This may seem like a dumb question, but can someone who makes really struggle to get by? Now if you asked 10 people on the street this question you would get 10 resounding NO! responses. However I argue that it is very possible for someone near the vaunted 1% (which as of 2019 results in an income of $421,926) to struggle to get by. However with even minimal financial knowledge (emphasis on MINIMAL) a person making this much money should be rolling in dough, but a lot people do not have any sort of financial know how.
Our hypothetical family in this example is a married couple living in a very expensive city (like Los Angeles in this example). They have to live in an expensive city because they have companies with jobs available that can support and pay someone $300,000. This with an average family had 3 kids and a dog and as you will see later in the post it could be quite difficult to save for retirement with the money that is left over after each year.
Now the first thing that we have to get out of the way is taxes. That wonderful payment (hopefully refund, but not too big of a refund), that you make once a year to the governments, federal, state and even local. Per IRS tax tables the estimated federal tax for a married couple making $300,000 is $30,989. This is assuming of course, that the couple will have $70,000 in deductions (mostly relating to the mortgage and property taxes for their house). So after federal taxes this couple’s income is about $269,011. However we’re not done yet because this trendy couple lives in Los Angeles and state and local taxes will take off another $13,939 or so off of our total so after all taxes is $255,072. Also DO NOT USE THIS FOR TAX PLANING OF ANY SORT. I am kind of lazy, so there may be gaps in my tax logic, just a fair warning.
So now that we have our allotment of cash to spend through out the year. Let’s get going on spending it. So obviously this couple is going to want to max out a retirement account. The current max for one contributor is $19,000 a year so after retirement contributions it goes down to $236,072. This may seem like a lot of money, and to be quite frank, it is. However once you start peeling back some key expenses, the picture and savings rate start to dip down dramatically.
Now I have taken the liberty of making some big assumptions. First of I assumed they live in a 1.4 million dollar house which is very expense. However in Los Angeles the housing prices are extreme as well. A modest 4 bedroom home, 2,400 sq. ft. home (a bedroom for everyone and one extra one for a private study) in Los Angeles will run you about $1.4 million dollars (assuming about $600 sq. ft. which is quite average in L.A.). This will result in a combined mortgage and property tax payment of $79,200. Also another reach that I a made is that this couple has a large car payment because of the 2 $40,000 cars in their garage (again kind of expense but think of them as having a Model 3 and a base Mercedes SUV in their garage). Also I assumed that being affluent, they would want their kids to be the same. And for better or worse in most affluent people mind’s that means going to college, which means they would need to start saving for such right away. Also childcare may be a tad bit excessive but this is to account for potential sports, private lessons for like the violin or something. Also the older children may be going to a private school because I am assuming the family doesn’t want to drop their child off in a random L.A. school.
Once we get all of the necessary expenses out of the way (like food, cars, college and a couple of vacations because, why not?) the family is left over with just over $3,000 , which would make any financial analyst, planer or adviser mad. Now the point of this post is not to show that rich people have it tough or anything, I mean taking a $10,000 vacation twice a year is pretty cool and out of the reach for most people. But instead it is to serve as a tale for people who suddenly find them selves 20 years down the line making serious money but not being able to save serious money. Anyone with half a brain and some financial know how could easily find money to get this savings rate from just over 1% of gross income, to a number that lands in the 30 – 40% percent range.
DISCLAIMER: This post is not mention to be any sort of financial advice, nor is it meant to be tax advice. Tax, investment, or financial advice should be made with the help and input of a trusted professional.