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Decent article on "median" US household.....
Old 06-22-2009, 09:31 AM   #1
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Decent article on "median" US household.....

Not a bad article, it points out the value of LBYM in a subtle way.......

A Look at Median Incomes, Housing Prices, and U.S. Consumer Health | Money and Markets: Free Investment Email Newsletter
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Old 06-22-2009, 09:39 AM   #2
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From the article:

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Then, Uncle Sam will want his “regular” cut. For a couple making $72,000 that would come out to about 20% according to the IRS. Say goodbye to another $14,400!
Not close.

In 2008, our total income was a fair bit higher than this. We paid about 12% of total income and about 13.5% of AGI in federal income tax and we don't itemize.
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Old 06-22-2009, 09:52 AM   #3
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Good points but they are way overestimating federal income taxes. They are forgetting all the deductions, with the standard deductions and exemptions they are unlikely to owe more than a couple of thousand in income taxes.
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Old 06-22-2009, 10:07 AM   #4
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This article about Tax Freedom Day is pretty interesting...
The Tax Foundation - America Celebrates Tax Freedom DayŽ
Note the state tax freedom table about 2/3 down the web page.
Full report is here
http://www.taxfoundation.org/files/sr165.pdf
Figure 3 and Table 2 are good summaries if you don't want to read the full report.
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Old 06-22-2009, 10:21 AM   #5
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Originally Posted by FinanceDude View Post
Not a bad article, it points out the value of LBYM in a subtle way.......
You're right! It's amazing how much their imaginary "median couple" is spending. They should be able to make those house payments and build their nestegg as well, if they apply some serious LBYM.
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Old 06-22-2009, 10:53 AM   #6
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I agree with Martha, something I seldom do. Not only did he ignore deductions, but he use a 20% rate which would be the rate on the 'next dollar earned' and not on the 'total earned' a rate closer to 12% to 15% would be closer. I also question his mortgage calculations. Using the average home value does not mean that is what the 'average families mortgage is'. It would only be the mortgage for the average family purchasing a home. A family that purchased their home 5 or more year ago, would have a tidy appreciation, assuming they did not borrow against it.

His idea is good, and the basic statistics appear accurate, however, like others, he seems to have bent them to fit his preconcived opinion.
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Old 06-22-2009, 11:02 AM   #7
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Yes, the Federal tax bill is way too large. According to my calculations, a married couple making $72K a year and taking the standard deduction would pay only $7313 a year in Federal taxes. Add a couple of kids and that tax bill would but cut in half. I assumed no 401K contributions which would lower the tax bill even further.


But I think that the author makes some good points. DW and I make enough money to comfortably fit in the top 5% of US households by income (even more so at the local level since we live in a low COL area with a median income far below the national average), and yet we do not feel like we could afford one of those $500K+ houses (still) popping up all around us. We have been wondering for a while, who are the people who buy those houses
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Old 06-22-2009, 11:29 AM   #8
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those $500K+ houses (still) popping up all around us. We have been wondering for a while, who are the people who buy those houses
I suspect that these are not considered to be "starter houses". If I wanted one, which I don't, then this would be my path... step one is already completed! My salary will never approach six figures but I have no debt.

(1) bought $160K home (with $32K down and $128K mortgage) in 2002, paid off completely by 2006. Hopefully could sell now for $200K which would be an average annual appreciation of 3.3%. Suppose I cleared $185K.

(2) Now, buy a $350K home (with $185K as down payment, $165K mortgage since my paycheck has gone up 153% from 2002 to now, and interest rates have gone down). Pay off completely in four years like the last time. By the year 2013, it is worth $400K, assuming the same annual appreciation. Suppose I cleared $375K.

(3) The same house that is $500K today, would cost $570K in 2013. Buy it for that price (with $375K down, $195K mortage which would be easy since my paycheck would have gone up). Voila!

But as for me, I would SO much rather retire. I have zero desire for a $500K+ house. I am looking at houses around $130K or so for ER.
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Old 06-22-2009, 11:35 AM   #9
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But as for me, I would SO much rather retire. I have zero desire for a $500K+ house.
Same here. I much prefer our little $90,000 house with no mortgage, low property taxes, low insurance and (relatively) low summer cooling bills.

I've seen mortgage calculators tell me we could qualify for $450,000 houses. Ye gads, I can't imagine the stress I'd feel knowing I was tethered to w*rk for 30 years -- with NO ability to downsize my career and no ability to weather a layoff -- to "afford" that kind of house. I'd feel totally trapped and imprisoned.
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Old 06-22-2009, 11:40 AM   #10
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Same here. I much prefer our little $90,000 house with no mortgage, low property taxes, low insurance and (relatively) low summer cooling bills.

