A few weeks ago, there was a lot of news when the US Department of Agriculture released new figures on how much it costs to raise a kid in the US today, from age 0 to age 18:
The cost is before college, and is for 1 kid. The report notes that families with 3 or more kids spend 22% less per kid. That makes a lot of sense. As the youngest of 3 in my family, I was the recipient of lots of hand-me-downs. And I liked it that way, gosh darn it!
But that got me thinking: if the cost of raising a kid is that much, and the median household cost in the US is now $176,900, how much does it all add up to, annually? I mean, how much do you have to earn to account for all those things they say you should be doing, like saving for retirement?
So, let's break this down. I'm going to make a ton of assumptions, but I think they're within the ballpark of reasonable. And the point of this exercise is really to get down to an order-of-magnitude estimate of what it costs, not to quibble about the third-decimal-place of accuracy. So here we go:
- The average family has 2 kids. And, let's assume that the second kid gets a 15% discount. $222,360 per kid, minus a 15% discount for the second kid, results in a cost of $1904 per month.
- The median house in the US is $176,900. If I assume a 20% down payment on the house, a 30 year fixed mortgage loan at 5% interest, and $1,000 property tax per year on the place, those monthly payments are $843 per month.
- I'm not counting on Social Security to bail me out for retirement, so let's say you and your spouse want to retire with $1 million. (That's actually pretty low by many estimates.) And let's say you have 35 years left to save, and your current retirement nest egg is $50,000. At 5% interest per year (yes, conservative, but who likes to play aggressively with their retirement?), you need to save $8,000 per year, or $667 per month, for retirement.
- As I blogged about before, college is expensive. If each kid is going to squander over $200,000 on college, I'd better start saving, fast. To get to $200,000 in 18 years, again at 5% interest, that's $500 per month, per kid -- or $1000 per month.
- Lastly, there's the living expenses of, well, me. Let's say that's $1000 per month.
The above comes to $1904 + $843 + $667 + $1000 + $1000 = $5414 in spending, per month.
So assume a 28% federal tax rate, and you get about:
$90,000 per year
That's a household income of $90,000 per year, required to do the "average" American things like own the median cost house, raise 2 kids, save for college, and save for retirement. I freely admit that I've probably double counted in there somewhere -- I did not read the entire USDA report, and they may already have included the "kid portion" of the larger house that's required; I didn't account for tax deductions on the mortgage interest; et cetera -- but it sure is eye opening to get a value that is approximately 80% higher than the median US income.
Obviously, something has to give, and I think in middle part of this decade, it was the absurdly low savings rate in the US:
We'll see what happens in the future. For now, I've gotta get back to work. Looks like I've got some earnin' to do.