Lazy Man and Money

Middle Class Income Numbers are a Myth

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Yesterday I came across a Tweet from The 76K Project asking about “middle class income” in “cold hard numbers”:

My first thought was that this sounds like an exciting article and I hope to read it when it is completed.

However, that quickly changed to, “I don’t think this is going to go well.” My response:

(I’m 95% sure I’m done quoting the Twitter conversation and can get back to the point.)

The point was that trying to find a middle definition of a wide variety is not very useful. I’m sure there are statistical ways of determining the average weight and caloric intake of mammals, but you’ll always be stuck with a disclaimer of “YMMV” (Your Mileage May Vary). Even if we narrow it down to adult humans, we quickly realize that the range is pretty wide.

The more information we have about a person, the better we can tailor the answer. However, for someone writing a general audience, we’re forever doomed with writing in abstract terms and hoping the reader can personalize the information on their own.

Here’s a personal example on how even when income doesn’t change much, it can feel very different.

I haven’t lived all over the United States, but during the years of publishing this blog (12 years), I’ve lived in Metro-West Boston, Silicon Valley, and Newport, Rhode Island. I looked up the median household income for all three places and it was generally $68K, $135K and $68K, respectively. I also did some searching and found that the cost of living index for the three places (rounded slightly) are 140, 325, and 140. (Source: Sperling’s Best Places)

Here’s a table:

LocationMedian IncomeCost of Living Index
Metro-West Boston$68,000140
Silicon Valley$135,000325
Newport County, RI$68,000140

The Metro-West Boston and Newport County areas are the same. I didn’t plan it that way. A better, less personal, statistical analysis would be to compare places all over the country.

The interesting thing is that our income hasn’t changed that much over 12 years. My wife has gotten some promotions over the last ten years. Blogging has gone up and down a bit and side gigs have come and gone. It certainly has gone up, but if you assume 3% inflation the costs of living in general have gone up 34% in that time.

In all places we’ve had a higher than average median income. I don’t claim to be middle income. However, I certainly felt a lot more “middle income” in Silicon Valley. We weren’t too much higher than the median and the cost of living index was extremely high. Of course Silicon Valley is not normal. That’s kind of the point.

At least the Boston suburbs and Newport County are more normal. However, they aren’t very normal either. A quick Google search for U.S. median household income shows a census report at around $58,000. (The census report was a little difficult to read, so I chose to go with Business Insider’s analysis.) So while both place have higher median incomes they are only 18% higher, while their costs of living is 40% higher.

In the Boston suburbs or Newport County having a median income would likely feel like being below average. I don’t think it would be strange for a household making $80,000 in these areas to claim they are middle income even if that’s not accurate according to the rest of the country. For the costs of living in their area (40% above the US average).

Imagine how someone with median income in a below average cost of living place feels reading about the woes of “only” $68K or worse “only” $138K? It’s probably not going to go over well.

But What About Feelings?

Up until now, I’ve mostly been making a case about the numbers. That was the main point I wanted to make. However, I realized there’s more to the story.

When someone writes about being middle income, it could also be in terms of how they feel. That may not be technically correct, but it could be a short-hand way of saying that he/she feels he/she lives an average financial life. That might be where some confusing in personal finance blogging comes in, because we can each feel differently about the same thing.

Take for example, someone’s social circle. If you were friends with a group of lawyers who made $150,000 a year, how would feel if you only made $100,000? You still might feel successful, but you could also feel like you are closer to middle income.

Let me make this example a little more personal like I did above. My wife’s active duty status provides a very generous scholarship for our children at a local private school. It’s a social circle where the incomes are often double ours. In addition, we’re using as much as our income as possible to invest. That’s normal FIRE blogger behavior, but it isn’t normal for a typical social circle, much less this one.

Not only do they make more, but it seems obvious that they are willing to spend it. When you combine the two, it barely feels like we live a middle income lifestyle. That’s another reason why we don’t feel rich.

Final Thought

Much of personal finance is relative to one’s personal situation. I think we need to keep these relationships in mind and readers should do the same.

I try not to write things that place assumptions on what other can or should be able to do. Instead, I typically write about we are doing. Sometimes, I’ll write about what might happen if someone were able to do something (How to be a Millionaire in 20 Years).

We aren’t going to find people who live the exact same lives as us. Instead we may be able to find some people who have similar goals and exchange thoughts that we can adapt to our own lives.

Retire on $5 Million Dollars?

