Is earning $1 million a year, a top 1% income, enough to retire early? Most would say yes. However, some people who earn $1 million a year having a hard time letting that money go.
After all, all you’ve got to do is work one more year and you will make another $1 million! For most people, I’m sure they’d happily sacrifice working at a crap job for another one million dollars.
This article explores when earning $1 million a year isn’t enough to retire early. Many high-income households in big cities are having a difficult time escaping the rate race to do something new.
When Earning $1 Million A Year Isn’t Enough To Retire Early
We know that a $300,000/year household income is pretty middle class if you live in an expensive coastal city like San Francisco or Washington DC.
However, we can all agree that earning $1,000,000 a year or more makes you rich, especially since a top 1% income level starts at roughly $470,000 in 2021. No household earning $1,000,000 or more should ever struggle unless they leveraged up and their investments imploded.
If you make $1,000,000 a year or more, you’re free to celebrate. Just don’t tell anyone lest you want an ax-wielding robber waiting for you in your living room after an evening of fine dining.
Let’s explore the lifestyle of a typical household earning $1 million a year living in New York City. They’ve anonymously shared with me their expenses, and I’ve done my best to tell their story without sharing their exact details.
This post will give you a taste of what it’s like to make $1 million a year. You’ll also get to decide whether making a top 0.1% income is truly worth the price.
Very Profitable Earning $1 Million A Year
After tax cuts were introduced in 2018, making more money has never been more profitable. Not only did the top federal marginal tax rate get cut from 39.6% down to 37%, the income threshold for the top federal marginal tax rate also rose from $418,400 to $500,000 for singles and from $470,700 to $600,000 for married couples.
In other words, there’s never been a better time for earning $1 million a year! However, beware as President Biden is looking to raise the federal marginal income tax rate on households making over $400,000 to 39.7% again.
So, if you’ve been wanting to make over $500,00 a year as an individual or over $600,000 a year as a married couple, now is the time to do it. You’re essentially getting about a $15,000 federal income tax break if you make $1,000,000 now versus in 2017.
But as we are all well aware, the desire for money and prestige tends to corrode lives after a certain point. Once you make over $200,000 as an individual or $350,000 as a family, there is no additional happiness that accrues from making more money.
Instead, lifestyle tends to deteriorate due to longer hours at the office, more stress, poorer physical health, and less family time.
Further, with Joe Biden planning to raise taxes for households making more than $400,000 a year, perhaps making so much is becoming less worth it.
$1 Million A Year Profile
Rachel Chen is one such person who doesn’t know whether the $1 million lifestyle is worth it. At 45, Rachel is one of several portfolio managers at a small hedge fund with $1.5 billion in assets under management.
She toiled as a research analyst on the sell-side for six years before making the leap to buy-side analyst at 28. At 37, she was finally promoted to portfolio manager.
Rachel’s husband, Colin, 43, has been a stay at home dad since their second son was born in 2011. Colin used to make about $350,000 as a strategy consultant, but got tired of all the travel and decided to give up the grind, especially after Rachel started making more.
Colin has been working on a non-fiction book to keep intellectually stimulated. But it’s hard to stay focused with the kids and his wife’s robust earnings.
Income Statement Of A $1 Million A Year Household
Let’s take a look at the Chens’ income statement. As you will see, earning $1 million a year goes fast due to taxes and other living expenses.
Income And Tax Analysis
After maxing out her 401(k) and contributing $6,000 a year to her Health Savings Account, Rachel has a taxable income of $975,500. Her income is in the 37% federal marginal income tax bracket, and she pays an effective federal tax rate of 31%, or $302,405.
Given this household lives in New York City, they pay a State tax rate of 6.85% ($323,200+), and city tax rate of 3.87% ($500,000+). Their effective State and City tax is therefore around 10.71%, or $104,574.
Their total Federal + State + City tax bill a year equals $406,979.
As a W2 wage earner, there’s really no way around this enormous annual tax bill. Due to the SALT (State And Local Tax) limit of $10,000, high-income earners in high income tax states such as California, New York, New Jersey, Connecticut, Oregon, Minnesota, and Iowa lose out. Before 2018, the deduction was unlimited, but subject to Alternative Minimum Tax.
Even though the marriage penalty tax has been abolished for individuals earning up to $300,000 a year who decide to get married, the SALT cap limit of $10,000 is a marriage penalty tax. If you have two unmarried taxpayers both paying $10,000 in SALT, they will get an aggregate $20,000 when they file, whereas if they get married they suddenly lose $10,000 in deductions.
EXPENSE OVERVIEW
Private School Tuition – $100,000/Year
The couple forks out a hefty $100,000 a year for their two sons to attend The Dalton School. Tuition for the 2018 – 2019 school year is $48,450 a student, which includes books, computers/tablets, and lunch. Add a mere $1,550 for fundraisers and miscellaneous stuff and you’re at $50,000 per child.
Given mom and dad went to Yale University, they’d like their children to also go to Yale University. They know that Yale and all the prestigious private schools have a legacy system which gives children of alumni a huge leg up in admittance, no matter their racial or economic background. Some call this affirmative action for rich kids.
