Can't Save? Here's Why

[Spartan_Warrior]

And when you do retire, the income from your nest egg will go less far year after year. I can't see how it wouldn't be a problem, especially since the most common measure of inflation (which most of us are using in our plans?) appears to be quite wrong where essentials are concerned.

[C40]

"@C40: I look forward to your numbers; I seriously doubt you can prove expenses haven't outpaced income since just about every economic study on the U.S. has said otherwise, but I'll try to be as openminded as I can."
Secretwealth - I'm not out to prove that. I'm checking because I'm curious about it and would like to know more. I'm expecting there to have been more inflation than what the CPI says. I'm interested in seeing how much more, especially in cases where I can compare objectively.
I think this comparison will depend very heavily on how much I factor in improvements of products to actually compare apples to apples, instead of comparing a product in the 1950's that has changed so much since that it is no longer a valid comparison. As a past Car enthusiast, that is an area I'm very familiar with and I'm capable of making a true comparison (and it's easy to do so). For other things like health care, college, and even to some extent homes, I'm not familiar enough to suss out how the goods or services have changed over time in order to quickly compare apples to apples. I'll see what I can come up with.

[secretwealth]

I think the way to compare like with like for college is to correlate the income differential between a degree and non degree holder to the cost of tuition--and we should try to compare instate with instate.
Thanks for your levelheaded approach--it's things like this thread that keep me checking this site like a crack addled hamster.

[jacob]

... like a crack addled hamster.
I'll see if I can sneak this metaphor into a performance review sometime.
My previous highpoint was getting the word SNAFU into the distinguished and esteemed annals of a German research society.

[C40]

Inflation study: Prices vs. Income – 1955-2012.

Result – prices have increased overall by 14% more than median income. It appears that food, housing, and transportation have gotten cheaper by 20-40%, but that but that healthcare and college tuition have skyrocketed (tripled or more!) . The impact on specific people at certain times in their lives depends completely on their spending category breakdown.
Also, although housing prices have gone down, people are buying houses more than twice the size people in 1950's did, so total housing spending has increased.

Bigger version – Part A
Bigger version – Part B
So I did this as well as I could in a few hours. It’s certainly not a complete representation. I used only a small number of samples. All I know for sure is that it's impossible to know for sure how accurate the final number is. The more you look into this, the more questions and uncertainty will come up.
Some of the values were pretty hard to find. Healthcare was the most difficult. Some other things are pretty confusing like conflicting male median incomes (Sources range from $32k to $47k. Huh?? I just use an average of 5 sources... Using one end or the other will cause a HUGE difference in the final number). In the transportation category - due to my familiarity and the simplicity of cars and gas I was able to do some corrections to get closer to an apples-to-apples comparison. In other areas it is more difficult. I also made an adjustment to the 2012 cost of baby delivery to try to make it similar to the services rendered in the 1950s. I did a reduction to the average 2012 costs (which varied wildly) to estimate average cost of delivery without epidural and a bunch of extra stuff. The other categories are straight prices with no modifications. If you want, you could shoot holes in this from either side – saying that the 2012 costs are lower than actual, or that the 1955 prices are too high or low, or that the 2012 services and goods are so much better than what was common in 1955 that it is no longer a valid comparison. I’d rather not debate these things myself. I’ve looked at it close enough to be comfortable enough with the numbers myself, and I’ve had enough research for a while!
Here are many of the boring and ugly source notes, for anyone crazy enough to be interested:
*1 - Childbirth. 4 Actual bills from the 50's varied from $87 to $274. Reports of current costs varied widely from $3,000 to $13,000. Using $5,000 as an estimate of a bill that does not include epidural. I had a hard time finding other healthcare costs from the 50's. It's harder to find than any of the other categories and current numbers are confusing because of insurance. I'm surprised that healthcare went up less than education. Maybe it's because child births are not representative, or that I messed up the 2012 number, or that the increase in healthcare spending is also very heavily due to an increase in the volume of drugs, visits, operations, and late life care.
*2 - The Miata is better than the Corvette in every type of objective comparison. Thought about factoring in improved lifetime of the Miata vs Vette (The Miata will probably last twice as many miles), and also the excess miles caused now due to urban sprawl. This caused the total of car and gas cost inflation to go down to 655% instead of 7xx%, and since it's pretty close I just left the straight car prices.
*3 - Corvette 11.4 mpg, Miata 25mpg (2.2 times more miles per gallon. Due to sprawl, dividing current gas prices by 2 instead of 2.2
*4 Using Spartan's average price of $10,000 50's at 1,000 square feet. Using average price now of $230,000 at 2,350 square feet. Not sure about changes in construction quality or utilities/amenities - not making any changes for them.
*5 Using an average for the 1950's cost of Spartan's #s and this site: http://www.fiftiesweb.com/pop/prices-1955.htm
*6 Chicken costs about $2.00 per lb where I live. I don't know what meat was like in the 1950's, but I'm guessing to buy chicken of the same quality now, you have to buy the "natural" type that does cost closer to $4.00
*7 Assuming that a person spends about the car's price worth of gas over the lifetime of a car. Not sure how accurate this is, but the price increase of the car and gas are similar anyways
*8 1955 cost from http://www.archives.upenn.edu/histy/fea ... /1950.html, current cost from http://www.collegedata.com/cs/data/coll ... choolId=67
*9 University of Nebraska. Both numbers from http://irp.unl.edu/dmdocuments/050_tuition_history.pdf
*10 Spend categories: http://myfamilyfinances.net/2012/07/how ... -to-yours/. This other list is pretty close http://www.npr.org/blogs/money/2012/04/ ... ricans-buy
*11 Estimation of lifetime education cost (only tuition) - Taking ($25k/year tution)*(4 years) divided by (70 years)*($25k / year spending / person)
*12 - I'd like to know more about this number - specifically - whether it includes the cost of health insurance for those who have to pay for it themselves.. The median income number will not include the cost of insurance paid by employees, so if everyone had a job with insurance this wouldn't matter... I don't know..
The numbers I found for median incomes are as follows:

