Wikinvest Wire

The new ($250K) middle class

Monday, April 20, 2009

There have been more than a few comments left here by readers over the years about families with big salaries and/or bonuses carping about how tough it is to get by on just a couple hundred thousand dollars a year in income.

Always of modest means, never having had to foot the bill for little ones around the house, and having avoided living and working in the Bay Area, my view of things is probably a bit slanted in the other direction but, to me, a quarter million dollars a year looks to be a huge opportunity to sock money away for retirement.

Via the Wall Street Journal comes this tale of the difficulty some have in making ends meet.

Ellen Parnell and her husband, Donald Parnell Jr., seem like the kind of well-off couple President Barack Obama has in mind when he suggests raising taxes on families earning more than $250,000 a year. A surgeon at Fort Sanders Sevier Medical Center in Sevierville, Tenn., he drives an Infiniti. They vacation at a beach resort every year.

Yet, right now he is working seven days a week. The car is more than a decade old, the vacation home in Sandestin, Fla., comes at a moderate weekly rate because members of Ms. Parnell's extended family own it. Her family of five would like more room than they have in their 2,500-square-foot home, yet they can't afford anything larger. The downturn has them skittish about paying for renovations.
While not familiar with the local real estate market at all, clearly, you can get a lot of house for not too much money in Sevierville.

The story continues:
"I'm not complaining, but the reality is Obama may call me wealthy, but I thought we were just good old middle class," says Ms. Parnell. "Our needs are being met, but we don't have a load of cash to cover wants."
Wealth and comfort "depends on where you're coming from," said Lois Avitt, a sociologist and founding director of the Institute for Socio-Financial Studies in Charlottesville, Va. To a family earning $50,000, $250,000 is well off, but for the family earning $250,000, rising college and medical costs and dropping home values make the perception debatable.

The reasons for the insecurity are that net worth is declining at the same time that expenses like education and health care, two of the biggest concerns cited by members of that income group, are going up faster than wages and income, says Heidi Shierholz, an economist at the Economic Policy Institute in Washington. "Those are the biggies. They are huge parts of the set of middle-class aspirations, and the prices of those have increased way faster than income." The bursting of the housing bubble makes that more stark.
San Jose, Calif., Mayor Chuck Reed calls a family living in Silicon Valley earning $250,000 "upper working class." That is about what two engineers working at a technology firm can expect to make, but "a family earning $250,000 a year can't buy a home in Silicon Valley," he said.

James Duran owns a human-resources company in Silicon Valley and is president of the Hispanic Chamber of Commerce in California. He supported Mr. Obama, but is worried about the tax proposals. He has laid off some employees in recent months and has been wondering how he can fund an extension of those workers' health-care benefits.

Mr. Duran said he and his wife earn about $400,000 annually, but "I'm barely getting by." They have high property and state taxes, as well as college tuition and savings to cover. "I'm an Obama man, but this side of him is a difficult pill for me," he said.
For the Parnells, their perception of themselves is based on the math. The value of their house is down $60,000. Ms. Parnell says the couple's gross income last year was about $260,000. Taxes, premiums for medical care and deductions for Social Security and their 401(k) contributions cut the gross to about $12,000 per month. The family tithes $1,300 a month at their church. Their mortgage, second mortgage and payment on land they bought is nearly $4,000 a month. Other expenses, including their family car payment, insurance and college funds, as well as basics like food, utilities and donations to charities, leave them with about $1,200 left over each month.

"I'm not after sympathy. We are blessed. What I want is a reality check on what rich means," Ms. Parnell says. "I can pay my mortgage and I can buy some clothes. I'm not going without, but I'm not living a life of luxury."
The Parnells should probably take a basic personal finance class or two and many of their problems might quickly be solved - that $4,000 a month in mortgage payments for a house that's too small that's worth $60,000 and some other property should have set off alarm bells long ago.

Also, that top line of $260K that erodes to $144K after 401k contributions, medical care premiums, and taxes sounds a bit excessive - you can quickly get to about $40K for the first two items leaving their tax hit at $75K.

Does that sound right?