Although legacy children have a roughly 3X higher chance of getting admitted than nonlegacy students, there is an understanding that alumni should provide regular donations to stay in good standings. Therefore, Rachel and Colin together donate $5,000 a year.
Finally, the Chens also contribute a maximum gift limit of $60,000 combined to their children’s 529 College Savings Plan. They are fortunate to have paid off their student loans years ago.
Food And Entertainment – $4,583/month
New York City is the best city in America for food and entertainment. Although many in San Francisco might contest this claim, the entertainment part of the equation is truly second to none.
The classic mutton chop at Keens Steakhouse costs $60 before tip and tax. Add on a glass of Cabernet Sauvignon, some creamed spinach, wedge salad, and a 1/2 dozen fresh oysters, and we’re easily talking $150 per person. A meal at one of my favorite restaurants, Le Bernardin, will easily cost $600 for a couple with wine pairing. Have a look yourself.
After a nice meal, the Chens like to hit up a Broadway show. Tickets range from $60 up to $1,500 on average for the latest hot show. But given they aren’t earning multi-millions, they often settle for $250 tickets at most. In other words, a date night out easily costs $1,000+. Good thing they only go to shows about once a quarter because they’re often too busy or too tired to do anything more than have a meal at their favorite local sushi restaurant for $150 total.
When the Chens are not eating out, they’re eating home delivery from GrubHub, or having a simple home cooked meal prepared by Colin. Living in the culinary capital of America is both a blessing and a curse. Both Rachel and Colin are constantly watching their diets and working out so they don’t die prematurely.
Housing – $9,749/month
They own a 5 bedroom, 3 bathroom, 2,700 sqft brownstone in Park Slope, Brooklyn they bought in 2012 for $2,000,000. It was a fortuitous time as their brownstone has appreciated by roughly 40% six years later.
When their first child was born in 2008, they had owned a $1.3 million, two bedroom, one bathroom condo on the Lower East Side bought in 2004. They realized very quickly that they needed more space for two kids. They plan to live in the house until their youngest goes off to university in 11 years.
With a loan-to-value ratio of just 53%, they feel comfortable paying down a $1,500,000 mortgage on her $1,000,000 income. They locked in a 30-year fixed interest rate at 4% in 2013 and can comfortably afford the $7,161 monthly mortgage payment, $2,600 of which goes to paying down principal.
Unfortunately, they’ve also got to pay property tax of $17,556 and home maintenance expenses of about $10,000 a year. Things tend to break or leak with old brownstones. They didn’t truly realize how much more it would cost to maintain a larger home with outdoor space compared to their condo in Manhattan.
With the SALT deduction capped at $10,000, they will be losing out on thousands of dollars of tax deductions. As a result, they’ve diversified into real estate crowdfunding to take advantage of heartland real estate where valuations are cheaper and net rental yields are much higher. Perhaps, one day, they’ll retire in a lower cost of living area as well.
Vehicles And Transportation – $2,842/month
Colin is a car enthusiast, and Rachel appreciates the utility and safety of an SUV for her kids. As a result, they own the newest Range Rover Velar and Porsche 911S. The P380 Dynamic Velar is leased for $850/month. The Porsche 911S costs $1,400/month.
The Chens drive their Velar to the Hamptons many weekends during the summer where they rent a vacation house with friends. Colin drives his Porsche to the country club to play golf a couple times a week while the kids are in school. It’s his way of staying in shape and socializing given most of his peers still work full-time jobs.
Vacations – $40,000/Year
The Chens take three vacations outside of New York City a year plus a combined week’s worth of local vacation scattered through the year. Granted, they are spending more time locally due to the pandemic.
Given Rachel works ~65 hours a week, vacations are extremely valuable to her so she can recharge and spend quality time with family. The thing is, even when she’s on vacation, she’s checking in with her analysts and following global stock markets at all hours.
Rachel has long felt a tremendous amount of guilt for being away from her kids for so long, but she also realizes she’s in an enviable position to maximize her career earnings while the stock market is still hot. Eventually, the market will turn and it will become much harder for her to outperform.
The Chens’ favorite vacation spots are mostly in Europe: Dubrovnik, Almalfi Coast, St. Tropez, Provence, and Mallorca are some of their top destinations. It’s easy to fly to Europe from the East Coast, but every other year, they’ll take a trip back to see extended family in Taiwan. They also love visiting Japan, Thailand, and Vietnam when they can arrange two consecutive weeks off.
Each international trip for a family of four costs roughly $13,500 for the week. The cost can be broken down as follows: $4,000 – $6,000 for economy class flights, $4,000 – $5,000 for 7 nights at a five-star hotel, and $2,000 – $4,000 for food, excursions, and souvenirs.
The remaining $5,000 out of their yearly $40,000 vacation budget is allocated towards being a NYC tourist.
Clothes For Four – $24,000/year
Rachel loves clothes and shoes, and Colin doesn’t mind dressing up nicely to match his lovely wife, although he prefers to wear athletic gear all day. As a fund manager who expects to be taken seriously in a male-dominated industry, Rachel dresses her position.