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I’ve really been digging how Retire by 40 can always find a new spin on financial freedom. Their article from a couple of days is a great example: Can You Retire With 5 Million Dollars?

I would have never thought of that idea. That seems like an absurd amount of money for most people to retire on. It’s almost like asking if anyone would want a million dollars… the answer is going to be “Of course!” I read everything that Joe writes at Retire by 40, but this title made me curious why he picked such a high number.

It’s a very good article, but as Joe writes, “accumulating $5 Million isn’t exactly normal.” You typically need a high paying career (or two) and that typically comes with a lot of lifestyle inflation.

It reminds me of these stories of bankers barely getting by on a million dollars a year. Taxes cut the million to around $600,000, and mortgages in Manhattan and the Hamptons aren’t cheap. Throw in private school for 3 kids at around $40,000 a year each and it’s easy to see that money disappear.

That’s an extreme example, but you get the idea. There comes a point when the question, at least for the 1% (or 0.1%) almost becomes legitimate.

But you (most likely) and I aren’t those people. Joe recommends tracking your expenses (we both use Personal Capital) and using the Rule of 25. That means once you know what you spend in a year you can multiple it by 25 to figure out how much of a nest egg you need to retire. For Joe, the annual number is $55,000 which means he should have a nest egg of $1,375,000. (For math nerds and personal finance junkies this Rule of 25 is just flipping the Rule of 4% on it’s head.)

Now this doesn’t factor a variety of other factors. For example, if you have real estate property (which we do), it might be possible to generate $15,000 a year from that. Suddenly that $55,000 becomes $40,000 making for a more manageable nest egg of $1 million.

You also need to invest the money properly. I find this risk tolerance calculator from FinMason to be a great tool for that.

And while Joe says you probably shouldn’t include your primary residence in the calculation, I think it’s fair to calculate your expenses assuming your mortgage will be paid off. (You are going to have your mortgage paid off in retirement, right?) For many people, that’s their biggest expense. There’s still taxes, insurance, and maintenance on the home, but eliminating the mortgage payment is a big deal.

Personally, it’s been a couple of years since I tried to calculate the numbers. When I eliminated expenses that should eventually go away in retirement (child care/college, mortgage payments, electricity (via paying off our solar panels)), I was surprised how little was left. The bulk of it was car ownership. And by that time, we’ll probably have robot Uber drivers which could make owning a car unnecessary.

The calculation is almost flipped upside down for us as the rental property income should be enough to cover our retirement expenses. Of course those retirement expenses were based on necessary expenses and didn’t include any cushion. They also didn’t factor in any money for fun. That’s why I say the calculation is “almost” flipped.

On the other hand, rental income is only one small part of our overall retirement income plan. If you have enough income coming in, you may not need to draw down on investments at all.

To close this out, the retire on $5 million question isn’t a very good one for almost anyone reading this. Instead it is better to figure out what you can retire on. And while many people believe in getting a big nest egg and drawing down on it, keep an open mind towards other income streams that can continue in retirement.

What You Can Learn From My Retirement Income

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Here’s How to Get a Big Bag of Retirement Money
Yesterday, I detailed what our $200,000 annual retirement income looks like. If you haven’t read that, please do, otherwise today’s article won’t make much sense.

I realized that making a statement like I did yesterday could be a lightning rod for criticism. I thought it must annoy those struggling to get by in a tough economy. I prepared myself for the worst, but I didn’t get any negative comments. That was refreshing. I hope that people were using it to think and talk about personal finance… specifically about planning ahead.

Planning ahead for retirement is more important now than ever. Study after study, year after year, we are learning that people don’t have enough money saved. Even people making a lot of money don’t have enough to retire.

I hope my retirement income plan serves as an example of what happens when you are mindful about your finances. Many will say that I’m lucky, and I won’t argue. However, I’ve found that good luck has a way of following those who have prepared well.

The first thing you can learn from my post yesterday is to marry well. I had a friend that told me I had to point that out. I don’t know if she was kidding or not, but she was exactly right. If you choose to marry a significant percentage (perhaps more than 50%) of your financial well-being may be dependent on your spouse.

While there were 5 significant retirement income streams detailed in yesterday’s post, my wife’s military pension was the largest. I imagine many readers are probably complaining, “But I don’t have that and I can’t possibly duplicate that.” Rather than look at that glass as half empty, I hope you can look at what you do have and what you can do within your set of circumstances.

