The_Ideal_Income_For_Maximum_Happiness_While_Working
00:00:00.000 | Hello everybody, it's Sam from Financial Samurai and in this episode I want to talk about the ideal income to earn while working and
00:00:07.560 | In retirement the ideal income provides for a wonderful middle-class lifestyle
00:00:13.260 | That means owning your house having a car being able to afford raising two children
00:00:19.040 | Paying for college and taking I don't know three to four weeks of vacation a year
00:00:24.560 | That's a pretty good middle-class lifestyle. And I think that's what most of us want now
00:00:29.940 | Instead of debating whether president Biden's student loan forgiveness program will add to inflation
00:00:36.560 | Probably cause moral hazard
00:00:39.480 | Probably a little bit result in colleges raising tuition
00:00:44.160 | Probably a little bit and affect the outcome of the upcoming election
00:00:49.300 | Probably I decided to take a different tact
00:00:53.200 | I explored why the announced income threshold to receive student loan forgiveness is
00:00:58.960 | the ideal income for most people from this exploration I then
00:01:03.440 | Interpolated the ideal net worth for someone to have before retiring
00:01:08.560 | Listen folks someone didn't just randomly come up with a hundred twenty five thousand income threshold per person
00:01:16.040 | Figured to be eligible to receive loan forgiveness
00:01:18.960 | Instead a whole committee of well-paid
00:01:23.280 | highly educated people debated for over a year and decided a threshold of
00:01:28.900 | $50,000 above the median household income was the right call
00:01:33.260 | $50,000 folks the median household income is only about
00:01:36.920 | $75,000 so a hundred twenty five thousand dollars per person or
00:01:42.440 | $250,000 per married couple or filing head of household is quite a significantly higher amount than the median household income
00:01:52.880 | Therefore the income threshold is not just a number but a clear guide for how much you should aim to make
00:02:00.680 | To live a more comfortable life
00:02:03.000 | And if you're burned out and making way more than a hundred twenty five thousand per person
00:02:08.080 | Then you may consider taking things down a notch or two until November 5th
00:02:12.340 | 2024 the next presidential election now first, let's just recap on August 24th
00:02:18.760 | 2022 president Biden unveiled a plan to cancel up to ten thousand tax-free and federal student loans for borrowers who
00:02:25.880 | individually earn less than a hundred twenty five thousand and
00:02:28.520 | cancel up to
00:02:30.880 | 20,000 tax-free in federal student loans
00:02:33.880 | If you were a Pell Grant recipient and Pell Grant recipients are lower income households in addition
00:02:39.640 | You can even get a refund for any payment
00:02:42.520 | including auto debit payments you made during the payment pause period that began on March 13
00:02:48.440 | 2020 and
00:02:51.160 | Finally president Biden will also extend a pause on federal student loan payments what he called quote the final time
00:02:58.280 | until December 31st
00:03:00.640 | 2022 for background I went to William & Mary
00:03:03.600 | It's a state school and I paid in-state tuition because that's what we could comfortably afford
00:03:08.800 | At the time tuition at William & Mary was twenty eight hundred dollars a year
00:03:12.160 | Versus about twenty two thousand a year for a comparable private university
00:03:16.440 | I really wanted to go to Babson College this college about an hour west of Boston
00:03:21.440 | Because it was the number one college for entrepreneurship for like literally 20 years in a row now
00:03:26.880 | But it was just too expensive. So we decided nah, let's just skip that
00:03:31.560 | Let's go to our local state school and worst case if I graduated from William & Mary and couldn't find a thirty thousand dollar or
00:03:38.160 | Forty thousand dollar a year job. I could go back to my job making four dollars an hour and McDonald's and pay my parents back
00:03:45.380 | So luckily I got a better paying job not huge forty thousand dollars a year base salary at Goldman Sachs in New York City
00:03:52.000 | But it was enough to launch me into making more money in my career
00:03:56.480 | So whether you believe forgiving student loans for individuals making up to 125,000 is right or wrong
00:04:03.320 | we must accept the government has the power to do what it wants and we the people voted these people in and
00:04:09.800 | Society is all about giving and taking you might have gotten I don't know child tax credit or a stimulus check
00:04:16.840 | Both of which I did not get or you could have got a PPP loan, right?
