Cost of Living

I TUTOR MY 10-year-old niece once a week in math and science. After the study sessions, we often talk about other things—mostly kid stuff. Recently, her treasured piggybank got a nice boost on her birthday and we discussed what she might do with the money.

That’s when my niece asked, “How much money will I need when I grow up?” I guess she was trying to figure out if she did indeed have to study hard and get a job—or whether her current savings would be enough. I laughed and told her that she would definitely need to work, just like the rest of us, because she’d need much more money than her piggybank held.

Still, in retrospect, I think her seemingly innocent question can be a good starting point for introducing teenagers and young adults to the topics of money and careers. As children grow, they generally develop a sense for why money is important—but there’s no easy way for them to gauge how much they need.

A ballpark estimate can give them perspective and help them to double-check whether a career path will meet their financial needs. It can also force them to learn more about basics of smart money decisions. When I started my career, I knew I needed to work hard, earn a decent wage, avoid overspending and save regularly. But beyond those abstract notions, there was no concrete, holistic target in my mind. A rough roadmap—even one with a large margin of error—would’ve helped me to plan and organize my financial life better.

It isn’t too hard to come up with a ballpark estimate. Let’s ignore inflation and instead think about everything in today’s dollars. Let’s also assume a hypothetical couple who start a household at age 30, work for 30 years, raise two kids, retire at 60 and then live another 30 years. Their cumulative lifetime expenses might include the following major items:

• Cost of a house. These days, newly constructed homes cost somewhat more than $300,000. Existing homes tend to be less expensive.
• Cost of eight cars. Let’s assume both partners have a car, and that each car costs $25,000 and lasts 15 years, for a lifetime total of $200,000.
• Annual household expenses for 60 years. The typical household spends around $60,000 a year. Keep in mind that a third of this goes toward housing, plus an additional chunk toward car purchases, so we might reduce this figure to $40,000, or $2.4 million over 60 years.
• Cost of two college educations, which we might estimate at $100,000 per kid. If you favor private colleges, you might increase this to $200,000 or more.
• Lifetime health care and long-term-care costs. Let’s put that at $300,000.

Once the lifetime lump sum is determined, it’s easy to calculate the required average household annual income: You just divide the lump sum by the number of working years. This annual income represents income after federal and state income taxes, plus payroll taxes during the couple’s working years. You might increase the after-tax sum by 25% to arrive at the required pretax annual household income.

Using the above methodology and the national median household numbers cited above, the lifetime lump sum comes to about $4.25 million in today’s dollar. Over a 30-year working life, that amounts to roughly $70,000 per year per spouse or partner. What are the lessons from this exercise that you might discuss with your kids?

• A lot of money is needed over a household’s lifetime. Even the median U.S. standard of living demands a sizable household income.
• Everyday expenses—that $40,000 a year—are the biggest driver of lifetime spending. It’s important to avoid overspending and keep recurring expenses in check.
• At least a bachelor’s degree is almost essential to affording the lifetime expenses we’re discussing.
• Even with a bachelor’s, much depends on career choice.

A software engineer by profession, Sanjib Saha is transitioning to early retirement. Self-taught in investment and financial planning, he’s passionate about raising financial literacy and enjoys helping others with their finances. Earlier this year, he passed the Series 65 licensing exam as a non-industry candidate. 

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