There’s a lot more than the military pension in yesterday’s article. If you focused on that, you may have missed out on the following lessons:

Financial Knowledge is Important

Before we met, my wife wasn’t contributing as much as she could in her Thrift Savings Plan (the military version of a 401k plan). Even though she was 27 and decades away from retirement, it was in a stable value fund instead of a growth fund. She had some after-tax money tucked away in some mutual funds, but they were funds with high expenses.

She wasn’t very interested in optimizing her finances. She felt she earned enough… and she does. However, a few financial moves we made really helped makes a very, very big difference.

To illustrate her financial state, I remember her telling me a story fewer than 10 years ago. She had seen a friend’s bank stub and was amazed that it had an unfathomable $15,000 in it. In that time we’ve come a long, long way.

Frugality is Critical

It may not seem obvious, but living a frugal lifestyle has been critical to putting us in the financial position we are in. For example, if we had large car payments and a huge mortgage, we wouldn’t have had the money to buy real estate investment properties. Being frugal allows us to max out our retirement accounts (401Ks, Roth IRAs, etc.) and build a nest egg that we can draw down in retirement.

Without having control of our spending, none of this possible.

You Can’t Forget Compound Interest

We started early to create that nest egg and compound interest has really helped it grow. It looks like the income that we’ll be able to draw from it could be as much as the military pension… over $50,000 a year in today’s dollars. That alone combined with a frugal lifestyle could be enough to fund a decent, maybe not spectacular, retirement.

Taking Advantage of Your Opportunities

When opportunity knocks are you in a position to answer the door? We bought two of our properties after the housing market crashed and interest rates were historically low. This big win might have been worth hundreds of thousands of dollars when compounded over a lifetime.

Diversify Your Income Streams

When you make a retirement plan at age 37, many, many things can go wrong. By diversifying our income with retirement savings, rental income, small business income, and good old Social Security, we’d have a solid foundation even without the military pension. If any one of them goes away for whatever reason, our retirement plan will be able to withstand it.

Planning Ahead and Mindfulness

Much of this boils down to just being mindful of your money and your goals. It’s putting down a plan and following it. It’s re-evaluating that plan on a consistent basis to make sure that you still heading in the right direction.

What Does an Annual $200,000 in Retirement Income Look Like?

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Retirement Income for the Win!
This is perhaps the most scary and most exciting post I’ve written in 8 years. I’m writing it at 3AM because I literally can’t sleep thinking about it. The idea of this post has been percolating over the last couple of weeks. I simply couldn’t wait any longer.

Yesterday, I reviewed the book How Much Money Do I Need to Retire? where I agreed with author Todd Tresidder on the value of a cash flow model of retirement. That spurred me to run the following exercise: figure out how income we’ll have in retirement.

Retirement Income

This is the scary and exciting part of the post that I mentioned at the top of the article. To come up with a number, I put together all the reasonable sources of retirement into one pile. For our family it includes the wife’s potential military pension, rental income, web businesses, Social Security estimates, and drawing down from retirement accounts (my IRAs, wife’s TSP, etc.) and regular taxable accounts like Lending Club.

Why is this scary? I’m afraid this will come off as being uppity or bragging. I realize that this is a tough economy for many people and very few find themselves in a similar situation. I’d love for those people to instead take this as inspiring hope. We are only 37 and have been earning money for 15 years, so a lot can be done in a little time (depending on your situation). I won’t deny that we’ve had our share of good fortune. I believe that fortune likes to follow good planning and preparation. Putting the information in this post together is part of that planning and preparation.

Without further introduction, let’s dig into the income:

Wife’s Military Pension

My wife was up for a special military promotion this year. The long odds (1 in 33) didn’t come through, but it is a sign that she’ll reach the rank of O-6 in a year or two. That’s important because it plays a role in figuring out her pension. In about 6 years she’ll have 20 years of service and be eligible to retire with 50% of that base pay… or $4812.60 a month. I did a little math in a previous post and it could be much more than that if she decides to continue working a few more years. For example, if she stays in another 16 years she’ll get 75% of that base pay which will be at higher salary (assuming no further promotions). Currently this would be 8,133.08 a month. There’s a sliding scale in between, so it isn’t all-or-nothing.

The income from this could realistically range from $57,750 to $97,600. It’s possible, but extremely difficult, to get a second promotion and reaches O-7. The pension range would be between $72,250 and $111,000 a year.

Before writing this post, I had either forgotten or somehow didn’t know it could be this much. What is even better is that this income adjusts with inflation. We don’t have to worry about what $57,750 will buy in 2034. By that time the $57,750 pension will adjust to be more.