Her pantsuits from Gucci, Dolce, and Chanel easily cost between $2,000 – $3,500 each. On average, she buys one work suit once a year to keep her threads fresh, although sometimes she buys a couple during holiday sales.
With every power suit must come matching Manolo Blahniks or Jimmy Choos at the cost of between $800 – $1,000 a pair on average. Below is a regular blue satin pump by Manolo for $995 before tax at Nieman Marcus.
After the pumps, Rachel must of course own a work-appropriate tote bag that can cost anywhere from $1,000 – $3,000. She prefers the understated Prada bags with their hard waterproof exterior. Below are some of her clothing examples.
Given Colin is a stay at home dad, he doesn’t need to spend anything on work clothes. However, he does own and appreciate an array of finely cut blazers to go along with his designer jeans and button down shirts for when they go out.
Each custom blazer costs between $1,000 – $1,500 on average. Designer jeans run between $180 – $300, and shirts from the likes of Thomas Pink can range from $80 – $250. He only has one watch, a stainless steel Royal Oak Audemars Piguet he bought for $16,000 years ago.
Charity – $25,000 / Year
The Chens feel extremely fortunate to be in their position as second generation Americans whose parents worked lower income jobs to put them through school. When you are given the opportunity to make it beyond your wildest dreams in the greatest country on Earth, the Chens feel it’s their duty to regularly give roughly 2.5% of their gross income to charity.
Rachel and Colin are particularly passionate about helping foster kids get through a difficult system in order to be given a fair chance at life. They know their sons are extremely fortunate to attend private school, and deep down they feel it is unfair that their kids can have so much, while other kids, through no fault of their own can have so little.
Finally, they donate to organizations that do research on nystagmus, a visual condition their youngest son inherited. Nystagmus is a neurological condition that causes involuntary movement in the eyes, which leads to worse than 20/20 visual acuity, even with the use of glasses, contacts, and surgery.
Net Worth Summary After Earning $1 Million A Year
Rachel has a target of working for 15 more years until her youngest son graduates college. Once both kids are through college, this will free up roughly $200,000 a year in after-tax children related expenses, which is equivalent to roughly $340,000 in gross income based on their 41% effective total tax rate.
After 15 years, the Chens should be able to accumulate at minimum:
- $277,500 in 401(k) plus $150,000 in profit sharing
- $816,495 in after-tax cash
- $500,000 in principal pay down (leaving $1,000,000 left in mortgage)
For a base case net worth increase of roughly $1,600,000 without any appreciation in their investments or house.
Assuming $106,666 in base case net worth growth over 15 years, no compensation increase during this time period, and a current $3,000,000 net worth, including the equity in their primary residence, the Chens will realistically have a $10,000,000 net worth by the time their youngest graduates from college using a 6.2% annual growth rate. She’ll be 60 years old and he’ll be 58.
Once their brownstone is paid off, they’ll save an additional $86,000 a year in after-tax cash flow, equivalent to $145,000 gross based on a 41% effective tax rate.
Therefore, the Chens can afford to maintain their lifestyles earning just $500,000 a year once they no longer have mortgage debt or child expenses.
With a $10 million net worth, all they would need to do is figure out some way to generate a 5% return to live a great retirement and diligently track their finances to make sure there’s no leakage.
They’ve been surprised at how some of their rich friends ended up with so much less because they weren’t aware of their risk exposure during a downturn or how much they were spending.
Not Sure If It’s All Worth It
On paper, everything looks great for the Chens. Yet, Rachel tells me she doesn’t know if it’s worth working 65 hours a week for the next 15 years. Even the finest lobster at Le Bernardin or the most picturesque luxury villa off the Almalfi Coast gets old after a while.
Rachel sees a therapist every other week to help her manage the constant pressure she feels to provide for her family, outperform her peers, and outperform the markets. The market takes no prisoners and every month she starts with incredible anxiety. This type of pressure has begun to pulverize what little peace and quiet she has left inside. She’s also recently begun to develop heart palpitations, which has her worried.
Colin also sees a therapist once a month to help him get through his feelings of unworthiness for being a stay at home father. Although he’s truly a great dad, he often feels gutted to have given up his career. None of his friends, who all work, understand what he’s going through. He feels isolated and occasionally depressed. Sometimes he gets jealous of Rachel’s success, which leads to fights.
Wants To Spend More Time With Family
What Rachel misses most is spending time with her boys, who are growing up too fast for her liking. Like middle age, where she now has a greater sense of her mortality, she knows that she might only have 5-7 years left to spend time with her sons before they would prefer spending all their free time with their friends. Before she knows it, they’ll be off to college where she might be lucky to see them twice a year.
Rachel envies Colin’s time at home. Most of her girlfriends are stay at home moms who take turns hosting playdates when their kids are off. When they’re in school, they often go to brunch at Blue Water Grill with bottomless mimosas over mounds of freshwater oysters.
They recognize they are extremely fortunate, and for the most part, they are happy. The Chens just wonder whether the grind is worth it, especially when they see friends from high school leading happy lives on much less.
Generate A Greater Net Worth
The only way to live a freer life is to drastically reduce expenses, change their lifestyle completely, or accumulate at least 20X their annual expenses in net worth. At their current $500,000 annual burn rate, Rachel will truly need to work another 15 years to finally experience the joys of financial freedom.
