Inflation Makes Big Incomes Smaller

$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.