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0 pointsspokey15y ago0 comments

> PS: A 90k/per year developer can easily have a family and 1/2 mill in the bank by their late 30’s.

I'm not sure that's true, but maybe your definition of "easily" is different than mine. Certainly that doesn't seem to be the case if you're working from salary alone.

Let's assume our developer enters the workforce at 24 and we're considering 38 to be "late 30s". Then she's worked 14 years, we'll assume at an average of $90K/yr, yielding 1.26 million in total income if you ignore interest, inflation, etc.

Various forms of tax will eat about 40% of that [1], so you're left with $756K out of the gate.

Suppose by shrewd living you're spending no more than 15% of your income on housing (which is half of the typical assumption), that's $189K over 14 years, leaving $567,000.

In 2005, the average cost of food at home for a family of 2 on a "moderate" plan was ~$475 (for a family of 4 that jumps to $675 to $810 depending upon the age of the children) [2]. Let's use $475 as an average. So that's another $79,000 for the 14 years (168 months), leaving you with $488,000 for a family of 2, or $453,600 for a family of 4.

So working from salary alone, you're under half a million just by taking into account quite frugal budgets for housing and food, and that's without accounting for costs of transportation, insurance, medical, entertainment, etc. let alone the costs of raising children.

I'm certain with the right decisions or investments it can be done, but I think if this were "easy" to do you'd see a lot more people with a lot more money in the bank.

[1] http://articles.moneycentral.msn.com/Taxes/Advice/YourRealTa... [2] http://www.cnpp.usda.gov/Publications/FoodPlans/2005/CostofF...

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3 comments · 1 top-level

Retric15y ago· 2 in thread

By "easy" I mean assuming no major issues or windfalls. Now, starting at 24 is really late IMO. By, 39 "She" should have 16 years of work experience, if "She" contributed the cap into her 401k (16,500$) each year and got a 5% return over inflation that works out to 390,348$ in 16 years. Granted that's pre tax, but some company matching is also fairly common so let's call it 300,000k and assume she contributed a little less when starting out. <I>Down to (90 - 16.5k) = 74.5k which needs to create 200k in assets.</I>

Now let's assume she bought a 2br condo @ 26 and had 1 roommate to reduce her rent. At 30 that becomes a BF and at 33 she had her first child etc. By 29 she is easily 13 years into a 30 year mortgage and after 13 years it is probably worth more than when you bought it so 150-200k of equity is reasonable as is someone living off of 73k having other assets to make up the difference. (The assumes the husband followed a similar path and maintained equivalent savings.)

As to having that much money earlier conceder what happens when two 24 year old 90k / year developers get married. Split a 1br apartment and they can each live off of 60k vary comfortably while each saving 30k pre tax in a mix of 401k and other investments. In 2 years they can save up a 60k down payment while maxing their 401k's. Once they have children saving money becomes far more difficult, but until then they can create a significant nest egg.

PS: You could also have long stretches of unemployment a crack habit and a husband with a gambling problem. I am simply suggesting that the “happy path” represents a significant opportunity cost when you’re looking to start a startup.

spokeyOP15y ago

Note that from December 1999 to December 2009, the average annual compounded rate of return for the S&P 500 was -0.6%, and the average annual inflation rate in that same period is around 2.8%. A 5% return over inflation may be a little optimistic.

Also, "in the bank" has now become "net worth" and our family with a 3 BR condo has now become a couple with a 2 BR that has what, doubled their investment on the condo bought in 1997? I'm not sure that's a typical case. Even at the height of the housing bubble I think that represents a fairly exceptional return, e.g.: http://en.wikipedia.org/wiki/File:USA_home_appreciation_1998...

But you don't need to convince me. I agree with you: I'm 100% confident that there are many reasonable scenarios that lead to well over $500,000 in net worth by 39.

I'm just pushing back on the "easy" part: If this were easy more people would be doing that, but that fact is $0.5M is 10 times the net worth of the average American in the cohort we're talking about, and more than twice the net worth of the average American at the time of retirement. By living frugally and choosing investments wisely you can certainly do it, but those are easier choices to make in retrospect than working forward.

(Edit: I said $500,000 is 100 times the net worth of the typical American 40 year old, but it is really just 10 times.)

Retric15y ago

Edit: What you say is reasonable, while I understand your viewpoint I want to add a little food for thought.

First off, 401k contributions to the S&P 500 over that time period would significantly outperform that due to Dollar cost averaging. http://en.wikipedia.org/wiki/Dollar_cost_averaging. Even more so if you assume that they made smaller payments early on when they were making less money.

Also, for clarification I am assuming they leverage the roommate to rapidly pay down the mortgage, I know people in that situation making less than 65k that pay down an extra 600$-1000$ a month while trying to get out from PMI. EX: A 26 year old making ~52k decided to refinance to a 15 year mortgage when the rates dropped because he was paying significantly more than that anyway and with the new interest rate and he could pay it down even faster.

As to easy: In 2007, the "real" (adjusted for inflation) median annual household income rose 1.3% to $50,233.00. 10x the savings from 1.8x the average household income sounds works when the average savings rate is so low. There are rules of thumb that you pay X% of your income on specific category’s, but we are well into the ridicules stage so saving ridicules amounts of money is just as valid as having stupid bar tabs.

PS: I happened to put a fair amount into the stock market during the dip last year at the same time as my company’s annual 10% deposit so my 401k actually made over 40% ROI last year. Starting in 2002 I have made well over 5% plus inflation and I missed the dip right after the 2000 – 2001 crash.

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