I chalk it up to things simply costing more. I make more than my dad did. I dont take any major vacations, go out much, or live in a McMansion, yet we struggle to save.As a kid we took lots of vacations, they saved a good amount of money (stock market was good for them) and are doing well for themselves.
I imagine it's only going to be worse for my kids.
This is the "Avocado Toast" argument that we're poor because we spend $10 on Avocado Toast.
It is totally false. It blames citizens for national structural economic problems like hidden inflation and like bad housing policies discouraging building/planning.
People spend $10 for Nextflix, $90 for Amazon, etc as short term pleasures because they cant spend $GIANT on a mortgage. What are you supposed to do? Might as well treat yourself.
Of course, I'd rather get a home, but if I cant afford it, I wont just sit at home staring at a wall.
It's false for some locations but not for others. I checked on the two homes I lived in growing up and both appreciated slower than inflation from the late 90s to the early 2010s when they were last sold. In real terms they are about 20% cheaper than they were when my parents bought/sold them.
Flyover suburbia is more affordable than it was 20-30 years ago. All major physical items are better and cheaper than they used to be. Netflix is cheaper and better than VCRs + rentals + expensive cable. The big difference is health care and college costs. But most people don't have huge medical bills and college is somewhat of a choice.
The cost of living increase is largely driven by California, NYC, and Seattle. Pretty much every where else things are cheaper than they used to be.
I dont quite agree. I dont think you can compare home to inflation only -- you have to also look at the income in that area as well as total cost. If incomes have also fallen, then the relative cost/income ratio may have remained the same (or as i'm proposing -- has increased.)
As an example, there are depressed areas in flyover states where costs have indeed gone down. But incomes have gone down even more -- they are once thriving places like Binghamton NY which had industries that have since moved overseas.
There is also the cost of healthcare, education, and retirement savings. My father benefited from a pension plan -- I have to save myself in a 401k. My father paid no employee premiums for healthcare, I pay about $900/mo for the family premium (before copays and coinsurance.)
It's not just in declining cities. One of those houses is in the suburbs of Chicago. It's true in basically everyplace outside of the ones I mentioned. You can find a SFH around any major city for 150-300k.
Healthcare is definitely eating up more of the budget. I'm open to the possibility that it's eating up so much more of the budget that it's making buying a house prohibitive, but the numbers I see don't back it up. Most people still have employer provided healthcare and don't pay 900 a month in premiums. Part of that is CoL. Your contribution are higher than my family plan premiums I got through the market place.
this is a variation of the "avocado toast" argument. if you go crazy and subscribe to amazon prime, a music streaming service, and several video streaming services, you're paying somewhere around $100/month. if instead you invested the $100 every month, you could expect to have an extra ~$200k (inflation adjusted) after forty years. that's not nothing, but it doesn't add a whole lot to your safe withdrawal rate in retirement (roughly $8000/year). if you're only able to save a couple hundred bucks every month, that extra $100 makes a big difference. if you're saving $1000+, your subscriptions aren't going to make or break your retirement; you need to dig into those bigger fixed costs to really move the needle.
We might be talking about different budget levels, but to normal people (people who don't have the word 'software' in their job title), 200k in retirement is a lot.
Actually the median 401k balance at retirement is only around 60k, so that alone would quadruple their retirement savings.
>> Actually the median 401k balance at retirement is only around 60k, so that alone would quadruple their retirement savings.
You are comparing apples and oranges. You are comparing today's values at retirement to future values at retirement. It is almost certain that $200k 40yrs from now will not be worth $200k in today's dollars. Inflation accrued over 40yrs -- however low and however faked -- is absolutely going to make that $200k seem not so much.
Presumably, some of the $200k invested will grow, but also, not all the 200k is invested right now, it drips in over 40yrs.
You also forget the wildcard of healthcare lottery. One large medical surgery co-pay and you lose half your nextegg.
I got the $200k figure assuming a 6% rate of return, which is basically the inflation-adjusted rate of return for the S&P 500. both the $200k and $60k are 2020 dollars.
This is the problem. $200k in 2020 dollars wont mean much 40yrs from now. Similarly, $60k sounded like a huge figure in 1980 for retirees planning for 2020. For a proper comparison, you'd need to compare purchasing power of $60k to a retiree today vs $200k to a retiree in 2060 -- i'll bet it is about the same!!!
Inflation is a huge unknown here. My parents' home in 1981 was $35,000. The same exact house today is over $1,000,000. Rent used to be $150 to $200/mo. The same rent today is over $3500.
I did a monthly $100 contribution at 6% assuming tax free comounding for 40yrs and came up with your figure of $200k. That is right -- you'll have $200k at this rate. But in the year 2060 that might be just a year of rent and you're broke!