If I was Rachel, I’d either ask for a sabbatical or dial back work to 40 hours a week for less compensation if she cannot outperform. Making less money with less stress, fewer hours, and a lower effective tax rate sounds so much more reasonable. They’ll have to cut down on entertainment, clothes, and travel, but they’ll gain back so much more quality time as a family.
At high income levels, retiring early is a choice. Yet so many people cannot or will not because oftentimes, the money is too hard to quit.
How To Retire Earlier On A High Income
Even if you are earning $1 million a year, you must build a big net worth and track your finances. To do so, sign up for Personal Capital, the web’s #1 free wealth management tool to get a better handle on your finances.
Run your investments through their award-winning Investment Checkup tool to see exactly how much you are paying in fees. After you link all your accounts, use their Retirement Planning calculator. It pulls your real data to give you as pure an estimation of your financial future as possible. What you measure can be optimized.
Earning $1 million a year is great, but you’ve got to save most of it and invest it.
Invest In Real Estate
Earning $1 million a year is great, but you need to invest the money wisely as well. Real estate is a core asset class that has proven to build long-term wealth for Americans. Real estate is a tangible asset that provides utility and a steady stream of income if you own rental properties.
Given interest rates have come way down, the value of rental income has gone way up. The reason why is because it now takes a lot more capital to generate the same amount of risk-adjusted income. Yet, real estate prices have not reflected this reality yet, hence the opportunity.
Take a look at my two favorite real estate syndication platforms:
Fundrise: A way for accredited and non-accredited investors to diversify into real estate through private eFunds. Fundrise has been around since 2012 and has consistently generated steady returns, no matter what the stock market is doing.
CrowdStreet: A way for accredited investors earning $1 million a year to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations, higher rental yields, and potentially higher growth due to job growth and demographic trends.
Both platforms are free to sign up and explore.
I’ve personally invested $810,000 in real estate syndication across 18 projects to take advantage of lower valuations in the heartland of America. My real estate investments account for roughly 50% of my current passive income of ~$300,000.
The real winners in this world are the “prestige” institutions. You pay for the privilege to get the prestige, and then work yourself into heart palpitations and therapy to generate enough income to pay them again with the earnings they helped you generate (because your kids HAVE to go there). Then you die and realize you gave all your money (i.e. time) to ivy league schools,a few cocaine dealers, and NYC bar/restaurant scene…lol joke is on you.
OMG, John. You nailed it. I hope they read your post.
I love Paper Tiger’s (right above) comment. Its always so interesting to see it from the other side. Our household doesn’t make close to 1 million so its like a mini “what their lives are like” without the annoying reality TV music.
I wonder about the stress of the Chen’s legacy children too. I wonder if the parents, depending on what they choose to do, will reflect the same spirit as their sons down the road.
Oh and another topic I guess is, maybe the stressful work environment of portfolio managers need to be taken into consideration on the whole. To keep talent….how does one take the edge off?
I hope there’s a part 2!!
It seems that Rachel and Colin really need to discuss what’s most important to them and make lifestyle changes as soon as possible considering that Rachel’s income is dependent on how well the markets do and a recession might not be that far away. The Chens do not seem like a happy family and isn’t happiness the ultimate goal in life? They probably have happy moments while on vacation or on dates but is that enough? It’s understandable that they would want their sons to have the best education, so they could one day get into Yale and achieve similar successes as them but if the parents are suffering from stress, why would they want their children following a similar path? I think the most important thing is for Rachel to take care of her health and if that can be achieved by reduced work hours then she should do it. Another change I would make would be to cut the private school expenses. The money spent on Dalton is so significant that if it were invested, it could be a huge nest egg/trust fund for the family’s peace of mind.
I have so much to say about this bloated budget that I am speechless. My wife and I live in South Florida walking distance to the beach, make <$200K/per year and save more than this. I simply don't get it. This post has ruined my day.
“Wherever your treasure is, there the desires of your heart will also be.”
This really is a discussion about values as much as it is about money management. They should take a hard look in the mirror, decide what is really important to them, place priorities and values around attaining joy and happiness rather than wealth and power and maybe, just maybe they will have a chance to “pull the nose up on this jet” before it gloriously crashes to earth.
Remember, money is not the root of all evil; it is the LOVE OF MONEY that causes all the problems!
Thanks, Sam. We live considerably more frugal lives about a dozen miles away from Central Park and are constantly amazed by how many people just spend it like crazy.
I got nauseated when I got to the spending table and I couldn’t finish reading…how come people choose to live a life like that…they think they are happy? really? never mind
They don’t think they’re happy, they’re both in therapy. It’s absolutely crazy.
I think one mistake in your calculation is the cost of education. Depending on how old their kids are those tuition rates, especially at Yale are likely to go up..by alot. Aren’t tuition costs growing at like 7% per year.
Better factor in a lot more to be Yale Bulldogs.
Nice play on characters – excited for the movie.