00:04:21.640 | A lot of people have been able to get PPP loans, but these loans are for running your business to pay your employees
00:04:26.520 | So that's a little bit different
00:04:28.640 | But the point is, you know give and take that's what society is when you're lucky enough
00:04:33.560 | You give and when you're unlucky enough, hopefully you can take and get a helping hand
00:04:38.640 | So it is my belief the government believes
00:04:42.080 | $125,000 per person is
00:04:45.760 | the upper limit for what they describe as middle class and
00:04:49.520 | Middle class is the best class because it is the protected class that gains the most favor from the government
00:04:56.400 | Further the middle class makes enough to live a comfortable lifestyle without the need for subsidies
00:05:02.480 | You know
00:05:03.160 | We're talking about again making enough to own a house a car have two kids and safer education and vacations
00:05:08.840 | At the same time the middle class is always eligible for subsidies such as the student loan forgiveness
00:05:16.640 | stimulus checks and child tax credits because
00:05:20.380 | Politicians rely on the largest demographic group in the country to stay in power
00:05:26.560 | One of the main goals of a politician is to stay in power for as long as possible until the term limits are over
00:05:33.480 | Once you have power, it's really hard to let go
00:05:36.560 | I've spoken to many people who have power and they just say look I like the power. I want that power to keep on going
00:05:43.600 | It's intoxicating and can set your friends and loved one up for life
00:05:49.280 | You know, really you just you got the power you got the power to dictate
00:05:54.080 | Who wins and who loses and obviously you can help out your friends and family
00:05:59.040 | Power is also the reason why you see billionaires enjoy buying media companies, right Bezos bought the Washington Post
00:06:06.560 | Lauren Powell Jobs bought the Atlantic Mark Benioff bought time
00:06:13.040 | John Henry bought the Boston Globe
00:06:16.360 | Glenn Taylor bought Star Tribune
00:06:20.400 | Patrick soon shown bought the Los Angeles Times Sheldon Adelson bought the Las Vegas Review-journal
00:06:26.600 | Joe Mancetto
00:06:29.280 | Bought fast company and Elon Musk is trying to buy Twitter but not at the price
00:06:34.800 | He initially offered but rather maybe 30% lower
00:06:38.200 | It's funny because when you're rich you want power and when you're in power
00:06:43.560 | You want to be rich and it both kind of leads to the same road if you pay attention very closely to our
00:06:51.200 | politicians many of whom
00:06:53.400 | Become very wealthy very wealthy during their times in office
00:06:58.320 | This combination of having your cake and eating it too is one of the reasons why wealthier households like to claim
00:07:05.160 | They are also middle-class
00:07:07.880 | Learning how to convince people you are middle-class when you're actually very rich is a skill worth learning
00:07:14.800 | And I wrote a post about that and it's worth reading. It's about
00:07:18.760 | Using sleight of hand tactics so people don't pay attention to you
00:07:23.800 | It's about changing the way you speak the way you dress
00:07:27.880 | It's actually about empathizing with other types of people from different socioeconomic backgrounds as well
00:07:33.880 | So it's worth the read who doesn't want to feel like they belong to a larger group the government always supports
00:07:40.440 | Nobody nobody wants to feel persecuted for earning more or having too much whatever too much is
00:07:47.480 | Therefore I think we all want to be middle-class whether we truly are or not
00:07:52.800 | And that is why so many people identify as middle-class the tricky situation
00:07:58.560 | Every politician faces however is determining what income cutoff is eligible and ineligible for free money
00:08:05.960 | Deciding this income threshold for a rigged distribution of tax dollars is carefully decided by a team of strategists
00:08:12.320 | economists and advisors
00:08:14.760 | They don't just one day come up with a hundred twenty five thousand and two hundred fifty thousand out of thin air
00:08:19.320 | If the income threshold for free money is too high
00:08:23.120 | Then enough people will start grumbling that politicians are providing tax cuts and free money to the rich and since most
00:08:29.960 | Politicians entering the office are rich. They don't want to make it too obvious
00:08:34.560 | Their policies are also helping themselves and their friends if the income threshold for free money is too low
00:08:40.400 | Then politicians won't be able to effectively buy enough support to remain in power
00:08:45.600 | Let's be honest folks
00:08:47.440 | The vast majority of people would vote for someone if the candidate promised to give them a free
00:08:52.720 | $500 $1,000 let alone a free ten to twenty thousand dollars and this is nothing new folks
00:08:59.760 | Whatever party is in power
