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A great Article....
Old 04-20-2009, 11:22 AM   #1
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A great Article....

Every now and again Yahoo has a really good article. This seems to be a clear and un-hysterical piece on what it means and does not mean to be "rich" in the US... enjoy...

Wealth-Less-Effect-Earning-Well-Feeling-Otherwise: Personal Finance News from Yahoo! Finance
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Old 04-20-2009, 05:53 PM   #2
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"Rich" is one of those words (like "fair") that seems entirely in the eyes of the beholder. When I was earning half of $250,000, I thought I was doing very well financially. Apparantly some people feel they are stressed at a quarter million.

I can't explain why this happens. I'd guess it has something to do with what you had as a child. Maybe it also involves how much thought you gave to what $XXX,000 meant before you started earning that much.

There is an Elizabeth Warren tape in which see says that if someone had told her that by 2005 most American mothers would be in the workforce, earning a healthy percent of their husband's incomes, she would have said "They are going to be rich". I thought, "how naive". She apparantly hadn't thought through child care expenses, work expenses, and progressive taxes before she reached that conclusion. Maybe a lot of other people make the same mistake.

(There's an interesting calculation in one of Kotlikoff's books that purports to show that plumbers make more over their lifetimes than MDs. I'm not sure that he's really accurate, but I expect the gap is less than most prospective doctors expect.)
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Old 04-20-2009, 06:04 PM   #3
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Originally Posted by Independent View Post
(There's an interesting calculation in one of Kotlikoff's books that purports to show that plumbers make more over their lifetimes than MDs. I'm not sure that he's really accurate, but I expect the gap is less than most prospective doctors expect.)
That might be correct if you consider that the Dr's
education cost
delays working due to longer education - plumber after high school
starts at a low salary during residency

=====
Don't forget that the "high end" taxes are not indexed for inflation so, like the AMT more people will be in the "high end" as time goes by.
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Old 04-20-2009, 07:46 PM   #4
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$1500 PER yr student, $6-7000/college grad in engineering, 8k at Boeing Aerospace.

10k middle middle class, 25k upper crust senior manager.

1966.

heh heh heh - so when did the dual incomes really hit?
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Old 04-20-2009, 08:07 PM   #5
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Let's say that surgeon earned his $250,000 a year, but owned a private jet? We'd say "Well, it's fair that he be taxed -- he chose to purchase that private jet."

Instead we say "Wow, he has to pay the expenses for all those kids and send them to college. Poor him, we shouldn't tax him too much."

Yet choosing to have five kids is no different from choosing to buy a private jet. They're just a little harder to sell.
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Old 04-21-2009, 12:05 AM   #6
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I can see a painless way for them to reduce spending by $1300 per month.
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Old 04-21-2009, 08:54 AM   #7
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Interesting how life changes.

Made almost 6 figures in the '70's and 80's, probably putting me in the top 5%-----We sure didn't feel rich, even though DW didn't have to work.

Now retired with EVERYTHING paid off, on SS, and we only use savings for travel. Restrict ourselves to a couple of cruises a year, or a month in warmer climates, with a bit available to convert to Roth without paying any income tax. I feel rich now - putting one over on the Gubmint.

The only cloud on the horizon is Medicare, next year - Don't want the hassles!
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Old 04-21-2009, 10:05 AM   #8
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That might be correct if you consider that the Dr's
education cost
delays working due to longer education - plumber after high school
starts at a low salary during residency
.
IIRC, his numbers were:
Tuition: 8 years, total of $300k
Plumber's wages for those 8 years: $275k
Residency: 3 years when the doctor earned the same as the plumber

After that, MD earned $146k minus malpractice insurance. Plumber earned $41k. The doctor borrowed the entire $575k difference @ 9%.

I think he understated the Dr income by at least the malpractice insurance, and by ignoring all the potential specialties. Also the 9% is too high, especially since the rate should be real, not nominal. I don't recall if he did taxes explicitly, or simply said that progressive tax rates ate into the difference.

At any rate, I think it's worthwhile doing the math even if he went overboard. My gut feel is that most Americans over-estimate the value of college.
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Old 04-21-2009, 10:52 AM   #9
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I can see a painless way for them to reduce spending by $1300 per month.
It may be painless in this life. But eternal fire burns hot!
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Old 04-21-2009, 11:00 AM   #10
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I think he understated the Dr income by at least the malpractice insurance, and by ignoring all the potential specialties. Also the 9% is too high, especially since the rate should be real, not nominal. I don't recall if he did taxes explicitly, or simply said that progressive tax rates ate into the difference.

At any rate, I think it's worthwhile doing the math even if he went overboard. My gut feel is that most Americans over-estimate the value of college.
I just finished reading the book, and I thought the example was a little strained. He also used full costs of private education for 8 years of schooling (undergrad plus med school) I believe. When the reality is that many affordable state schools are available. And grants and low interest loans abound. And work opportunities during school and during the summer are available as well to partially offset costs.

