• 02:58:26 am on July 25, 2008 | 12
    Tags: , , ,

    Living off $100,000 per year …

    I thought that I should give you some help in determining how much you need to live off.

    So here is an excerpt from a new book by Michael Masterson, which seeks to answer the question, “how much ‘living’ does $100,000 a year income ‘buy’ you?”:

    Take about $35,000 for federal, state, and local taxes. That leaves you with $65,000 in cash. What kind of lifestyle would $65,000 buy?

    Let’s start with housing. You could spend a lot, but I’ve made it a rule to never spend more than 25% of my income on housing. What kind of home could I rent for $1,350 a month?

    If you did spend $1,350 a month on rent, you’d have abut $4,000 left over to pay for other expenses. Utilities, upkeep, and routine maintenance on your home might be as much as 30% of your rental costs – that’s $405. And you could expect to pay another $900 a month for food and household supplies [2 person family; add more for kids].

    Transportation would be your next biggest expense. Figure $600 a month for two medium-size Toyotas.

    Those are your major expenses. Do the math and you’ll see that you are left with about $2,000 for things like travel, entertainment, dinners out, and other nonessentials. Those expenses can vary greatly, depending on your personal preferences. If you can be happy with a god meal at a local restaurant, you may be able to budget meals for two people at $80. If you prefer fancier places, you’ll have to figure on spending two or three times that amount.

    So, according to Michael Masterson of Ready, Fire, Aim fame, that’s a $100,000 per year lifestyle. I won’t dispute these numbers, but I will make the following comments:

    1. Assuming that you are renting a house is a nice simple way to turn a ‘capital purchase’ into an easy income-related number.

    A better way might be to leave the house out (for now), and simply add the purchase cost of this to the total ‘nest egg’ that you will come up with using the Rule of 20 (or 40) from two days ago.

    2. Even though you should pay cash for those two Toyotas (hope you didn’t have Maserati and Mercedes written into your future, at these numbers?!), assuming a lease/rental rate is a nice way to allow you to build in some savings buffer for your replacement vehicles 6 to 8 years down the road [pun intended].

    3. In his book, though, Michael makes what seems to me to be a major mistake: he says that this is a $1,000,000 lifestyle, in that $1,000,000 invested at 10% produces the $100,000 income per year that he has outlined for you.

    The problem is that he has not allowed for inflation (unless he is assuming 15% ongoing returns which is too much to ‘bank’ on). $100,000 income today becomes a $75,000 income in 10 years and a $50,000 income in 20 years … I don’t know about you, but I don’t intend to live any LESS well when I’m 59 or even 69!

    At a ‘safe’ withdrawal rate of 2.5% to 5% this is actually a $2,000,000 to $4,000,000 lifestyle … scary, huh?

    Just wait until you see tomorrow’s post!



  • Di Eats the Elephant 8:45 am on July 25, 2008 | #

    Good follow-up to last night’s discussion, AJ!

    I had calculated that I would need about $8-9M in about 5 years 🙂 to achieve the lifestyle I’d like without relying on a J-O-B income.

    Some of his assumptions are also based on where he lives and what grocery prices are. Being a cost analyst in my field right now, I can tell you that inflation should be included today, and perhaps a bit higher in some areas than others. We may be lucky again and skate free, but I recall the horrendous inflation in Brazil years back and already see the effects in my own meagre salary (as do we all I am sure). Thanks for the (free) “food for thought”!

  • Di Eats the Elephant 8:48 am on July 25, 2008 | #

    P.S. Don’t forget the cost of health care rises as we age (prescriptions on a daily basis seems to be the norm; hence my drive to be in good shape/health/strength and avoid those as long as possible) – I would suggest taking out at least 40% of your income, rather than the 35% suggested, to get to the take-home figure.

  • Deanna 9:48 am on July 25, 2008 | #

    eeek –

    I haven’t done my own numbers yet. Been too busy being sick and WORKING my J.O.B trying to catch up from the sick days – sigh. But this post resonates with me. We live on just over $100k a year, and I am so flipping frustrated that we still struggle and we still worry and we still don’t have extras! This was supposed to be our benchmark – making 6 figures=grand life. HA!

    I’ve got a lot of catching up to do for my J.O.B, but will do my numbers ASAP – I’m sure it will be eye opening.

  • AJC 10:28 am on July 25, 2008 | #

    @ Di – Thanks; take a look at the next two day’s posts and see if they exhibit the same ‘issues’ as you see them … and, keep sharing. This site is all about collaboration, so, thanks!

    PS Also, note that he makes allowance for Tax – a key expense than I didn’t address in my own post. I feel that he underestimates the tax on the, probably erroneous, assumption that you will be tax-advantaged at these higher levels of income (writing off business expenses, etc.)

    @ Deanna – Like all good things in life, you can afford to wait a little to make sure that you do it RIGHT.

    @ All – The most important thing for now is to get a handle on your Life’s Purpose; if you have done that well, even a rough cut at these numbers (using what I am giving you today and for the next couple of days) – which shouldn’t take more than a couple of hours of work – will get you close enough to a Number that you can panic over …

    … remember, these are ‘life destinations’ – presumably, we have 7 years to adjust our thinking 🙂

  • Shannan 1:18 pm on July 25, 2008 | #

    @AJC – Hopefully I didn’t miss this question last night, but here goes… It seems like you are a much bigger proponent of the Rule of 40 than the Rule of 20, yet you do state that we can use the Rule of 20. My Rule of 40 $11M is a lot bigger than my Rule of 20 $5.5M. Duh! =P How do we decide which number to use?

  • AJC 2:56 pm on July 25, 2008 | #

    @ Shannan – Start with the Rule of 20 … if that doesn’t scare the sh*t out of you then move up towards the Rule of 40 😛 In truth, I used the Rule of 20 but now that my ‘nest egg’ has kept growing, I am aiming to keep my spending limited (at least until I reach Rule of 40 levels) to ensure that I NEVER run out … we’re about to see how well we’re doing at this (I’ll post soon).

  • Carnival of Personal Finance #163 - “Quotable Quotes” 3:38 am on July 28, 2008 | #

    […] 7 Millionaires … In Training! thinks you need to think again if you’re of the opinion that 100k means you’re ‘rich’. […]

  • James 10:12 am on July 28, 2008 | #

    100K is definitely not rich–particularly if you have debt that you need to pay down, like most of America does.

  • AJC 1:09 pm on July 28, 2008 | #

    @ James – with or without the debt, it’s not rich in strict terms .. of course, if it is passive, indexed from inflation, and supports your Life’s Purpose, then you are indeed ‘rich’ in my book, at ANY [passive] in come level.

  • Andy 2:07 pm on August 1, 2008 | #

    So true! I remember when 100K was an amount to aspire to. Now it is just middle class.

  • AJC 3:15 pm on August 1, 2008 | #

    @ Andy – barely 🙂

  • Ideal Budget Allocation? « How to Make 7 Million in 7 Years™ 3:44 am on August 29, 2008 | #

    […] I pointed you to some typical personal budget allocations at varying income levels i.e. $100,000 p.a.; $250,000 p.a.; and $550,000 p.a. (before […]

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