It's a good thing Ms. Parnell is not asking for sympathy because she's not likely to get any.


Anonymous said...

Their house is worth $60,000 less, not worth $60,000.

Although looking at the real-estate link you've got there the mortgage payment numbers still seem high.

Nick said...

I always thought middle class should be defined more by the lifestyle you can afford, rather than an arbitrary fixed number. For example, the average income for an area should be around 1/3 the median home price; so say up to 2/3 the median home price is middle class (a better calculation would look at area of the bell curve of prices, but this will work for a rough estimate). So in LA proper in the bubble, median was around a million, so middle class would be anything below ~$650k annually. Now days the median is closer to $800k, depending on the area, so you're talking only $530k income annually to be "rich".

Oh, and anyone who's making payments on land they are holding gets no sympathy from me. I may not like a lot of Obama's policies (well, probably almost all of them to be honest), but if you own extra land you're just holding, or extra homes, etc., you have luxury expenses, and are not just "getting by".

Maureen said...

I think that most Americans, when they use the term "middle class," mean the cultural middle class, not the middle of the income quintiles as determined by the BLS and the IRS. The reason that the couples, who as described by income are upper class, can think of themselves as middle class is that they don't have the trappings that society (read: TV) taught them are "wealthy" - they work for a living, they aren't trust fund babies, they don't have servants (the twice-weekly house cleaner and gardener "don't count").

Tim said...

"Their house is worth $60,000 less, not worth $60,000."

Oops... still kind of getting back in the swing of things...

MoobyCow said...

Wouldn't the extra taxes on their gross income of $260,000 be ~$300? I think they can probably swing that.

Anonymous said...

There is a valid point here about $250k/yr not being considered "rich". Think about income levels when AMT was first introduced. Then, fast forward to now when quite a few comfortable though not rich folks are getting bitten by AMT. Meanwhile, you can hire fully-armed bodyguards for you and your party at $20/day each in Somalia. Price and income levels are completely out of whack and there will be a lot of readjustments.

albrt said...

I think I'm even more skeptical than you, Tim. NPR did a feature on this a while back. They interviewed a bunch of people about whether they were rich. The whining and excuses continued all the way up as high as they went on the chain - I think it was a hedge fund manager's wife with a solid 7 figure income who could barely make ends meet.

Sorry, but tithing and maxing out the 401K are discretionary expenditures, and those two items alone add up to pretty near the median income for Tennessee.

And how do they have a car payment on a ten year old car?

dearieme said...

"Their mortgage, second mortgage and payment on land they bought...": do you in the US use the expression "Aw diddums?"?

Tim said...

Not that I know of - you'll have to explain.

Anonymous said...

Cry me a river. Oh boohoo they even have high state taxes. Yea so what? Anyone living in CA earning over 40k pays the maximum state income tax.

I understand somewhat about high costs of living, but these guys? Give me a break.

Although a 401k is not discretionary. Not if you have no pension, no other help with retirement etc.. Then it's called avoiding eating cat food in old age if social security goes belly up. Still it's a form of wealth and shouldn't really be in the same category as taxes at all, which are income you'll never see.

AJ said...

The problem is that "middle class" needs to be divided even further. There is a lower middle class, for whom there is no immediate financial danger, but they cannot afford a luxury car or a vacation every year. Then there is the upper middle class, who cannot afford jets and personal islands.

If you're giving $1300 a month to your church, you aren't lower middle class, that's for sure.

donna said...

OK, they give more to their church every month than lots of people even make.

$1200 a month left over would sound really good to a LOT of people.

Idiots, really.

WTF? Honestly, the whining must end.

John S said...

I'm not sure if these people are rich, but since the recession started my wife and I find we are now (barely) in the 15% bracket. And just last year I was fretting about the AMT. Is that what Obama meant by cutting middle class taxes?

Mathlete said...

Let's not forget those senior citizens blowing their SS checks at the casinos and bingo night, or the poor who waste their welfare checks at the convenience and liquor stores. I don't believe morality has a price tag. Rich or poor, people who are stupid with their money deserve no sympathy, only a lesson in home economics.


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