I hope this doesn't come off as condescending, but I think you are missing the distinction between real and nominal value. if I just say "$200k" without qualification, that is a nominal value. if I associate that nominal value with an instant in time (a whole year can be a narrow enough window when inflation is reasonably low), it becomes a real value. when I say you would have $200k in 2020 dollars in forty years, inflation is already taken into account. if a dollar is worth half as much in 2060, I'm saying you would have $400k in 2060.
you are right that inflation is a huge unknown. if inflation goes up massively without a corresponding increase in nominal returns (unlikely, but possible), it would make that 6% figure incorrect. in this case, you would have less than $200k 2020 dollars in 2060, but the real value of a 2020 dollar would not have changed.
as a concrete example, suppose I own a three shares of microsoft stock and you have a brand new ipad air. both are worth about $600 today. if I offered to trade you my microsoft stock for the air, you might be happy to do so if you don't have any use for the ipad. if the fed prints trillions of dollars overnight causing the value to collapse, it doesn't change the fact that my three MSFT shares have roughly the same real value as the ipad. "2020 dollars" is just a slightly more abstract way of describing this dynamic.
Fair, but i'd say the 6% assumption is suspiciously high in that case. I think you might be doing something like ({mean SPY return} - CPI)
Except that CPI is a deviously misleading number. I wonder if the same approach applied in 1980 would come close to aligning with 2020 numbers (including healthcare, college, rent, energy, etc.)
Please be brutal in your response, I want to understand if my understanding of this is all wrong!
keep in mind, this is really just a back-of-the-napkin calculation. I'm certainly not an expert on the matter, but AFAIK 6-7% is generally accepted as the real rate of return on the S&P 500 (at least historically and over long periods of time). inflation calculations are always kind of messy thing though. in reality, some goods/services increase in price much faster than others, and CPI will be very sensitive to what goods/services you choose for your basket. even when you take into account overall inflation, college tuition is vastly more expensive than it was a few decades ago. it also gets tricky when you consider that the quality of goods can increase over time. a mainstream CPU costs about the same as it did in 2000, but is way more powerful. is that deflation, or is technological advancement a separate thing? I never got far enough in economics to know the answer.
yeah, I'm assuming most of the people on this forum have upper-middle salaries or will likely have them in the future. I mostly wrote the post with this audience in mind, though I think the bit about analyzing spending in relation to your savings rate is relevant to everyone. I am very fortunate to have the opposite "problem": I tend to be very stingy and waste a lot of time and energy trying to save amounts of money that just aren't very meaningful compared with my savings trend. unless you're unable to save anything at all, I think it is very important to strike a balance between saving for retirement and spending on stuff you enjoy in the moment.
also minor addendum: someone with the median 401k savings might receive something close to the median social security payout of ~$15,500/year. since this is a guaranteed payment until end of life, this is like having >$375k in a retirement account at age 67. $200k is a meaningful amount to add to a $60k retirement account + social security payments, but it doesn't do anything close to quadrupling the person's safe spending capability. it's more like a 45% increase, which is still nothing to shake a stick at!
> since this is a guaranteed payment until end of life, this is like having >$375k in a retirement account at age 67.
I would not bet on social security retirement age staying at 67, nor would I bet on the purchasing power of $15.5k remaining anywhere close to it is today.
sure, don't lose track of the thread though. I'm comparing against someone who is currently retiring with $60k in their retirement account. $60k probably won't be the median 401k value in forty years. all this stuff is subject to change.
I'm not sure how one would survive on 60k for even 10 years. This isn't an "investable" amount and it's not enough for food, yet along housing expenses.
Clearly nobody is in that situation. If you have any money at all in 401k, you almost surely have paid significant amount into Social Security, which pays out retirement benefits independently of whatever you might or might not have in 401k account.
This all depends on what you assume for spending. Speaking from experience, it is pretty easy for an "entertainment" budget to hit $1000 per month, or a $2MM inflation adjusted savings.
4x nice restaurant or dates = $200
1x Weekend trip = $250
Hobby projects = $100
Drinks with friends = $100
Media Subscriptions =$50
Most of the people I know who are struggling are stuggling because rent and utilities takes the vast majority of their post-tax income. There's a few people I know who are just terrible with their finances (people who no doubt would have had problems at every previous time in history), but now seems a bit structurally different to some of the boom times due to the number of people I know who have hardship due to expenses they can't easily drop.
But the thing is, nobody said you have to pay for Netflix or Amazon. Each person is responsible for making good choices with his or her money. Lack of financial discipline is not society's fault.
Yes, managing finances takes some level of skill when there are many different expenses in a modern personal budget. But there are ways to live frugally and get ahead. They just aren't flashy or fun.
On two very small incomes my wife and I made big financial strides early in our marriage. We were very frugal but we made it work. We had the lowest tier Internet. We had a very conservative budget for eating out and groceries. We didn't have Netflix or Amazon. Once we paid off a number of debts, our spending was able to increase responsibly.