If they’re unhappy and want to cut back, there are a few easier targets, like leasing 2 luxury cars in NYC, the country club membership, clothing, food budget and travel budget (3-star hotels aren’t so bad), but there are some things that pull harder on one’s heart strings. Like how do you pull your kids out of Dalton once they’re in? And who can fault them for contributing $60,000 per year to college funds, especially since their alma mater now costs well over $60,000 per year to attend? It’s hard to provide your children with less than what your parents could provide you, and so the cycle continues.
One question I’ve been pondering recently is how much is a reasonable amount to spend on activities for your kids, such as sports and music lessons? Say you’re already living a more reasonable, upper middleclass lifestyle and spend less than the Rachel and Colin and save more. If your child is a talented athlete and makes the top travel team for 2 sports (which are largely in different seasons), how much would you need to make to conclude it’s reasonable to spend $2,000 per sport per year for that child? Or if your child is a gifted musician, what’s a reasonable amount to spend on music lessons? And what if you have 2 or 3 children, each who plays two sports, and an instrument? It adds up pretty fast, and it’s harder for some people to say no to their kids than it is to say no to themselves.
Having older children now…I’d say do not spend a lot of money on sports as I’ve seen kids burn out and get hurt at a young age…so all that time & money wasted. If a child REALLY wants to play an instrument- I’d spend the money there as long as you’re not begging them to practice. Save the money for education from what I’ve seen. Very few of our kids friends went on to play professional sports.
Thanks for sharing this. As an athletic kid growing up, I loved playing sports. But I did get injured, and you’re right, few become professional athletes. But, sports can make you have a better life in school due to our sports culture (I was tennis team captain and got some love there in HS), and may help get you into college. I’m a HS tennis coach for 3 months a year for 15 hours a week.
I’d love, love for my son to master a musical instrument like guitar, sing, write, and do some long term athletic activity. We shall see!
Wow. If they are really concerned about finances, the husband ought to go back to work and then they need to trim those expenses. All of those expenditures on vacations, clothes, food is crazy! They can still do lots of things in those areas but could be much more frugal/sensible about it.
I might have missed it, but what is their current level of savings? How much tucked away in 401ks, IRAs, 529s, brokerage accounts etc etc? Any help from family? Feel like there may be other parts of their financial lives not shown here which would provide a fuller picture.
At that income level, and a few smart investments, they should be in a much better spot. Otherwise trying to keep up with the Joneses in NYC is a losing battle.
Thanks again Sam – these lifestyle posts are so interesting to read, sort of like watching soap operas or lifestyles of the rich and famous!
Similar to Jurassic Park movie sequels to your past articles of living on $200,000 and then 500,000 a year that generate so much commentary and interest,
maybe the next posts can be pre-quels like Star Wars and show a family of 4 living on $100,000 and then 50,000! (or have you already done this)
On a side note, our family of 4 spent a glorious month in France and San Sebastian for a total of $22,000 (actually 19,000 if you subtracted items we would have spent at home like groceries, utilities etc) and I’m sure others do it for much less but to each their own if they can afford it! One tip I have is it cost us a total of $1780 for the four of us to fly non-stop economy in high season (June/July) from LAX to Paris by applying for 2 travel credit cards that each earned $60,000 miles 6 months before we left for our trip to pay for 2 flights!!! We also airbnb it and always stayed in at least 2 bedrooms for under $300 a night – beach front in San Sebastian- do not know how to attach a photo but is was a dream come true!
Thank you for your posts, I am a fan!
Ah yes, a Star Wars prequel series for sure! I plan to survey readers in my private newsletter, or here, if they want to share their story.
I’m interested in people who live in: Austin, Denver, San Antonio, Seattle, LA, San Diego, Honolulu, DC, Boston, and Miami for starters.
Gonna create a Google Docs survey for people to fill in.
Sounds like a fun adventure you guys had!
“Unfortunately, the only way to live a freer life is to drastically reduce expenses, have Colin go back to work, change their lifestyle completely, or accumulate at least 20X their annual expenses in net worth.”
I couldn’t agree more. As I was reading your post, I kept wondering what world I am living in since it’s so different from Rachel’s. And honestly, I’d love to try their lifestyle for a day to see what it’s like. Not sure if I’d enjoy it eternally, but it’d be a great break from the frugal lives we have.
Envy in a marriage/relationship is real. I understand why they feel that way about each other. I agree with you that Colin should go back to work, and Rachel can reduce her workload or change her career to better balance work and life. If it doesn’t work, they can go back to the way things were. Having a bitter spouse is a recipe for a stressful and deteriorating marriage IMHO.
Agreed. He is driving a porche around playing golf and he’s upset with her working long hours. Living this way on one salary has to be stressful for both of them, because, her job isn’t 100 percent guaranteed either. The irony is they seem to need a financial planner.
Colin should suck it up and make up with his ah-mah so he’ll inherit a bundle. She’s old and she won’t live forever. ;) I read all 3 books.
As for Rachael, I think your plan is good. Cut back on the hours and learn to live with a bit less income. Less stress will lead to a more harmonious family life. They’ve got to get along and stop fighting.