I've seen mortgage calculators tell me we could qualify for $450,000 houses. Ye gads, I can't imagine the stress I'd feel knowing I was tethered to w*rk for 30 years -- with NO ability to downsize my career and no ability to weather a layoff -- to "afford" that kind of house. I'd feel totally trapped and imprisoned.
Exactly! And really, there is no time to enjoy one's possessions if one is working so hard.

Good deal on the $90K home, by the way!
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Old 06-22-2009, 12:02 PM   #11
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Originally Posted by Want2retire View Post
I suspect that these are not considered to be "starter houses". If I wanted one, which I don't, then this would be my path... step one is already completed! My salary will never approach six figures but I have no debt.

(1) bought $160K home (with $32K down and $128K mortgage) in 2002, paid off completely by 2006. Hopefully could sell now for $200K which would be an average annual appreciation of 3.3%. Suppose I cleared $185K.

(2) Now, buy a $350K home (with $185K as down payment, $165K mortgage since my paycheck has gone up 153% from 2002 to now, and interest rates have gone down). Pay off completely in four years like the last time. By the year 2013, it is worth $400K, assuming the same annual appreciation. Suppose I cleared $375K.

(3) The same house that is $500K today, would cost $570K in 2013. Buy it for that price (with $375K down, $195K mortage which would be easy since my paycheck would have gone up). Voila!

But as for me, I would SO much rather retire. I have zero desire for a $500K+ house. I am looking at houses around $130K or so for ER.

For #1 you had to pay more than $2700 per month to pay it off..

#2 would be $3,400 per month...

#3 would be over $4,000 per month....

I would doubt very many people can pay these kind of payments on a normal salary... it does not seem like you could do it without some kind of other income or living way below your means...
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Old 06-22-2009, 12:12 PM   #12
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For #1 you had to pay more than $2700 per month to pay it off..

#2 would be $3,400 per month...

#3 would be over $4,000 per month....

I would doubt very many people can pay these kind of payments on a normal salary... it does not seem like you could do it without some kind of other income or living way below your means...
... but I did it on a five figure salary
... I started with $60K+ that I had saved up over a couple of years ($32K of which I used for the down payment)
... also, NO debt including CCs
... $2700/mo is $32,400/year
... $32,400/year net is less than $50,000 gross per year;
... also contributed the max to my 401K, about half what the max is now, but it did lower my tax bracket
... plus I have saved a lot since 2006 when I paid it off, due to no mortgage or lump sum payments
... ***Life is full of choices*** Is it leaving way below my means to live in a really nice house instead of in a hovel? Guess it all depends on one's choices. I chose to budget my money as stated.

Besides, when you get the $500K home paid off by 2017, then you have your whole salary to live on, plus you are living rent free! Piece 'o' cake. But who wants it? Not Ziggy29, not me either.
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Old 06-22-2009, 12:17 PM   #13
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For #1 you had to pay more than $2700 per month to pay it off..

#2 would be $3,400 per month...

#3 would be over $4,000 per month....

I would doubt very many people can pay these kind of payments on a normal salary... it does not seem like you could do it without some kind of other income or living way below your means...
You mean I can't assume I'll have huge capital gains and appreciation each time I sell a house? How am I supposed to trade up to the Taj Mahal, then?
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Old 06-22-2009, 12:30 PM   #14
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OMG, whatever shall we do? ;D Don't tell me, I need to LBYM a little and actually SAVE to get that Taj Mahal?

What I wrote above was not nice, and I am sorry. Although I can't excuse, I can explain. I briefly considered trading up to a $350K home back around 2006-2007. I really didn't want the house - - my motivation was solely to "show them" ("them", being all those people who I felt had been flaunting their iphones and lexuses in my face while I lived so frugally other than my house). Pretty stupid, huh?

Then I had a little conversation with myself over a few months concerning what I truly want in life, and whether or not I was still on the right track to get that. If I had gone for the expensive home, I wouldn't have been able to retire. So, I really can't do that if I am to be true to myself. Maybe if I had gotten it together financially when I was younger, I would have lived in an expensive home like this. I am so glad that I didn't go for it at my age, though.
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Old 06-22-2009, 04:01 PM   #15
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I agree with the main point of the article -- Americans were supporting lifestyles with borrowing. As we get into a recovery, if they don't borrow as much as they used to (either due to new consumer caution, or new lender caution), we should expect the recovery to be slow.

But, his median family numbers are questionable.
As already mentioned, he overstates FIT by nearly $10,000. (I got a taxable income of $46,376, taxes before child credit of $6,154, and taxes after child credit of $4,154.)
I'd also expect most families with new mortgages to be spending closer to 25% of gross income on principle, interest, taxes, and insurance. That would be $18,000 instead of his $12,000. His housing expense is surprisingly low.

