How much annual income does one need to achieve "Poverty Escape Velocity" in the USA?

Great Debates
#1

For the purposes of this thread, I see 3 broad categories of “you”:

  • 25 year old single person

  • 25 year old childless couple

  • 25 year old couple with 2 babies (twins! yay!)

I picked 25 years old because it seemed old enough for most people to start thinking about retirement. Of course, some will start saving and investing earlier and some will never start at all ;). let’s assume that you are financially responsible without being an ascetic saint. To err is human, and so is to spend on vacations and sweet rides.

What is defined as escape from poverty? Up to you but I arbitrarily suggest the accumulation of $1M in net worth by age 60, including the total value of your house if you own one, all your cash and all your stocks in all your accounts (401k/IRA included), combined, minus the negative total of all your debt.

My guesses for ceilings (I assume the real numbers will always be lower):

Single person: $72,000/y net income ($6000 paycheck monthly). Or around 95K gross income.

Childless couple: $84,000/y net income ($7000 paycheck(s) monthly) or around 110k gross income.

Family of 4: $108,000/y net income ($9000 paycheck(s) monthly) or around 140k gross income.

Are those figure wildly off the mark or in line with your own estimates?

The neuroses of free money
The lack of delayed gratification in America
#2

Your numbers seem wildly inflated to me. Many working-class people (and maybe even lower middle class) that are not in poverty do not have that kind of savings or retirements. According to the Census only 10% of the US is in poverty as of 2019.

MIT has a nice living wage calculator that adjusts for location that might be of interest: https://livingwage.mit.edu/ It has broken down by 1 adult, 2 adults, and then amount of children. It seems to me if someone is making a living wage, then with decent budgeting and saving habits they should be able to stay out of poverty barring random catastrophic events.

#3

Sorry for double post but missed the edit window.

But this data set Survey of Consumer Finances by the Federal Reserve also has a lot of good info, from 2019. There are some good summaries on their site: Federal Reserve Board - Survey of Consumer Finances (SCF)

#4

Where you live plays an important part in this. I’ve discovered that, if I lived in the Dallas area, my money would have 17% more buying power than it does here in the Chicago area.

This is an expensive region to live in, but your figures are too high even for here. I’m single/38, not much different from your single/25, and I’m living a very comfortable lifestyle on about 61 Large net a year. I’m talking no bills, credit card balances paid in full every month, and money enough to buy pretty much anything I need without a problem.

#5

I’m sure escaping poverty does happen to individuals but I think what is more common is to achieve the ability to ‘launch’ your children to a higher income class. E.g. your parents were low income and through working hard for a lifetime they were able to move you up to lower-middle class. Then you work hard for a lifetime and move your kids up to upper-middle class, etc.

#6

Oh, that’s a cool calculator! Thanks for letting me know.

ps: I was definitely assuming a Miami-type area with higher than average cost of living.

#7

For certain. I, too, live in the Chicago area, which is relatively expensive. My primary clients are in Alabama, and the cost of living is substantially lower there, especially if we’re talking about the smaller towns and more rural areas of that state.

#8

as a single person you don’t need anywhere near 95k a year in gross income to escape poverty. if you’re in a low cost of living area it’s probably closer to 30k a year as a minimum to lead a fairly middle class life .

Also saving a million over fourty years isn’t too difficult. if you max out your Ira and put 6k a year in for fourty years that alone will be over a million when growth is factored in. a million dollars tax free allows a withdraw of at least 40k a year. plus social security income and a paid off house is a fairly well heeled life in a low cost of living area. assuming you don’t end up needing nursing home care.

point being, it depends on real estate prices but it’s way less than listed. also how do you define poverty. you can own a home, a decent used car, have food and medical care (with work insurance) etc for maybe 30-40k gross in a low cost of living area. technically less if you want.

#9

I could live 15 miles from where I do at 50% of the cost. I’d eat some of that in trips to town, but location matters a lot.

#10

The OP may not have meant it this way, but to me “escape velocity” is a term from physics which means essentially you’re going so fast you can’t be pulled back to Earth. Ever.

As applied to finance, “escape velocity” means (to me) that your money keeps growing faster than you are spending it. IOW, if I need $100K to live on and am retired, my asset total at the end of the year after spending my $100K must, including the effects of inflation, be bigger than the asset total was at the start of the year. Only if that number is bigger every year am I at “escape velocity.”

For someone needing $100K to live on, and assuming 2% inflation and a 4% real rate of return, they can only spend that 4% return on their assets each year. Which spending includes paying required taxes. That means they need $2.5M to be richer at the end of each successive year all without working.

So the question then becomes how does a 25yo get to 2.5M in investments by what age? Diligent saving, careful choices of investments, and no severe national crises or personal screwups or disasters.

Now what I just described as “escape velocity” is by no means the bare minimum to achieve a comfortable middle-class retirement.

First off, there’s actually nothing wrong with spending down your principle if planned over a long enough timespan. Plan to blow it all between 65 and 67? Gonna be a cold and bleak existence after that. Plan to run out at age 90? For almost everyone that plan will work fine. And can be tweaked in either direction along the way if the future is not working out as you’d assumed. Being able and willing to spend principle completely changes the equation of how much you need.

