$100,000 income: No big deal anymore
By Craig Guillot | Bankrate.com
One hundred thousand dollars. Since the 1980s, the magical
"six-figure" salary has been a benchmark for financial success. Not too
long ago, that income often meant two nice cars in the garage of a large
house, fun family vacations and plenty of money left over to save for
retirement and college tuition.
But times have changed. Not only has standard inflation steadily
eroded the real value of a $100,000 income, but the cost, of housing,
health insurance and college tuition have risen dramatically in recent
years. Consider the rising costs of food, energy and the necessities of a
middle class life, and that six-figure luxury quickly turns to
six-figure mediocrity.
Less than 20 percent of American households even break the six
figures. But many who earn incomes near the mark find that their prized
incomes don't take them as far as the hype. Many say that while breaking
the $100,000 annual income mark may still be an impressive milestone,
it doesn't exactly roll out the red carpet.
Costs eat away at benchmark
According to the U.S. Census Bureau, only 6.03 percent of individual
over 18 and only 19.9 percent of households had incomes of $100,000 or
more in 2010. In fact, the median annual household income for 2010 was
$50,046, just more than half of the six-figure benchmark. The
overwhelming majority of Americans still look up to a $100,000 income,
but the expectations of what comes with that income are rapidly
slumping.
“Without a doubt, the housing situation is the biggest thing that eats into our income.” -- Brian Neale, investment manager
According to Labor Department statistics, the average inflation rate
for 2011 was the worst since 2008, with consumer prices rising 3.1
percent, compared to an average of 1.6 percent in 2010. Much of this was
fueled by energy costs (up 15.2 percent for the year) and food costs
(up 3.7 percent for the year). Just to keep up with standard inflation, a
$100,000 salary in 1990 would have to be $172,103.29 in 2011.
"What would have cost you $100,000 in 1976 would cost you $381,000
today. That's just the inflation, and there are so many other things
that have grown very expensive," says Mari Adam, Certified Financial
Planner and president of Adam Financial Associates in Boca Raton, Fla.
Adam points to health care as a major expense that has grown almost
twice the rate of inflation. The Kaiser Family Foundation, which tracks
the costs of health insurance, found in 2011 that insurance costs had
increased by a whopping 134 percent since 2000. The total cost of health
insurance now averages $5,429 per year for individuals and $15,079 for
families. Adam says college costs have also grown tremendously in recent
years. According to the College Board's annual "Trends in College
Pricing" report from last year, published tuitions at four-year public
universities are up 42 percent in five years, the largest increase of
any five-year period since the 2007-09 school year.
"These are things that everyone spent money on 30 years ago, but the
percentage of what was going out of their paycheck is a lot higher now.
More of the income is being taken away to pay for a lot of these
things," says Adam.
The cost of housing has also played a major role in diminishing the
power of a six-figure income. In many parts of the country housing
prices have outpaced wage growth for almost a decade. The Housing
Affordability Index, which compares the cost of housing against median
family income, dropped considerably between 2000 and 2007. In 2000, the
median family income was $50,732, and the median home price was
$139,000. While median income grew to $60,831 in 2011, median home
prices skyrocketed to $229,299 in 2007 before leveling off at $166,200
in 2011. In those 11 years, median home prices had risen 19.6 percent
while median incomes had risen 16.6 percent.
"Without a doubt, the housing situation is the biggest thing that
eats into our income," says Brian Neale, an investment manager from
Westminster, Md.
Money doesn't go far
Neale, 33, says he surpassed the $100,000 mark last year but says
that between mortgage payments, the high price of heating fuel, gas,
food and everyday items in life, his salary doesn't go as far as he
thought it would. Neale is married with three children and says that his
extracurricular real estate and investment activities help them buy the
extras in life.
"Now that I've made (a $100,000 salary), it's not all it's cracked up
to be. We make sacrifices. It's not like I tell my kids we're going to
have to eat peanut butter and jelly every night. We live well, but I
wouldn't consider it anything extravagant," says Neale.
Many now consider $250,000 the new $100,000 income. Adam says that
level of income is typically required to provide what many have before
expected of a six-figure salary. Adam also points to other expenses that
are not necessities but are considered part of a middle class lifestyle
-- things like cellphones, high-speed internet access, vacations,
karate lessons, iPods, laptops and digital cameras.
"What you might think people deserve for a person that has a
reasonable income is excessively high. Add in all the other expenses,
and there just isn't anything left and that's part of the reason why a
$100,000 income isn't going that far," says Adam.
Geography and lifestyle factors
With the cost of housing typically the largest expense for a family,
location is one of the most important factors in dictating the power of a
$100,000 income. While that level may not go far on the coasts, it may
still provide a fairly comfortable lifestyle in much of Middle America.
Jeff Eschman of Brazos Financial Advisors in Houston, says that in much
of that state $100,000 income earners can enjoy very comfortable
lifestyles.
"I don't see many families who are at the $100,000 income level
currently making a lot of sacrifices. Families at that income level
should be able to afford a very nice lifestyle in this area," says
Eschman.
“There is still
only a small percentage of people making this income. It points out
that for your average person in your average job, this is becoming an
increasingly hard country to live in.” -- Mari Adam, certified financial
planner
In cities like San Francisco; Manhattan, N.Y.; Los Angeles; San Jose,
Calif.; and Washington, D.C., the cost of housing alone can take a
major bite out of a $100,000 income.
The Council for Community and Economic Research's Cost of Living
Index, which compares typical family and individual expenses across
hundreds of cities shows that. According to the Index, for 2012 Q1, a
typical family earning $100,000 per year would need to earn around
$228,300 in New York City and $166,500 in San Francisco to maintain that
same lifestyle
In low-cost areas, Eschman says that people at that income level tend
to run into financial problems when their lifestyle outpaces their
income. While this is a problem for many Americans in all income levels,
top figure earners are not immune from it. Adam says she has even seen
people with incomes of up to $300,000 having trouble covering their
expenses.
Choice is yours
Bryce Danley, a Certified Financial Planner and advanced financial
adviser with Ameriprise Financial, says the real power of any income is
all about perspective and choices. He says buying too much house,
spending too much on automobiles and having too much debt is commonplace
with families in the $100,000 income level and largely responsible for
the six-figure pinch. In one example Danley uses a household that earns
$100,000 a year, owns a $375,000 home, leases 2 vehicles for $450 each
per month and pays $250 per month on credit cards. After that household
pays the mortgage, car notes, debt and takes out social security and
federal income taxes, it has spent 75 percent of its income.
"This is a very typical situation for someone in that income range.
And we wonder why average Americans don't save any money -- it's because
of the decisions they made in housing, cars and debt," says Danley.
While the real power of a $100,000 income has been drastically
diminished, it highlights that the burden of increasing costs on those
making less is even more profound. Danley says that regardless of income
level, Americans' penchant for debt, consumerism and outspending
themselves is what ultimately causes financial disappointment or stress.
"There is still only a small percentage of people making this income.
It points out that for your average person in your average job, this is
becoming an increasingly hard country to live in," says Adam.
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