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 In retirement the ideal income provides for a wonderful middle-class lifestyle That means owning your house having a car being able to afford raising two children Paying for college and taking I don't know three to four weeks of vacation a year That's a pretty good middle-class lifestyle.

And I think that's what most of us want now Instead of debating whether president Biden's student loan forgiveness program will add to inflation Probably cause moral hazard Probably a little bit result in colleges raising tuition Probably a little bit and affect the outcome of the upcoming election Probably I decided to take a different tact I explored why the announced income threshold to receive student loan forgiveness is the ideal income for most people from this exploration I then Interpolated the ideal net worth for someone to have before retiring Listen folks someone didn't just randomly come up with a hundred twenty five thousand income threshold per person Figured to be eligible to receive loan forgiveness Instead a whole committee of well-paid highly educated people debated for over a year and decided a threshold of $50,000 above the median household income was the right call $50,000 folks the median household income is only about $75,000 so a hundred twenty five thousand dollars per person or $250,000 per married couple or filing head of household is quite a significantly higher amount than the median household income Therefore the income threshold is not just a number but a clear guide for how much you should aim to make To live a more comfortable life And if you're burned out and making way more than a hundred twenty five thousand per person Then you may consider taking things down a notch or two until November 5th 2024 the next presidential election now first, let's just recap on August 24th 2022 president Biden unveiled a plan to cancel up to ten thousand tax-free and federal student loans for borrowers who individually earn less than a hundred twenty five thousand and cancel up to 20,000 tax-free in federal student loans If you were a Pell Grant recipient and Pell Grant recipients are lower income households in addition You can even get a refund for any payment including auto debit payments you made during the payment pause period that began on March 13 2020 and Finally president Biden will also extend a pause on federal student loan payments what he called quote the final time until December 31st 2022 for background I went to William & Mary It's a state school and I paid in-state tuition because that's what we could comfortably afford At the time tuition at William & Mary was twenty eight hundred dollars a year Versus about twenty two thousand a year for a comparable private university I really wanted to go to Babson College this college about an hour west of Boston Because it was the number one college for entrepreneurship for like literally 20 years in a row now But it was just too expensive.

So we decided nah, let's just skip that 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 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 So luckily I got a better paying job not huge forty thousand dollars a year base salary at Goldman Sachs in New York City But it was enough to launch me into making more money in my career So whether you believe forgiving student loans for individuals making up to 125,000 is right or wrong we must accept the government has the power to do what it wants and we the people voted these people in and Society is all about giving and taking you might have gotten I don't know child tax credit or a stimulus check Both of which I did not get or you could have got a PPP loan, right?

A lot of people have been able to get PPP loans, but these loans are for running your business to pay your employees So that's a little bit different But the point is, you know give and take that's what society is when you're lucky enough You give and when you're unlucky enough, hopefully you can take and get a helping hand So it is my belief the government believes $125,000 per person is the upper limit for what they describe as middle class and Middle class is the best class because it is the protected class that gains the most favor from the government Further the middle class makes enough to live a comfortable lifestyle without the need for subsidies You know We're talking about again making enough to own a house a car have two kids and safer education and vacations At the same time the middle class is always eligible for subsidies such as the student loan forgiveness stimulus checks and child tax credits because Politicians rely on the largest demographic group in the country to stay in power One of the main goals of a politician is to stay in power for as long as possible until the term limits are over Once you have power, it's really hard to let go 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 It's intoxicating and can set your friends and loved one up for life You know, really you just you got the power you got the power to dictate Who wins and who loses and obviously you can help out your friends and family Power is also the reason why you see billionaires enjoy buying media companies, right Bezos bought the Washington Post Lauren Powell Jobs bought the Atlantic Mark Benioff bought time John Henry bought the Boston Globe Glenn Taylor bought Star Tribune Patrick soon shown bought the Los Angeles Times Sheldon Adelson bought the Las Vegas Review-journal Joe Mancetto Bought fast company and Elon Musk is trying to buy Twitter but not at the price He initially offered but rather maybe 30% lower It's funny because when you're rich you want power and when you're in power You want to be rich and it both kind of leads to the same road if you pay attention very closely to our politicians many of whom Become very wealthy very wealthy during their times in office This combination of having your cake and eating it too is one of the reasons why wealthier households like to claim They are also middle-class Learning how to convince people you are middle-class when you're actually very rich is a skill worth learning And I wrote a post about that and it's worth reading.

It's about Using sleight of hand tactics so people don't pay attention to you It's about changing the way you speak the way you dress It's actually about empathizing with other types of people from different socioeconomic backgrounds as well So it's worth the read who doesn't want to feel like they belong to a larger group the government always supports Nobody nobody wants to feel persecuted for earning more or having too much whatever too much is Therefore I think we all want to be middle-class whether we truly are or not And that is why so many people identify as middle-class the tricky situation Every politician faces however is determining what income cutoff is eligible and ineligible for free money Deciding this income threshold for a rigged distribution of tax dollars is carefully decided by a team of strategists economists and advisors They don't just one day come up with a hundred twenty five thousand and two hundred fifty thousand out of thin air If the income threshold for free money is too high Then enough people will start grumbling that politicians are providing tax cuts and free money to the rich and since most Politicians entering the office are rich.