Rental Income

This piggybacks on the information in my necessary expenses. Currently our income from 3 investment properties is $4,000.00 a month ($48,000 a year). We are losing around $300 a month on them right now, but in around 14 years the mortgage and interest payments will disappear. At that point, we’ll only have to pay condo fees, taxes, and insurance. I calculate we should be able to net the equivalent of $2,750.00 a month ($33,000 a year) in today’s money.

However, there’s going to be maintenance, vacancies, real estate agent fees. I’m going to be conservative here and presume this will bring in around $25,000 a year of income after that.

These calculation are in today’s dollars for two reasons 1) it is easier 2) I presume rents will go up to match inflation of the expenses. These should balance out for the most part.

Website Income

I haven’t posted my website income in quite a long time. There are a few reasons. Compared to what I could make as a software engineer, it is depressing. For another the MLM morons distributors who comment on my posts try to build a case that I’m just making up lies about company to line my pockets with riches. I explain that I never lie and make less than the average school teacher, but since they can’t handle the truth they have to make me out to be the villain. The truth is that financial companies and ads from them pay a lot better than MLM juice ads. I divert much of my time away to helping the MLMers in the comments on an individual basis… time that I could spend earning more money. (Sorry, now to step off the soap box…)

The reason why I still do the website, is that it makes our lives work. With two very young children and a dog who demands ample walks, the ability to create my own hours and respond to the rental properties listed above is extremely helpful. Even with day care, I have no shortage of things to do even outside this work.

With all that said, I’m going to estimate retirement income from websites to $25,000. It’s a complete crap shoot, as Lazy Man and Money may not exist in 20 years. Or maybe it is a huge income earner. Even without Lazy Man and Money, I could apply my software engineering skills and create websites for small business and/or consult on the side. There are a lot of options in retirement, but I’m counting on the fact that I’m going to be doing something that earns an income and I think it will be a decent one. I like to think this is a conservative number, again it is a crap shoot.

Retirement Account Income

If you read the book review I did yesterday or just know traditional retirement planning, you know there’s a “big nest egg draw-down” theory that says you should have around 25 times what your expected expenses are in diversified investments. This is because some really smart people have done some really smart math that shows it is generally safe withdraw 4% of their nest egg in retirement to live on perpetually. (Other smart people have debated that 4% number suggesting that it is closer to 3.5%. Then there are those who say that 5% will work. The debate on this number is another topic for another post and another day.)

I’ve totaled up my wife and my retirement accounts in a very unscientific fashion. Some are Roth IRAs that we’d get the money tax-free and some are her TSP or my Rollover IRAs which we’d get taxed at ordinary income on. With that disclaimer out of the way, it looks like we can roughly count on $15,000 with the current size of our nest egg.

That said, there’s a very good chance that it will grow a lot over the years and, just as importantly, we continue to add to it. Inflation will knock it down, but we are expecting the investment growth outpaces inflation by a significant amount as it historically has. We can afford to be more aggressive with our investments, because we might not need it at a specific time due to the investments above. In addition we may not be forced to take this income in a bear market which can deplete big nest eggs faster than anticipated. If investment growth outpaces inflation by 4% over 30 years, and we didn’t add any new money, this nest egg will grow enough to yield around $50,000 a year.

Some of this will not be taxed (the Roth IRAs), so that’s an extra bonus.

Social Security

Many people say that those of us in the 30s can’t depend on Social Security for anything. I’m okay with that thinking, because it makes sense to plan for the worst. However, realistically, Social Security will still have money coming in, meaning it will still be able to make payments out. The payments may very well be small, but wouldn’t lilkely be zero.

Using Social Security’s website you can look up an estimate of what your retirement benefit will be. I decided to use the age 70 withdrawal income estimate since we like to be optimistic about good health (in which case it pays to wait). Obviously, this is something that will have to be revisited as we get in our 60s. However, it looks like combined, my wife an I would get an estimated $5,000 a month… $60,000 a year.

That $60,000 is going to be in 2046 dollars though because we’re assuming we are taking it so late. If I want to adjust it for today’s dollars, I need to take off 33 years of inflation. Assuming the historical average 3% inflation that makes our Social Security estimated earnings to be $22,621.57 in today’s dollars.

Let’s factor in smaller payments in the future and knock it down to 75% of that estimate. That puts our expected Social Security income at roughly $17,000 a year.