00:09:02.400 | This is a strategy they use before midterm elections and before the bigger elections
00:09:08.000 | So observe what people do with their money
00:09:10.560 | Not what they say be agnostic and just understand that this is the way society is
00:09:15.960 | This is the way government is and it will always be this way
00:09:19.120 | We've seen this income threshold debated in the past when President Obama wanted to raise taxes on anybody making over
00:09:25.320 | 200,000 as an individual and any household making over
00:09:28.920 | 250,000 in his administration's eyes folks who made more were considered rich and then eventually there was compromise
00:09:37.320 | Now perhaps due to inflation and an increase in overall wealth since then
00:09:43.160 | President Biden has now raised the income threshold for higher income taxes to 400,000 per individual and
00:09:49.240 | 450,000 per household and
00:09:52.360 | Income taxes are likely going to go up for these income levels if the student loan forgiveness plan gets approved
00:09:59.920 | It's just it sets a great precedent
00:10:02.280 | given the ideal income to earn while working is between a hundred twenty five thousand and two hundred fifty thousand because again
00:10:08.560 | It's the protected income class where you're gonna get subsidies and you're not gonna get your taxes raised
00:10:14.200 | Then the ideal income to earn in retirement is also roughly the same
00:10:18.400 | After all, most of us would love to live the same lifestyle or better once we no longer have to work
00:10:23.880 | Here's the one thing that people don't realize who are working and saving for retirement and I realized this one year in back in 2012
00:10:31.880 | 2013
00:10:33.360 | Once you retire you successfully retire you have enough money your capital you're spitting out passive income
00:10:38.960 | You don't need to really save for retirement anymore
00:10:42.980 | You know
00:10:43.760 | If you've been saving 20 30 40 50 percent of your after-tax income for retirement once you're in retirement
00:10:49.680 | You don't have to save that 20 to 50 percent anymore. So suddenly
00:10:53.240 | your need for income or your burn is much lower and
00:10:58.760 | That is actually a surprise that many people have experienced since they left their day jobs now given
00:11:04.260 | We've had a history of saving and being frugal for so long
00:11:07.360 | Your natural propensity will be probably to save
00:11:10.200 | Even half of what your saving rate was while you were working because that's just what you're used to
00:11:15.760 | But you really don't have to do that and when you no longer need to save for retirement in retirement you free up a lot
00:11:21.920 | of cash flow
00:11:23.080 | So for me personally
00:11:24.320 | I'm trying to enter the accumulation phase at the age of 45 and I'll talk about this more in a future episode or future post
00:11:31.120 | But it's harder to do than you think because we're just used to habit creatures of habit
00:11:37.560 | It's just hard to change
00:11:39.240 | Since you don't need to save for retirement once you're retired
00:11:41.880 | The ideal income to earn in retirement is probably closer to a hundred thousand per individual and two hundred thousand per couple
00:11:48.280 | And so if you want to figure out how much capital you need to generate a hundred thousand
00:11:53.960 | Then it's just simple math to generate a hundred thousand a year in passive retirement income
00:11:59.200 | You will need the following invested capital ten million at a 1% rate of return
00:12:04.040 | Five million at a 2% rate of return
00:12:07.080 | 3.33 million at a 3% rate of return
00:12:10.200 | 2.5 million at a 4% rate of return two million at a 5% rate of return
00:12:17.320 | 6.66 million at a 6% rate of return and
00:12:19.960 | 1.43 million at a 7% rate of return a
00:12:24.280 | Reasonable rate of return in retirement is somewhere between 2 and 5%
00:12:29.040 | The last thing you want to do is take too much risk lose a lot of money and have to go back to work
00:12:33.940 | Therefore most people will likely need between 2 to 5 million in invested capital
00:12:40.080 | to generate the ideal income of
00:12:43.440 | $100,000 in retirement and I've written in the past how having a net worth of 10 million is the ideal net worth in retirement
00:12:50.080 | And that's what the majority of you voted on. So I went with that
00:12:53.040 | However based on government analysis of the student loan forgiveness income threshold
00:12:58.120 | 10 million is probably way too much. You just don't need it
00:13:02.100 | So it's just a nice to have but you really don't need it
00:13:05.420 | Now obviously not everybody needs to earn a hundred thousand in annual retirement income to have a great life
00:13:10.920 | We're talking about the mass market ideal here
00:13:13.960 | If you're happy spending fifty thousand a year gross per person in retirement
00:13:18.120 | Then all you need is a 1 to 2.5 million and if you're happy spending thirty thousand a year per person in retirement