They don't want to make it too obvious Their policies are also helping themselves and their friends if the income threshold for free money is too low Then politicians won't be able to effectively buy enough support to remain in power Let's be honest folks The vast majority of people would vote for someone if the candidate promised to give them a free $500 $1,000 let alone a free ten to twenty thousand dollars and this is nothing new folks Whatever party is in power This is a strategy they use before midterm elections and before the bigger elections So observe what people do with their money Not what they say be agnostic and just understand that this is the way society is This is the way government is and it will always be this way We've seen this income threshold debated in the past when President Obama wanted to raise taxes on anybody making over 200,000 as an individual and any household making over 250,000 in his administration's eyes folks who made more were considered rich and then eventually there was compromise Now perhaps due to inflation and an increase in overall wealth since then President Biden has now raised the income threshold for higher income taxes to 400,000 per individual and 450,000 per household and Income taxes are likely going to go up for these income levels if the student loan forgiveness plan gets approved It's just it sets a great precedent given the ideal income to earn while working is between a hundred twenty five thousand and two hundred fifty thousand because again It's the protected income class where you're gonna get subsidies and you're not gonna get your taxes raised Then the ideal income to earn in retirement is also roughly the same After all, most of us would love to live the same lifestyle or better once we no longer have to work 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 2013 Once you retire you successfully retire you have enough money your capital you're spitting out passive income You don't need to really save for retirement anymore You know If you've been saving 20 30 40 50 percent of your after-tax income for retirement once you're in retirement You don't have to save that 20 to 50 percent anymore.

So suddenly your need for income or your burn is much lower and That is actually a surprise that many people have experienced since they left their day jobs now given We've had a history of saving and being frugal for so long Your natural propensity will be probably to save Even half of what your saving rate was while you were working because that's just what you're used to 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 of cash flow So for me personally 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 But it's harder to do than you think because we're just used to habit creatures of habit It's just hard to change Since you don't need to save for retirement once you're retired The ideal income to earn in retirement is probably closer to a hundred thousand per individual and two hundred thousand per couple And so if you want to figure out how much capital you need to generate a hundred thousand Then it's just simple math to generate a hundred thousand a year in passive retirement income You will need the following invested capital ten million at a 1% rate of return Five million at a 2% rate of return 3.33 million at a 3% rate of return 2.5 million at a 4% rate of return two million at a 5% rate of return 6.66 million at a 6% rate of return and 1.43 million at a 7% rate of return a Reasonable rate of return in retirement is somewhere between 2 and 5% The last thing you want to do is take too much risk lose a lot of money and have to go back to work Therefore most people will likely need between 2 to 5 million in invested capital to generate the ideal income of $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 And that's what the majority of you voted on.

So I went with that However based on government analysis of the student loan forgiveness income threshold 10 million is probably way too much. You just don't need it So it's just a nice to have but you really don't need it Now obviously not everybody needs to earn a hundred thousand in annual retirement income to have a great life We're talking about the mass market ideal here If you're happy spending fifty thousand a year gross per person in retirement 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 Then you'll only need six hundred thousand to 1.5 million in invested capital with a 2 to 5 percent Return now with the average Social Security payment of around twenty thousand a year You actually may only need two hundred to five hundred thousand invested capital to generate ten thousand dollars a year in retirement Because you add that to twenty thousand and you got thirty thousand a year So this is really doable for folks, you know who've worked twenty thirty forty years So I thought this was a really interesting derivative way of thinking about the income threshold for student loan forgiveness And I don't think anybody's talking about it this way I would encourage you to use government policies as a guide to live a better life a more 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 One of the reasons why I felt more comfortable leaving work in 2012 was due to an upcoming Change in tax rates.

There was a new surtax of 3.8 percent on income from investments coming up in 2013 further the highest marginal income tax rate was going up to thirty nine point six percent from thirty five percent and Back in 2012. I was exhausted and I was also bored with my job I wasn't making that much money But I just felt like well if taxes are going up and I'm already really tired That just doesn't sound like a good combination and instead of complaining I just I just just figured out a way out by negotiating severance So really never complain for more than a moment instead do something about a sub optimal situation Don't change your life due to upcoming government policies.

That's the tail wagging the dog. It's backwards Instead use government policies as a guide to make marginal improvements in your life Government policies were at most 10% of the reason why I wanted to leave finance The main reason why was because I just didn't enjoy it anymore I didn't want the money and I found something else to do with my one and only life in Conclusion if you're making under a hundred twenty five thousand dollars per person You have the green light to continue going to try to make more money To improve on your career because you probably won't get taxed more and you'll probably still be eligible for subsidies over the next couple of years now if you make over one hundred twenty five thousand dollars per person and The more over you are the more you should consider taking it down a notch or two Especially if you're burned out since 2009 I have carefully recorded how happy I feel based on the amount of money I was making and I'll tell you folks For here in San Francisco after you make over about two hundred thousand per person There's really no more happiness You can cover all your basic needs and you can have really nice ones can go on vacation drive a nice car Eat whatever you want.

You're good anything more It just doesn't move the needle and so I truly believe that that ideal income where maximum happiness Doesn't increase anymore is about a hundred thousand dollars for America in general So obviously it goes up and down based on the cost of living where you live So the range is probably between a hundred thousand to two hundred thousand per person I don't know where you live and I don't know how burned out or energetic you feel right now But use that range that income range as a guide to help you determine how you want to spend your time How stressed you want to feel at work?

And what do you want to ultimately do with your remaining time? Time accelerates the older you get and it becomes more valuable because you have less of it every single year So you have to figure out that right balance? 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 For the mass market and for maximum happiness And if you enjoyed this conversation and the way I think that I think you'll really enjoy My Wall Street Journal bestseller buy this not that you can pick up a hard copy at financial samurai.com Forward slash B T and T and I appreciate a great review It's what keeps me motivated and it keeps me going to write and to record on financial samurai Finally, I also want to give a shout out to fun rise my favorite real estate crowdfunding platform It has over 300,000 investors and manages over three point two billion dollars in private real estate funds Primarily in the Sun Belt and I believe in the long-term trend of investing in the Sun Belt and you can sign up for fun rise at financial samurai.com forward slash FUNDRI SE.

Thanks so much everyone and I'll catch you guys later