Lending Club

I recently wrote about earning 7% Interest at Lending Club. I have around $3,700 in there and I haven’t added any new money, but at this rate of growth, I should have a nest egg of a little over $12,000 in 30 years. Using the draw-down rule of 4% would give me would produce around $475 a year. That’s definitely a small amount of money compared to the rest, but it is better than a poke in the eye. Maybe it covers my annual hovercraft license fees.

Total Retirement Income

I took all the most conservative estimates from above (in fact making some of them even more conservative) and added it up. It looks like we’ll have $172,000 a year in income given those circumstances. That’s also assuming my wife doesn’t decide to do anything that earns an income after a military retirement at age 44. That $172,000 estimated income is in today’s dollars, not dollars in 30 years from now where they might not buy as much.

I then took the best guess estimate of those numbers, which presumes my wife may work for a few more years and retire around age 50. I also projected that my online publishing makes as much as it makes today. I then presumed that Social Security pays what it estimates it will (the difference is not that much). Finally, I presumed that we draw down at 4% instead of the safer 3.5% that I used in the $172,000 calculation above. The result is that we’d have $236,500 in retirement income per year.

I averaged the two estimates together to come out with a conservative/best-guess average at around $212,000 a year. It seems so ridiculous that I have a hard time believing it. And in some ways, it isn’t really believable.

I’ve glossed over the timing of this income. I projected the Social Security at age 70, which is obviously very, very different than having it at age 50. I projected the draw-down of the tax-advantaged nest egg to happen at age 67. If I do it before, it has less time to compound and won’t give me the number per year that I am projecting. (Then again, we’ll continuing adding to that nest-egg so it might be more.) Even the rental income won’t kick in for another 14 years when the mortgage payments are finished.

It is far too early to plan when to take what money when. In fact, it may be dictated by circumstances largely outside of our control. Or we may choose to take significantly less money earlier so that we can enjoy it in our “relative” youth.

This is yet another reason to remind myself that retirement, especially at the age of 37, is a moving target. The only constant is change.

I expect there be a lot of focus on the military pension because that is huge ingredient in the recipe. However, there are a lot of other ingredients that I think are open to everyone. I hope that is what you’ll take away from this exercise. However, if you are Lazy like me and would like to be spoon-fed, I’ll spell out a number of lessons I have learned in tomorrow’s article.

About our Real Estate “Empire”

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It occurred to me that I while I occasionally write about our real estate holdings, I didn’t have one article that I felt summarized everything. It’s time for that to change.

The title is a little bit of an inside joke. I have a friend who refers our properties as our real estate empire. Compared to most people, I suppose it is accurate, but I can’t think of too many people who built accidental empires.

And if we were to put a label on our “empire”, “accidental” is the first thing that comes to mind. My wife bought a condo in early 2003 before she met me. I bought a condo in 2004, just 4 months into our relationship. We moved to San Francisco due to a great military position she got (and it wasn’t bad for this software engineer either). Oh and we got married in there too (hence why I refer to her as my wife.)

The market dropped. We were left with a choice: sell our properties at a loss or rent them out until there was a recovery. We chose the later. There are people who invest in real estate to make money, and then there’s us. We lose a little money each month on my wife’s property and a bit more on my property. Some empire, right?

I’m a glutton for punishment, so a couple years ago, we bought a vacation/retirement home in Rhode Island. The idea was to capitalize on the low interest rates for mortgages as well as the significant drop-off in the housing market. The combination of the two lead to what I believe is the best buying opportunity since a couple of stock market crashes (2009 comes to mind). We ended up renting the place as the income was just too good to pass up.

In the end, none of the properties are what a real estate investor looks for: a cash-flow positive property. On the bright-side, there are a few advantages to “losing money”… they vary in terms of value:

  • A Tax Write-Off – As the famous quote goes, “I’d rather be paying high taxes… it means I made a lot of money.” It works both ways, if you are going to lose money, might as well get a tax break, right? It’s making the most of a bad situation.
  • A Tenant Pays Your Principal – While I lose a little money each month, in a little less than 15 years, I’ll have an income-earning asset.
  • Forced Savings – Personal finance experts love to say, “Pay yourself first.” Well, I pay the bank first, but this obligation really becomes my savings (see point above about the income-earning asset).

All this has me thinking about expanding the “empire.” If there’s been a time in the last 15-20 years to invest in real estate, I’d say this is it. The housing market is starting to rebound, but when I check the current mortgage rates available in the area that I’m looking to invest, it is hard to resist. However, that’s an article for another day, maybe next week.

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