Correct. It was from being very frugal in _all_ areas of the budget. Eating out, entertainment, internet, not taking vacations that wouldn't be financially responsible. Frugal dates, frugal Christmas/holiday celebrations, living in an extremely inexpensive apartment in a not-wonderful area of town. We were pretty late adopters of smart phones because we had cheap flip phones. We gave to charity too.
It's all about priorities, and having a vision for being financially "free". The victim mentality is an _enemy_ of human creativity.
You can say, "this area is too expensive; we need to find a way to move somewhere else". You can say, "I need to sell this gas guzzler and get a cheap, used commuter car." These things aren't _fun_. But they set you up for success.
The crucial data point is missing: "two very small incomes".
US minimum wage is $7.25 per hour. 2 people working full-time at minimum wage would bring in a household income of $30k per year. But you couldn't possibly pay off $60k in debt and buy a house with that. So your household income had to be much, much higher.
presumably GP and their wife did not go on to both earn minimum wage after getting their degree(s?). even today when a bachelor's degree is worth less than it once was, the median wage for college graduates at their first job is around $48k. only about 2% of people with any amount of college education actually make minimum wage. it's pretty rough living on minimum wage, but paying off student debt is very rarely a contributing factor.
You're right. It was about [REDACTED FOR PRIVACY - but much much less than parent's 48k medium income per person for college grads] before taxes, both with college degrees.
I'm sorry lapcatsoftware if it sounded like I was making light of poverty. Poverty is terrible. But at least in the US, there is _so much_ opportunity to not be stuck on a minimum wage salary. Resigning to the idea that, "Well, I guess I just have to work for minimum wage" is not going to help and it doesn't have to be true. It's sad to think that people give up mentally when there's so much they can do to help themselves.
What opportunities? Tell me how an average cashier can land an average 150k/year job in a metro area? Don't forget that the said cashier has mediocre intelligence, so-so appearance, zero charisma and little talking skills. He might swap grocery store for an oil change shop, but that's about it. Our society is mostly stratified now, with a little upward mobility left for high-tech workers.
That person STILL deserves a modicum of dignity and stability. Most people in this category don't really care if they move up any ladder - they just want to exist and not be facing constant economic crisis and near-homelessness.
How are you ever going to be financially free from eating out less often? A meal at a restaurant costs what, $100? That's $5K a year. No holiday, another $5K maybe? Cheaper phone, ok, you don't buy the newest iPhone, so maybe you save most of a grand in relation to iPhone couples.
Even the car cost is not as big as the sticker price, because it has residual value. Granted it may be a big figure, but it is also spread over several years.
Seems to me you're literally one raise ($10K or so, and there's two of you?) away from making up such deficits, and you want to be near opportunity for that to happen.
Investing $10k a year at 6% (average stock market returns are 6-8%) gives you $368k after 20 years (net increase of $297k over inflation at 2%). Even if you just saved it for ten years that's $100k. Neither are enough to retire on, but it gives you a lot more options. Even if housing increases faster than the stock market, that $10k is $800/month which could be going towards a mortgage (in addition to the rent they are already paying).
Outside of the obvious "don't buy a gas guzzler" tropes, most of the best ways to save money will end up costing you time. Whether it's living with a longer commute or working more hours, there is a point at which people are just happier living their lives than wasting years in their prime scrounging and being miserable to afford a downpayment on a house in worse condition than what they could afford to rent. Big budget decisions like vacations and cars will obviously factor into this in a big way, but nobody's financial situation is changing massively over a Netflix subscription.
Following your own logic, it's almost like saying how dare you say you had _any_ budget for eating out? Why not just save even more money?
I think part of the disconnect is that many people today assume that life will be, or should be, pain free. Life is hard. It's always been hard. It's hard today.
I think the reason we want to believe otherwise is because of the tremendous wealth we have experienced recently, so we expect that trend to continue indefinitely.
To me, it is the lack of gratitude for what we do have and can afford that galls me.
The generation immediately after WWII gave a glimpse of what was possible, before crafty people figured out how to siphon off the majority of that wealth to those already at the top. And over time, that siphon has grown stronger.
Life should not be as hard as it is. It is hard, and it is not painless, but it's harder and more painful than it must be. We have billionaires siphoning money from the masses (either directly, or indirectly via government action) that are already struggling. Redistributing even half of their net worth would be a life-changing amount for the average person, and could put wind in the sails of many charitable/educational/scientific/medical causes.
There is no reason why the current situation should be allowed to continue, and many reasons why it should not. Obviously it's a hard practical problem to crack (given that a naive approach to redistribution of this kind would be met with a great pushback and implode various systems that we depend on), but unless we do something effective, we'll keep ruining the planet while trampling the poor at the same time.
I imagine it's only going to be worse for my kids.