Unfortunately that’s not how it works in this industry. You get paid for your performance, not your hours worked. It’s not like you can go to the fund manager and say, you paid my $1M last year and I worked 60 hours a week, this year I’ll work only 40 hours a week (2/3rds) and you just pay me $666k. You get paid $1M to outperform the market; if you can outperform while only working 40 hours a week you can cut back your hours without sacrificing pay. The reality is people work long hours in this industry because that is what it takes to beat all the other smart people working long hours trying to beat you.
the irony is long hours still won’t guarantee the out-performance…
Making all of a family’s income as a W-2 wage earner is a killer. This is my biggest take away here, who cares if they blow 26K on cars (paltry compared to income) or 100K+ on their kids (great investment) just looking at the 40% loss to the government should give the Chen’s some cause for thought. If they can team up and maximize their combined corporate experience and connections there is a business that can be grown from there. I am continuously shocked at how many extremely intelligent people choose to work for others. Get out and meet some business owners. As a group there isn’t something magical than makes them better, they just choose to say yes to having to figure things out.
What an unhappy, hopeless family. And the poor kids are destined to be as screwed up as their parents. It is insane to choose that lifestyle.
Isn’t it ironic that she manages money for a living, maximizing returns for others, probably trying to get them to financial freedom with their investments, yet her retirement age is 60.
It is ironic, but it’s what I’ve observed working in the finance industry from 1999-2012. Lots of people made good money. But lots of people spent aggressively and got caught with their pants down when the 2000 and 2008 recessions hit. Many got their bonuses slashed or lost their jobs and they could never get back to making similar money again.
Hence, why there’s an important need for personal finance education.
I’ve seen too many woody allen movies to know how this ends.
I will say it if no one else will. The expenses on the kids are fine, to each his own, and the home is relatively reasonable in cost too, since they bought at a good time and it’s appreciated well so far. The big elephant in the room are the other lifestyle expenses, like luxury car payments, clothes, dining out with entertainment and those overseas holidays. If she is getting stressed, these things represent living beyond their means. I’m not expecting them to wind down immensely but just halving these depreciating expenses like the cars, clothes and halving the costs of the dining out and holidays would make a massive difference to financial well being and peace of mind. I noticed they don’t seem to be investing much if any either which is asking for trouble especially in a single income household.
No go fund me link ? Not thinking they are going to get a lot of sympathy on this blog. Part of the tenants of FIRE is to live simply……46K per year in kindergarten may be viewed as a tad excessive.
I think I would change up stuff quick if the husband is already restless with the current arrangement.
I do hope more people realize the craziness of ~$50K a year private grade school tuition, when there are certainly much cheaper options.
https://www.financialsamurai.com/accept-1000000-to-attend-public-school-over-private-school/
Especially in Park Slope, where PS 321 is one of the best public schools in the city.
https://www.greatschools.org/new-york/brooklyn/2751-Ps-321-William-Penn/
https://www.niche.com/k12/ps-321—william-penn-brooklyn-ny/
One tactic of the wealthy in NY is to pick a top school district, then contribute to their local public school. That’s a lot cheaper than paying private tuition. This couple already has the right district.
PS 321’s PTA draws more than $1M/year, making it (as of 2013-2014) the ninth richest PTA in the country:
https://cdn.americanprogress.org/content/uploads/2017/04/18074902/ParentFundraising-report-corrected.pdf
Regarding Yale: ignoring inflation, they’re looking at about $400K total for two children for four years each. They’re putting $60K into 529 plans annually. After seven years, the colleges will be fully funded. Growth in the 529 plans should keep up with inflation. So well before the younger child (born in 2011) hits college, they should be able to stop funding the 529 plans.
They also get a state/city deduction of $10K/year on those 529 contributions (NYS has one of the best 529 plans). Not a big dent, but since you’re computing city/state income taxes down to the dollar, this $1K+ should go into the mix.
As should deductions for all their contributions (their mortgage interest alone takes them into itemization). These are at least $25K on one line, plus $5K contribution to their alma mater.
A big line item that’s missing in all of this is their medical expenses. Since they’re contributing to an HSA they have a high deductible plan, meaning that they’re basically liable for all their medical expenses, including those therapy sessions. Virtually anyone with this much money uses HSAs as super-IRAs and pays out of pocket. That’s got to make another dent in their cash flow.
$400,000 of college costs in each of the 529s won’t max out the lifetime contributions in NY ($540,000 I think). They could be running some of the current private school tuition through the 529 plans and get a state tax deduction, since the tax changes in effect for this year made private pre-college educational costs 529 eligible.
Good point. Honestly, I’d forgotten about the possibility of using a 529 plan for pre-college. As it turns out though, not all states have made the same change as the federal government.
New York is one of those states that doesn’t allow 529 plans to be used for K-12 expenses. The state will “recapture of any New York State tax benefits that had accrued on contributions.”
http://cdn.unite529.com/jcdn/files/NYD/pdfs/DisclosureBooklet.pdf
So simply running the K-12 money through the 529 plan wouldn’t gain much in tax benefits.
