Lifetime Costs (a thought experiment)
November 17, 2009 12 Comments
Work-Life Earnings for Full-Time Employees (in $ millions)
High School Graduate
Some High School
|Average Lifetime Earnings—Different Levels of Education.Source: U.S. Census Bureau, Current Population Surveys, March 1998, 1999, and 2000.|
You hear a lot these days about the value of a higher education degree. For instance, the above data which I found through Earnmydegree.com illustrates quite nicely how ON AVERAGE the higher degree you have, the more money you will make over the course of your lifetime.
Now, I don’t know if the US Census Bureau factored in the time it would take to earn the higher degrees and subtracted the years from this or not, but I have to imagine that since I’ve only worked a little less than two years since finishing my Ph.D. that I still have my full $3.4 million coming to me. Right? 😉
That seems like so much money, and yet it is really a finite amount.
First, we gotta give the government its share. With a lifetime earnings of $3.4 million – I’d find myself in the 33% tax bracket I’d wager. We’re now left with $2.27 million.
Well, let’s assume that one-half of it I spend just on the cost of “living” – like food, paying utilities, buying gadgets and clothes and furniture and life insurance premiums and presents for people. I’m estimating 1/2 because I don’t plan (after I get out of debt and into a “real” job to ever spend more than 50% of my income on myself.
Okay… so now after just the cost of living I have left to me… $1.135 million.
I’m going to be putting 10% of my take home salary (or $224,400) away for retirement (obviously earning interest!) – leaving me with $0.911 million.
Well, I’ll probably have to buy a house. And even though I don’t know where I will end up, there is a good possibility that it will be a major metropolis – so let’s just say this will cost me a cool $300k – so now I’m left with $0.611 million.
However, all of this is based on the ASSUMPTION that I won’t have to finance my house. And frankly, I’m not sure that I would be willing to save up for a $300k house to pay with cash. (Then I would have to include rent into the equation… oh my…) If I take out a 30 year fixed mortgage at 5% on my $300k house with $50k down – it will actually end up costing me $474k for that house! Now I’m left with $0.437 million.
Now I’m thinking that I’ll probably end up buying a car every 8-10 years. For the sake of simplicity lets say that I buy one every 8 years and it costs me around $15k. From now and when I hope I won’t be driving anymore – I have 48 years of driving time. Or 6 cars. For a total of $90k on cars. Plus maintenance and insurance. And I’m sure I’ll end up spending more than $15k on a car. So let’s just round this up for good measure to $125k. Now I’m left with $0.312 million.
Another large chunk will be used for “emergency” expenses. The unexpected job loss. End of life care for my pets. Medical expenses that I may have. I’m guessing over the course of ones life we end up spending probably $100k on the unexpected. Thankfully it doesn’t happen all at once! Now I’m left with $0.212 million.
All of these expenses later, I’m beginning to see the stuff I enjoy: vacations! I plan on spending around $2,000 per year for vacationing. Multiply that by how long I plan to be on this earth and I’ve spent $100k to travel the world. And now I have $0.112 million.
Oh yes, I should probably include my debt in this calculation since it is part of the equation. At my current rate of repayment I’ll end up paying $15,843 on my credit card (including interest) and $20,881 on my student loan (these are based off of what I will need to pay on these FROM TODAY). That will total around $37k – leaving me with $0.075 million.
Whew… that’s right… after all is said and done I have a margin of around $75,000 to my name. For my hobbies, my crafts, and the “incidentals” – oh yes, and even raising a child! – I better keep on budget! $3,400,000 +/- 75,000 isn’t a very large margin of error!
(Obviously I know that all of these numbers are made up and completely speculative – no one is ever the “average”. But it is interesting to think about lifetime earnings and what that can buy us. I think if you take your salary and put into account what you want to acheive/buy over the course of your lifetime you may be surprised. For instance, if I take how much I’m allowing myself to “live on” – which is $1.135 million. If I divide that by 50 years (hopefully around as long as I have left on this earth) – I find that this gives me a salary of $22,700/year – or expenses of $1,891 per month. That isn’t a whole lot when you think about being a “grown up” or in the “prime” of your life. ALSO, doing this made me realize how much someone with that salary could actually afford for certain big ticket items. For instance, my original calculation had my house price at $400k. But I couldn’t do $400k and come out in the black, so I had to reduce my house price to $300k to make it work. While this may look NOTHING like my future life… it is a nice ballpark on what I truly can and cannot afford in the future… Can you achieve your lifetime goals with your expected lifetime income?)