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# Do You Really Need \$130,000 for the American Dream?

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USA Today would have us believe that the American Dream costs \$130,000 per year. But does the math behind that assumption even hold up?

Published in: Economy & Finance
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### Do You Really Need \$130,000 for the American Dream?

1. 1. The American Dream at \$130,000?
2. 2. 1) Housing Costs USA Today used a house costing \$275,000 as its anchor because that was, “the median price of a new home.”
3. 3. 1) Housing Costs The Problem • According to the National Association of Homebuilders, new homes account for just 8%-10% of all home sales. • The other 90% are sales of existing homes— which are much cheaper. • The American Dream isn’t negated by buying an existing home.
4. 4. 1) Housing Costs The Solution • The median existing home price from the timeframe USA Today used was \$198,000. • By weighting the mix of new and existing home sales, we arrive at a new median home price of \$205,000. • This new price knocks the annual cost of owning a home down to \$12,623.
5. 5. 1) Housing Costs The Result Total savings from previous figure= \$4,439 New income “needed” for American Dream \$125,918
6. 6. 2) Car Costs USA Today assumed an SUV was essential for the American Dream. According to AAA, driving an SUV 15,000 miles in a year costs \$11,039.
7. 7. 2) Car Costs The Problem • A mid-sized sedan can easily meet the needs of a family of four, and is far cheaper and more fuel efficient than an SUV. • The average American driver, according to the Federal Highway Administration, drives less than 10,000 miles per year, further reducing costs. • An SUV is not essential to living the American Dream.
8. 8. 2) Car Costs The Solution According to AAA, a mid-sized sedan driving 10,000 miles per year costs \$7,616 per year to own and operate.
9. 9. 2) Car Costs The Result Total savings from previous figure= \$3,423 New income “needed” for American Dream \$122,495
10. 10. 3) Food Costs USA Today, using USDA numbers, said a family would spend \$12,659 on groceries. An extra \$3,662 was added for restaurant trips. That comes to \$16,321 spent on food.
11. 11. 3) Food Costs The Problem • USA Today didn’t read the USDA’s fine print. The USDA estimates assume, “that all meals and snacks are prepared at home.” [emphasis added] Obviously, that means no restaurants. • These numbers are also significantly higher than what the Bureau of Labor Statistics (BLS) says the average family spends on food—both at home and while eating out.
12. 12. 3) Food Costs The Solution • Normalized for a family of four, with two children under the age of 18, the BLS figures say that the average American family spends \$9,755 on food—both at home and away. • The USDA guidelines haven’t been updated in 7 years, and simply don’t reflect the reality of normal American eating patterns.
13. 13. 3) Food Costs The Result Total savings from previous figure= \$6,566 New income “needed” for American Dream \$115,929
14. 14. 4) Education Costs USA Today, while not revealing its methodology, assumes that the average family will spend \$4,000 on education between two children.
15. 15. 4) Education Costs The Problem • According to the National Center for Education Statistics, only 9% of the nation’s 55 million school children attend private elementary or secondary schools. • The Pew Research Foundation says that there are 12.4 million stay-at-home parents, accounting for roughly 28% of all family households. These families typically don’t pay for childcare. • Attending public school or having a parent stay home does not eliminate you from the American Dream.
16. 16. 4) Education Costs The Solution • It is difficult to correct these numbers, since USA Today did not reveal its methods. • But given the vast majority of public school students, and spreading out the cost of childcare over 18 years, we’ll assume (liberally) that the average family spends \$3,000 per year on education.
17. 17. 4) Education Costs The Result Total savings from previous figure= \$1,000 New income “needed” for American Dream \$114,929
18. 18. 5) Summer Vacation Costs USA Today, using numbers from an American Express survey, say that the average family will spend \$4,580 on a summer vacation.
19. 19. 5) Summer Vacation Costs The Problem • Again, USA Today didn’t read the fine print. American Express readily admits that its survey includes, “an affluent demographic, defined by a minimum annual household income of \$100,000.” • Obviously, the American Dream family will need over \$100,000 if data is being pulled from this subset. • You don’t need a \$4,580 vacation to live the American Dream.
20. 20. 5) Summer Vacation Costs The Solution Money Magazine and AAA have conducted far more representative surveys. They estimate the average American family spends \$1,600 on its summer vacation.
21. 21. 5) Summer Vacation Costs The Result Total savings from previous figure= \$2,980 New income “needed” for American Dream=\$111,949
22. 22. 6) Tax Costs As the paper states: “Total federal, state, and local taxes were pegged at 30% for households at this income level, based on a model developed for Citizens for Tax Justice [CTJ].”
23. 23. 6) Tax Costs The Problem • The CTJ includes ALL taxes paid, including sales tax. By using these numbers, USA Today double counted taxes on the tens of thousands of dollars already spent. • The CTJ adds in unearned income from investments to one’s adjusted gross income. But according to USA Today’s model, all investments are in tax-deferred retirement accounts— meaning no unearned income is present.
24. 24. 6) Tax Costs The Solution First, we would need to figure out your adjusted gross income (AGI). The major deductions you could take/consider: • A standard deduction of \$12,200 for a married couple filing jointly, which is the example USA Today used. • Four personal exemptions at \$3,950 each for a total of \$15,800. • Remember, your 401(k) contributions won’t count towards your AGI either.
25. 25. 6) Tax Costs The Solution • Your federal income tax bill would come to \$6,280. • According to the Tax Foundation, the median average combined state and local tax rate is 6.9% (varies wildly by state). Based on your AGI, you would pay \$3,300. • The New York Times calculated the average property tax rate in the United States at 1.38% (again, varies wildly). With a property worth \$205,000, you would pay \$2,830. • Your new tax burden would be \$12,401.
26. 26. 6) Tax Costs The Result Total savings from previous figure= \$19,956 New income “needed” for American Dream \$91,993
27. 27. 7) Retirement Costs USA Today encouraged maxing out 401(k) savings at \$17,500, or 15%-- which it stated was, “in line with financial planners’ recommendations.”
28. 28. 7) Retirement Costs The Problem • There’s actually no problem here. If you can put away the maximum into your 401(k), the more power to you. • However, it would end up being far more than the 15% USA Today mentioned as a good guideline. • You don’t need to put away this much to live the American Dream.
29. 29. 7) Retirement Costs The Solution • Using the new income level after all of our adjustments, you would want to put away \$13,175 per year in your 401(k) if 15% was your goal.
30. 30. 7) Retirement Costs The Result Total savings from previous figure= \$4,325 New income “needed” for American Dream \$87,668
31. 31. Important Points to Remember 1. Assuming this new number, roughly one-third of U.S. households could have the American Dream—much better than one in eight. 2. However, almost no one’s situation will match this exactly. Everyone’s life situation (and definition of the American Dream) is different. 3. This simply illustrates glaring facts that weren’t taken into consideration.
32. 32. Maximize Your Retirement Savings