FWIW, “Effective September 22, 2017, the Maximum [529] Account Balance will increase from $375,000 to $520,000.” (same reference)
Earning $500,000 in a low cost of living part of the country looks better and better after reading this. I realize this family has no choice but to live in the NY area because of career choice, but wow, earning half of what they do and living in a less stressful and costly environment is beginning to look like a better choice (which is how we live). And we have a 50% savings rate to boot. BTW, they could always move to the suburbs and save some money all around, but the commute would add additional hours to her day.
Here is a rough rough budget I did for myself for 2018, who works overseas with my spouse & child (who is in an international school) in a decently expensive city.
I don’t pinch pennies at all, and it is pretty easy to save a ton of money. In almost every case I rounded up (ie I sign up for CC’s for miles to get free flights back, usually eat in and don’t eat out like I listed, etc.so my costs are actually lower than below)
If the US government stopped being the only one in the world to tax overseas citizens, this would look even better.
Gross Income $750,000
IRA ($11,000)
Net Income $739,000
Foreign Taxes ($45,000)
US Taxes ($180,000)
Tuition ($12,000)
Rent ($44,615)
Car ($4,000)
Food/Ent ($24,000)
Children Activity (Language Tutors) ($8,000)
Vacations/Travel Home ($25,000)
Clothes ($10,000)
Gas/Insurance/Taxi ($2,000)
Misc ($10,000)
Total Expenses ($364,615)
Total Savings inc. IRA $385,385
Savings if the US joined the rest of the world and stopped taxing people who don’t live there (much like individual states don’t tax former residents state income taxes) $565,385
You only have a 24% effective rate on 750k and pay no state taxes. I’m up over 38%
For the “no state tax” part, there are safe harbor rules for each State. For example, Safe harbor is available for certain individuals leaving California under employment-related contracts. The safe harbor provides that an individual domiciled in California who is outside California under an employment-related contract for an uninterrupted period of at least 546 consecutive days will be considered a nonresident. There are certain exceptions to this rule.
Would love for you to expand on your 24% effective tax rate. Is this because of the foreign tax exclusion on the first $100K, even though I see the foreign taxes paid?
Also, how do you contribute to two traditional IRAs with income at $750K? After about $196K in the US, a married couple can no longer contribute to an IRA.
My understanding from reading https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits is that a married couple can contribute to a Traditional IRA even at a high income, they just cannot take the tax deduction.
It’s all about priorities. I’ll take sitting at this nice cafe and reading the paper and a few blog articles over working long stressful hours to accumulate a bunch of crap and turn out some spoiled kids. Time > Money
Sam, as you know, at the $1M income level in big cities, the spending and saving profiles all look different, and there is quite a bit of latitude. But, this one is definitely representative.
I know it seems incredible to many that people live like this. But they do, by the many 10’s of thousands in NY, SF, Vancouver, Boston, LA, Toronto, London, Paris, Munich, etc.
I would know. Both personally and by close observation of this cohort in a similar place.
Yikes! Reality is humbling.
I can’t relate to anything at the top but everything at the bottom.
I’m 5 years younger than Rachel, make roughly 90% less, have two 7-year-olds, and live in the DC area. I’ve experienced the heart palpitations from working 60+ hours a day and stressing over client satisfaction.
But if I’m experiencing that at this level, why even bother to get to the next, if all I have to look forward to is MORE… MORE stress and health scares; MORE taxes and relationship worries; MORE child support payments (in my case).
I hired a personal trainer and started working out more at the gym to give me a physical and mental outlet from the stressful work. My trainer has also become my therapist.
The Chens should consider hiring a personal trainer to keep them focused on a healthy lifestyle because that’s the only way they’ll make it through the all of the stress their lifestyle is putting on their bodies and their relationships.
The reality is they are top performers. And it’s hard to get top performers to stop pushing themselves. Even if Rachel falls back on her hours, Colin will see it as his chance to get back into working.
D’Angelo, thank you for making the point of questioning why MORE.
What I discovered after leaving corporate America is how much stress I was caring in my for so long that it became normal. Well, it ain’t normal. And looking back, I clearly understand how/why work was killing my quietly.
Hang in there! Therapist / trainers sounds like a good 2:1.
Wow. Congrats to the Chens on sacrificing and earning the right to have such a great income. That said, this story is a perfect example of the saying “It’s not what you earn, it’s what you keep.”
Outside of their 401k and HSA, they’re not regularly investing. With that kind of income, they could quickly become very, very, wealthy were they to allocate more of it towards buying income-producing assets like rental real estate or income dividend-paying stocks. It’s especially surprising they don’t do more investing considering what she does for a living.
1.5 million dollars in assets (really 1 million because I don’t count their home) after earning over 15 million in the space of 15 years is nothing to celebrate. I hope they read the comments in this post. They’ve done wonderfully in their careers. It’s time to get more serious about their investing.
Their future selves will thank them 15 years from now. You can only eat so much steak before it begins to taste like soap.
Considering those are all cash expenses I’m guessing the $1M is her cash compensation and doesn’t include her carry in the fund. She’s been on the buy-side for 17 years and a Portfolio Manager for the last 8 years. She should have at least a 6-figure if not 7-figure investment in her own fund. Your equity payout each year at most funds I know is paid out as a share of the fund, not as cash. So it isn’t true to say they aren’t investing outside of their 401k, I just don’t think that investment is accounted for in this article/description.