Secondly, I chose my $100K figure just for ease of calculation. One heck of a lot of Americans live what they think of as a middle class life on far less. Which means they need less principal at that retirement point.

#11

I think there is a big hole in this analysis. It seems to me that the underlying assumption is that the vector of your life is a smooth curve and you just need “velocity” to “escape” poverty.

When I was 25 I was in graduate school. I was paid enough as a research assistant to afford a cheap apartment and meals and modest entertainment. I don’t remember the salary, but I did some poking around and it seems that nowadays it is about $33,000 a year.

So it seems I must have been in trouble- living in an expensive location (San Francisco-Bay Area), low paid with no raises to speak of, far off from the necessary escape velocity.

Except I was working on my PhD in Electrical Engineering at one of the top three graduate programs in the country and the vector of my career and salary changed drastically immediately after graduation (by 3-4X).

At 25, I think it is reasonable to be working on the vector of your life, even if the velocity suffers a bit. 25 is when investing in yourself makes as much sense as investing in an IRA.

#12

You must have been making a boodle as a grad student, since mine increased by 8 - 9X.
Aside from that, my experience matches yours. I got my PhD at 28, and I have been retired for five years with no money worries.

In my book the number one secret is to never get laid off. That cuts into your savings a lot assuming it takes a while to get a new job. That’s easier said than done, though. I managed it, which helped a lot.

#13

is it realistic to build a career in IT and technology without getting laid off nowadays? the industry changes so fast now that job security isn’t a thing for many people.

and that’s another thing that makes escaping poverty harder. you need a stable job to buy a house, and home equity is a major source of intergenerational wealth as well as a factor in income inequality.

#14

IT is not the only such career. But for sure in IT and closely allied fields, you are a temp whether or not you work for a temp agency, are a full time W-2 employee of the company, or are a true self-employed “gun for hire”. The IT biz has become project oriented and your employment will last for the duration of the project. Much of the aerospace / defense industry has been that way since the 1960s. The only difference is their “sprints” are longer.

“Laid off” really has a different or at least a dual meaning. That you and your employer are expecting you’ll come back to the same job at the same company; only the date of your return is uncertain. That’s highly unrealistic in IT and is becoming more and more true in other industries.

You can spend a lifetime being fully employed in IT. You can’t realistically expect it to be with one employer.

Which means everyone needs to plan on being part of the churn. With all the problems that leads to for long term planning, home ownership, etc. Interruptions in income simply need to be planned (and saved) for. The need to change cities or at least regions within the conurbation every few years must also be planned for.

#15

It seems like that should be part of the “average income” conversion. As a teacher, I make less, but it’s quite realistic for me to hope I am literally never unemployed or laid off. I’ve worked for the same school district for 19 years, and it’s quite possible I will work for them for 40. I’ve known lots of people who did. And if I change employers, I will go from one contract to the next. On the other hand, my highest earning brother has probably had a couple years of unpaid time over the last two decades, which adds up to a lot of lost income. Now, he makes more than 10% more than me, of course, so his total earning have been higher, but that instability and irregular cash flow has its own cost, too.

#16

That’s true for pretty much every industry these days. When I started in the Bell System there were lots of people who joined right out of college and expected to stay until they retired. Not true anymore anywhere in private industry.
Not getting laid off doesn’t mean staying in the same place forever. Part of it is leaving a sinking ship before the rest of the rats. It is amazing how many people don’t pick up the omens of doom which could tell them that there will be a layoff in the near future.

#17

Indeed, that is true. t’was totally on purpose, to simplify things as much as possible; Akin to physicists assuming humans are spherical balls massing 100kgs to solve a problem.

it absolutely pays off to get paid nothing, or very little, while learning the secrets to earning 2x or 3x more for the remaining ~85% of your professional life, like you did. Many people do it in a year or less with bootcamps.

#18

The OP should say where he lives or will he will like to live in the future.

In Mississippi or Kentucky he could buy a house for $100,000 and some homes even under $100,000 and get buy making $30,000 year. But not in New York or Los Angels. You not even going to get home for under $500,000 in Los Angels.

And you are not going to be able to buy a home in Los Angels making $60,000 a year. You going to have to be making way more money at work than $60,000 a year in Los Angels.

#19

Spending habits make a lot more of a difference than income does. When I was growing up, we were literally in poverty, as in, net family income below the poverty line. But we never missed paying a bill, never had to go without a meal, were never at risk of losing our home, and led full, enriching lives. And my sister and I were both able to attend private high schools, and graduated from college debt-free. Mom was poor, but she was really, really good at being poor.

#20

'Zactly. The flat-broke paycheck-to-paycheck couple pulling down $400K between them is a cliché for a reason.

As Jillwood says, one of the largest “spending habits” you can control is the baseline cost of living in your local arena. Subject to the caveat that it’s often impractical for a seriously low SES family to up stakes and move to somewhere else. Many of those folks have become “boiled frogs” over the last 10-30 years as local cost of living just keeps moving upwards vs their low end wages.