And the method of comparing plumber vs. doc is "consumption smoothing" (or whatever term they use). In other words, the argument is that the plumber is able to live a better lifestyle starting at age 18 than a typical broke college student. The consumption smoothing method assumes the dr will try to achieve a constant level of consumption throughout life, including their freshman year of undergrad. In reality, the dr will have 8 years of modest living, 4 yrs of living like crap, then the remainder of his life with a nice income. The plumber is capped out at a very early age unless they start their own business. The dr can delay gratification until after med school and residency to experience a much higher standard of living from age 30 or so onwards. This delayed gratification violates the basic premise of the Kotlikoff book, that of consumption smoothing.
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Old 04-22-2009, 08:29 PM   #11
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Several studies have concluded that people acclimate very quickly to increased earnings. People are happy with a big raise in pay initially, but the affect fades pretty rapidly. They become accustomed to the higher salary and view it as normal. At fairly high income levels you can actually develop a warped sense of what a normal, or "middle class" income is.

I see it every day with people who make upper six and seven figure salaries. Most of them don't feel rich partly because they know people who make more. They complain (as does the above article) about the cost of living in NY; the high real estate prices (of large houses in the nicest neighborhoods); the cost of private elementary school (when public schools are available); the nanny (also known as “Mom” & “Dad” to real middle class families); the cleaning service (ditto); the landscaper (ditto), etc, etc. They don't, however, stop and compare their financial situation to that of their administrative assistants who also somehow manage to live in NY on a 10th or a 20th of their income.

Just because you can find more things to spend money on than your income can support doesn't make you middle class.
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Old 04-23-2009, 08:59 AM   #12
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I cannot resist: Where is Joe the Plumber! Didn't he have all this figured out? Or maybe MMNR's husband could help!

Having done my own plumbing in one of our rentals I can say for me plumbing is the worst job I have ever done and I certainly would not want to work on the business end of a sewage pipe as a career.
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Re: Plumbers
Old 04-23-2009, 09:29 AM   #13
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Re: Plumbers

Even with "new" construction, it's not unusual to come home at the end of the day, with dirt from head to toe...

Now if you want to really get dirty, spend the day cleaning an old boiler...
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Old 04-23-2009, 09:35 AM   #14
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Several studies have concluded that people acclimate very quickly to increased earnings. People are happy with a big raise in pay initially, but the affect fades pretty rapidly. They become accustomed to the higher salary and view it as normal. At fairly high income levels you can actually develop a warped sense of what a normal, or "middle class" income is.

I see it every day with people who make upper six and seven figure salaries. Most of them don't feel rich partly because they know people who make more. They complain (as does the above article) about the cost of living in NY; the high real estate prices (of large houses in the nicest neighborhoods); the cost of private elementary school (when public schools are available); the nanny (also known as “Mom” & “Dad” to real middle class families); the cleaning service (ditto); the landscaper (ditto), etc, etc. They don't, however, stop and compare their financial situation to that of their administrative assistants who also somehow manage to live in NY on a 10th or a 20th of their income.

Just because you can find more things to spend money on than your income can support doesn't make you middle class.
Well said.
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Old 04-23-2009, 09:42 AM   #15
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Several studies have concluded that people acclimate very quickly to increased earnings. People are happy with a big raise in pay initially, but the affect fades pretty rapidly.
Yet when you get the increased earnings you usually also get more responsibility, stress, long hours, problems.

So if the extra money doesn't make you feel better and happier then what's the point ? You can make the case that a promotion will make your life worse/less happy.

This is the down side of success that nobody talks about.
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Old 04-23-2009, 09:52 AM   #16
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Even with "new" construction, it's not unusual to come home at the end of the day, with dirt from head to toe...

Now if you want to really get dirty, spend the day cleaning an old boiler...
And I had always heard being a fat cat investment banker was a dirty job...
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Old 04-23-2009, 12:14 PM   #17
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Yet when you get the increased earnings you usually also get more responsibility, stress, long hours, problems.

So if the extra money doesn't make you feel better and happier then what's the point ? You can make the case that a promotion will make your life worse/less happy.

This is the down side of success that nobody talks about.
In management jobs, you also don't get the nice over-time pay. I knew several people who regretted/complained about accepting management jobs. But it's very hard to go back to an hourly wage position once the company and co-workers see you as management. It might be easier to quit and start again at another company, maybe even leaving that management stint off of the resume.
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Old 04-23-2009, 12:26 PM   #18
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And the method of comparing plumber vs. doc is "consumption smoothing" (or whatever term they use). In other words, the argument is that the plumber is able to live a better lifestyle starting at age 18 than a typical broke college student.
Already this flies in the face of reality. Who is having more fun, a 20 year old college student essentially living in a harem, or a 20 year old plumber living in a sewer?

These gurus reach pretty far trying to get out a book.

Ha
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Old 04-23-2009, 12:41 PM   #19
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I cannot resist: Where is Joe the Plumber! Didn't he have all this figured out? Or maybe MMNR's husband could help!....
A plumber is also playing on the thread called "Did anyone read the Ivy Portfolio." And in case you miss MMND, her site was seen recently linked to a link in Tony Soprano's "Hi, I am" thread. All this "missing people" reminds me of the last few lines of "Catcher in the Rye."
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Old 04-23-2009, 01:22 PM   #20
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Now if you want to really get dirty, spend the day cleaning an old boiler...
Or manually evacuating an impacted bowel.
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