Also she hasn’t been earning $1M/year for the last 15 years. Hedge fund analyst pay starts around $200k salary + $100k-$150k bonus. It takes a while to work up to the $1M/year level, certainly not until making portfolio manager at a fund of that size.
Agreed about other sources of income or savings. Her current income statement may not not look so great, but her balance sheet probably looks healthier. I’ll bet she knows know a thing or two about investing. I was a little unclear whether the base case net worth of $1.6M was an actual number or an assumption but Sam excluded house appreciation which is huge.
Also, people who have a big future nest egg (whether earned or inherited) have a completely different relationship with money. I know a couple who are intentionally taking it easy and earning very little because they have a wealthy parent (referred to as Grandma):
1. Grandma will take care of all college expenses for both kids
2. Grandma frequently pays for family vacations
3. Grandma chips in whenever they buy/upgrade their house
4. Grandma will bestow a large inheritance
5. Grandma recently bought an Audi Q7 for them
6. Any money they earn/invest now is fun/mad money
For their potential wealth, they live a relatively modest upper middle class lifestyle without the associated stress.
If I had the benefit of just number 1, I’d already be at number 5.
Living in Brooklyn I have to say that that townhouse is a steal for 3mil.
It is available right this moment! Opportunity! Or maybe, the housing market really is slowing…
Oh man get the popcorn out for this one… :)
Yes, I would work a few years at $1 million a year and I would do it, let’s say, completely differently. Then I would stop and enjoy the fruits of my labor for the rest of eternity.
Thanks Sam for sharing that and for Rachel and her family to provide all the details.
It really does shed light that the grass is not always greener on the other side. There is definitely a lot of lifestyle inflation here that although they could clearly afford it (evidenced by a high current net worth) if they were able to reduce some of it Rachel could exit the rat race much sooner and maybe save her sanity.
The other thing you pointed in the article is that she is taking advantage of the market while it is hot. Her job and salary will be intimately tied to how the stock market performs and that is a bit unsettling.
If there starts to be a recession (which you have given previous warning about with the yield curve post) her amazing salary can come crashing down and she may then be over leveraged and lose a lot to keep afloat.
Shocking about those property taxes as well as all the state and city taxes necessary living there.
I am thrilled I am able to take advantage of geoarbitrage to make my path to FIRE so much easier than hers.
Yes, the money management/finance industry is very cyclical. When times are good, they are really good. When times are bad, you not only earn poorly, you may also lose your job.
Hence, why it is prudent that folks save aggressively during good times to weather the bad times.
NYC prop tax is actually better than San Francisco’s, by a lot! 0.7% vs 1.3%.
I have a house worth less than half of theirs ($1.15M), and property taxes are substantially higher than theirs… I pay $25k+/year.
I thought those taxes looked cheap! What I did find pricey was their college savings. $30k/year per kid? That seems like a lot, no?
54 k savings…. I save more on a 100k salary than them on a million…
Agreed- I’ve never commented before, but I actually felt a little sad for this family. Our little family saves double what they do on a quarter of what they do. It seems like without major adjustments, they won’t have any peace.
This family is clueless financially. Cut back, save like crazy, give yourself a chance to scale back / semi-retire in 5-7 yrs. Or keep on running the treadmill. Two cars living in Manhattan – inventing dumb ways to waste money
I get to save nothing because most hogs like you don’t share your salary with coworkers that stay late and work extra hours, too.
I saw that is was 54k general savings plus $18.5k in the 401k plus 6k in the HSA plus 60k PER YEAR in the 529 of their kids. So actually a total savings amount of 138.5k / year.
Still a really low amount given their income.
And mortgage principal payments are also savings. Sam is guilty of a little hyperbole by emphasing the “free cash flow for investments” rather than the full savings.
It’s all in the chart though, and I’m great Petra pointed out the total savings from various line items.
Indeed, I just think there would have been less knee-jerk hostility in the comments to this family’s situation if a ‘full saving rate’ had been presented too. It may not be very nice for them if they read this !
I would feel very stressed in their situation though as redundancy would be devastating. While there is a lot of room to cut expenses in ( private school fees one car etc ) there is an incompressible level of core expenses of ~ 150k ( mostly house + some living expenses ) which is 3x previous annual free cash flow. Perhaps showing this & money makeover could be a follow up article ?
Depending on the year I make between high 6 figures to slightly over a million. It’s really surprising to see the expenses of other high-income households. I’ve lived in HCOL cities in the last 3 years (Singapore, Hong Kong, Sydney and London) and I rarely break $10k USD a month in expenses. Granted we rent and we have no kids or vehicles but I couldn’t imagine spending that much on clothing or food & entertainment every month! To each his own I suppose.
We live in HCOL cities too, our cost before kids could be below 10k USD but with kids we could not keep it even under 20k some months. We keep track of our expenses and are not big spenders. It is the cost of bigger house, education expenses, extra help, food, car etc. that you would not imagine compare to cost of single life. We are doing everything we can to cut down cost while maintain a certain lifestyle.