00:13:24.700 | Then you'll only need six hundred thousand to 1.5 million in invested capital with a 2 to 5 percent
00:13:31.000 | Return now with the average Social Security payment of around twenty thousand a year
00:13:37.140 | You actually may only need two hundred to five hundred thousand invested capital to generate ten thousand dollars a year in retirement
00:13:43.020 | Because you add that to twenty thousand and you got thirty thousand a year
00:13:46.760 | So this is really doable for folks, you know who've worked twenty thirty forty years
00:13:52.560 | So I thought this was a really interesting derivative way of thinking about the income threshold for student loan forgiveness
00:13:59.800 | And I don't think anybody's talking about it this way
00:14:02.500 | I would encourage you to use government policies as a guide to live a better life a more
00:14:09.160 | Optimal life because we're always trading time for money and as we get older we want to spend more time doing what we want
00:14:15.820 | One of the reasons why I felt more comfortable leaving work in 2012 was due to an upcoming
00:14:21.880 | Change in tax rates. There was a new surtax of 3.8 percent on income from investments coming up in 2013
00:14:29.960 | further the highest marginal income tax rate was going up to thirty nine point six percent from thirty five percent and
00:14:36.400 | Back in 2012. I was exhausted and I was also bored with my job
00:14:40.900 | I wasn't making that much money
00:14:42.880 | But I just felt like well if taxes are going up and I'm already really tired
00:14:47.680 | That just doesn't sound like a good combination and instead of complaining
00:14:52.600 | I just I just just figured out a way out by negotiating severance
00:14:56.360 | So really never complain for more than a moment instead do something about a sub optimal situation
00:15:03.460 | Don't change your life due to upcoming government policies. That's the tail wagging the dog. It's backwards
00:15:10.420 | Instead use government policies as a guide to make marginal improvements in your life
00:15:15.960 | Government policies were at most 10% of the reason why I wanted to leave finance
00:15:20.280 | The main reason why was because I just didn't enjoy it anymore
00:15:23.800 | I didn't want the money and I found something else to do with my one and only life in
00:15:28.800 | Conclusion if you're making under a hundred twenty five thousand dollars per person
00:15:33.060 | You have the green light to continue going to try to make more money
00:15:37.360 | To improve on your career because you probably won't get taxed more and you'll probably still be eligible for subsidies
00:15:43.920 | over the next couple of years
00:15:46.080 | now if you make over one hundred twenty five thousand dollars per person and
00:15:50.520 | The more over you are the more you should consider taking it down a notch or two
00:15:55.840 | Especially if you're burned out since 2009
00:15:58.940 | I have carefully recorded how happy I feel based on the amount of money I was making and I'll tell you folks
00:16:06.560 | For here in San Francisco after you make over about two hundred thousand per person
00:16:12.080 | There's really no more happiness
00:16:14.280 | You can cover all your basic needs and you can have really nice ones can go on vacation drive a nice car
00:16:20.240 | Eat whatever you want. You're good anything more
00:16:23.560 | It just doesn't move the needle and so I truly believe that that ideal income where maximum happiness
00:16:30.880 | Doesn't increase anymore is about a hundred thousand dollars for America in general
00:16:35.920 | So obviously it goes up and down based on the cost of living where you live
00:16:39.700 | So the range is probably between a hundred thousand to two hundred thousand per person
00:16:43.840 | I don't know where you live and I don't know how burned out or energetic you feel right now
00:16:49.120 | But use that range that income range as a guide to help you determine how you want to spend your time
00:16:55.120 | How stressed you want to feel at work? And what do you want to ultimately do with your remaining time?
00:17:01.560 | Time accelerates the older you get and it becomes more valuable because you have less of it every single year
00:17:08.040 | So you have to figure out that right balance?
00:17:09.960 | I'd love to hear from you in a comment in my post whether you think a hundred thousand dollars per person is the ideal income
00:17:17.520 | For the mass market and for maximum happiness
00:17:21.400 | And if you enjoyed this conversation and the way I think that I think you'll really enjoy
00:17:27.080 | My Wall Street Journal bestseller buy this not that you can pick up a hard copy at financial samurai.com
00:17:33.560 | Forward slash B T and T and I appreciate a great review
00:17:38.520 | It's what keeps me motivated and it keeps me going to write and to record on financial samurai
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00:18:06.800 | FUNDRI SE. Thanks so much everyone and I'll catch you guys later