A more interesting point is that this family doesn't "need" to save a lot for retirement. If they work to the SS normal retirement age, their annual SS benefit will be close to $29,000. When I take their income, subtract FIT, SS tax, Medicare tax, FIT, mortgage, and 1/2 the cost of food, cars, and miscellaneous (keeping 100% of the cost of utilities, RE tax, and inserting Medicare part B for medical), I have a retirement budget of just about $29,000.

Of course, I don't have the rest of their medical expenses, and SS probably won't pay the full amount. Yet, nearly 60% of their current income is being spent on things that would go away in retirement, so they can rationally target a replacement ratio way below 70%.

(p.s. The author could have found out what American families actually spend by checking the Consumer Expenditure Survey.)
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Old 06-22-2009, 04:06 PM   #16
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What I wrote above was not nice, and I am sorry. Although I can't excuse, I can explain. I briefly considered trading up to a $350K home back around 2006-2007. I really didn't want the house - - my motivation was solely to "show them" ("them", being all those people who I felt had been flaunting their iphones and lexuses in my face while I lived so frugally other than my house). Pretty stupid, huh?
And yet by letting the Joneses "win" rather than trying to keep up with them, you'll be retiring while they w*rk until they drop dead.

"I owe, I owe, so off to work I go." That bumper sticker is the mentality of the oneupsmanship rat race.

We need a different bumper sticker for dancing to a different beat.

How about "I save, I save, it's FIRE time I crave...."
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Old 06-22-2009, 04:13 PM   #17
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Originally Posted by ziggy29 View Post

How about "I save, I save, it's FIRE time I crave...."
...or "No owe, no owe, it's off to FIRE I go.."

And the unfortunate: "How rude, how rude, the market tanked & I'm screwed.."
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Old 06-22-2009, 05:24 PM   #18
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I did a prelim estimation of a hypothetical couple's taxes for 2009. Let's say they are over 50, have 2 teenagers living at home and make about $72K a year each or $144K in wages. Add in $18K in qualified dividends and $3K in some consulting income. So Total income is $144K + $18K + $3K = $165K. They are not quite in the top 5% of income, but they are getting there. I realize that "top 5% of income" might be different from "AGI" and might be different from "taxable income." You can decide for yourself if they are middle class or not.

So let's roll out the tax deductions and figure out taxes. This hypothetical couple contributed $22K each into their 401(k) plans and have $3K of cap gain losses subtracted as well. So AGI is about $118K.

They pay mortgage interest, property taxes, and donate to charity. Let's give them about $21,500 in itemized deductions. And they get 4 exemptions as well. After subtraction, the taxable income is $82.5K which has a tax of about $11.5K (remember some of the income is from qualified dividends).

But wait, they get a tax rebate this year because last year their income was too high and they didn't get it last year. With the kids, the rebate is $1500, so they pay only $10K in taxes which brings the overall tax rate down to about 6% of their income even though they started out in the 25% marginal income tax bracket.

They are well under the Roth IRA income limits, so they put $6K each into their Roth IRAs as well.

So they had $165K in income, put $56K into retirement accounts, paid $10K in Federal taxes. They still have quite a few other expenses to take care of.

Now some of those other expenses are FICA, medicare taxes, health insurance premiums, and FSA contributions that they don't see in their take-home pay. They also need to pay property taxes, car and homeowner's insurance annually, pay the mortgage and make those charitable contributions. After those expenses they get to spend $5K to $7K a month on themselves including groceries, eating out, utilities, gasoline, etc. All the rest is just fun stuff for themselves: vacations, electronics, hobbies, etc.
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Old 06-22-2009, 05:28 PM   #19
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Or "Ya gotta have dem dividends to meet yo ends
Else you gotta go to work wearing dem depends
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(no offense intended to the incontinent members of the board!)
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Old 06-22-2009, 08:21 PM   #20
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I sorry this guy is too sloppy with his figures for me to even call the article decent.

It took me a couple of minutes to bring up a tax calculator to see that with two kids the taxes are down to $4700 throw in a $5,000 for IRA/401K deduction and Fed taxes drop to $3,600. Most midwestern states where you could purchase a house for $169K, state income taxes are seldom more than 1/2 Federal and sometimes much less (Indiana states taxes are equal to 3.4% of Federal tax liability). In total instead of his estimate Fed+State of 16,560, I get a figure of $5,400. Leaving a difference of more than $10,000 I let them save $5,000 in the 401K and spend the remaining $5,000.

I'd also point out that $500 month for medical insurance is highly variable. As a single person I never paid for health insurance, although I certainly know of people who do fork over $500 month for family health insurance. A couple in their mid 30s with two young children can get family plans from Kaiser for $500/month (albeit with high deductibles and $30-40 co pays) in many parts of the country. This is with no group plan discount or employer subsidize. So without kids the couples medical cost maybe modest <$100/month and even with kids a $250/month is common.

In total I can easily make the case that couple has an additional $8K a year in discretionary spending and is able to sock away a $5,000 in a $401K enough to get an employer match.
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