want to exploit them. 

Jacqueline said...

Take a look at the chart on page two of the story.  All the numbers were vetted by BDO and average government costs for a family of four.  These hypothetical families live in suburbs of large cities, where expenses--including commuter costs--are high.  You can check the AMTRAK or LIRR commuter passes yourselves.  Also, even in Plano, there's something called "minimum wage."  Housekeepers qualify.   

Jacqueline said...

Take a look at the chart on page two of the story. All the numbers were vetted by BDO and average government costs for a family of four.

David Coughlin said...

Alexandria has a huge shadow latin-American population that drives that average number down.  You couldn't move to Alexandria if you made much less than $250k.  You can't even move to Fairfax if you make less than that, unless you are bringing $250k in home equity with you.

Scott said...

People will adjust their spending to fit their income.  Honestly, it wouldn't be hard for a somewhat frugal family to come out tens of thousands positive.

This family for four is spending $22k a year in food and household supplies (is dish soap that expensive?) or $15 a day.  Who feeds (or uses enough supplies) their children $15 worth of food a day? Kids are like the cheapest things ever to feed since they usually prefer simple things with sugar, carbs, and fat. Also $4k on after school activities? Sports cost like $100-200 a season and equipment probably $100. Art classes are like $20 a session max. 

Penney B said...

According to wikipedia, the latino population in Alexandria is one fourth the non-Hispanic white population.  If every latino had the unlikely income of zero dollars, and every white family had an income of 250k, the medium income would be 200k.  Obviously there must be some whites making much less then 250k to account for the actual mean income of 100k.

David Coughlin said...

That's right!  There are a lot of mid-level civil servant/government contractor types making $100k-$150k who have been there since the prices were more reasonable. [survey franklymls for the damage; Prices don't start getting reasonable until you are in the hour+ commute range].  I meant it when I said 'move there'

I would bet that there is 2x$25k latino workers in Alexandria for every $250k couple.

Jack Palmetto said...

Until my wife lost her job last year, we were living extremely comfortably on a little over $250k per year.  

Some qualifications:

1. We live and work on the outer edge of a major metro area in the East.  We're far enough out that real estate prices were never completely insane, although it's not like living in rural Tennessee either. 

2. We live in a very good school district but don't have children of our own.  Thus, on one hand, we're already paying for whatever K-12 schooling our children would need if we had any, but on the other hand, we don't have all the other expenses associated with children.

3. Most of my acquaintances who are in the same income range send their children to private schools that cost more than most colleges.  That more than anything else seems to be what makes it hard for them to cover their expenses and still save for retirement.

esmith said...

Minimum wage in Texas is 7.25/hour. The housecleaning budget of 5,000/year will pay for 13 hours/week of a housekeeper at the minimum wage.

esmith said...

Average household spending on food in the United States, as of 2009, is $6,400 ($2,500 per capita), and that includes visits to restaurants:

http://www.bls.gov/news.release/cesan.nr0.htm

steve hsu said...

Go to Whole Foods and buy lunch for your kids in the deli section. It will cost you $5-7 bucks per kid if you're not careful. Ditto for dinner. There is huge variation in how much can be spent on food, ranging from white bread, PB and cereal (sugar, fat and carbs) and expensive organic food. I'd say $2.5k per capita is very low for most upper middle class families.

Carson Chow said...

 Felix Salmon's rebuttal: http://blogs.reuters.com/felix-salmon/2011/05/16/taxing-the-rich/

KenC said...

Indeed JP. That is my “gleaning” of this competitive world we have always lived in--it is much easier to spend less (personally) than to earn more. But forsaking the golden apple is difficult indeed. That Mercedes or Beemer looks mighty fine--until you take it in for routine maintenance.

Steve said...

We can use the Obamas as an example. We know what the Obamas made from their tax returns from 1996 through 2004: from about $170k at the beginning to $252k in 2004. The First Lady has complained about how strapped they were. They got rich in 2005 off book royalties and Michelle's job, but Barack didn't start contributing to a tax-deferred pension until 2007, suggesting they were still strapped despite averaging about $1.5 million annually in 2005-06. 

esmith said...

You don't have to live exclusively on white bread and PB for $2.5k per capita.

You're correct that cereal staples and fats are extremely cheap. Whole grain pasta has 600 calories/dollar. Cheese has 400 calories/dollar on average. If you get half your daily calories from cereals and fats, it will cost $700/person/year.

Fruit and vegetables normally cost $2/pound or less. It will cost $1,500 per person or less to eat 2 pounds of fruit and vegetables per person per day. Of course, no one eats that much.

Per capita fish consumption in the US is 16 lbs. per year. If you want to eat twice that much, and stick exclusively with high-end stuff like crab meat ($15/lb), that's 16*2*15=$480 per person. 32 lbs. of wild salmon will cost $250.

Two visits a month for a whole family to a midrange restaurant (something like Olive Garden) will add $400/person/year.

But your food budget will, indeed, explode if you try to get a nontrivial part of your daily caloric intake away from home (say, by feeding kids in the deli section of Whole Foods Market twice a day). The same food that you could cook at home will be marked up by a factor of 3 to 5 in Whole Foods or any non-fast-food restaurant.

Blog Archive

Labels