2012 – Household – 50k, 50k, 51k, 51k, 51k

2012 – Male – 43k, 32k, 48k, 48k, 32k

1955 – Household – 4.0k, 4.8k, 4.4k

1955 – Male – 3.3k
The sites were found just by googling “Median household income 2012” with household/male and years interchanged. I used every number I found, all generally from first page results. (don’t want to paste them all in)
And yes, I do know how to spell Bananas.

[Spartan_Warrior]

Thanks C40. An interesting peer-review.
I think it's disingenuous to calculate housing costs your way versus doing a straight comparison of price per sq. ft. Just because the average house size is 2300 doesn't mean smaller houses aren't available. Why are you making your own calculation when the actual national average of sale price per sq. ft is available from Zillow? ($118 IIRC)
The comparison of the Corvette to a Miata still makes me laugh, because the Miata must be the girliest car ever. But I take your word on the technical comparison.
$5000 for child delivery seems about right. Would've liked to see cost of health insurance itself figure in somewhere too, but I know this stuff gets tedious.

[buzz]

Impressive study, C40. You could probably expand this and publish it in a journal. Although I'm not a part of this debate I found it enlightening (as well as many of the comments made here)

[C40]

Publish in a journal? I don't know the first thing about that. These are just numbers from a few hours of google searching and organizing. High school project kind of stuff.
Edit - wait, do you get paid for that?

[RealPerson]

Really impressive to pull all this together so quickly C40. Publish in a journal? Not academically sound. You could probably send it to the NYT. A scientific journal would not pay you for submission. Maybe the NYT would, provided it fits in their ideology. Writing might become an additional Renaissance skill and revenue source for you.

[Spartan_Warrior]

To elaborate on my previous statement, I actually do know something about housing, having spent a year going through the market before buying, and I can tell you that price per sq. foot *increases* as the size of a house decreases. Therefore taking the actual price per sq. ft. would be more accurate than an arbitrary calculation. But, I suppose it doesn't matter. Like you, I'm comfortable enough with my own numbers.
...And equally interested in payment for this journal stuff.

[C40]

Also, here are the individual category numbers:
Food: -30%

Healthcare: +200%

Auto Transportation: -40%

Housing: -17%

Tuition: +320%
So for a guy like me who's main expenses are currently Housing, food, and transportation, life is still pretty darn good. For someone without insurance and with a major health issue, not so good at all.
For the one healthcare example, if you use current full price including additional services now often rendered for child births, it'd be more like 300-400% increase.
I find it pretty incredible that healthcare and tuition went up so much. One should expect (in an ideal world, I guess) the categories to all go down by similar amounts due to improvements in technology and industry-specific methodology. Healthcare is certainly a category where service should benefit from technology and research, but holy cow. I think many of us are all too familiar with changes that increased prices instead.
Not certain if I should expect tuition to have gone down. I think the biggest changes are: 1- The use of computers (which should reduce the price I believe), and 2-That so many more people are now pushed into going to college. Could #2 have driven up demand enough to cause the price increase?

[akratic]

I think the fair way to compare health expenses would be to hold life expectancy as a constant. Suppose it was around 55 years in 1950, and suppose it's around 70 years now.
I think you'd want to figure out what level of medical expenses in 2013 gets you a 55 year life expectancy. I'm not sure how you'd figure that out, but my guess is that if you did, it'd be cheaper to achieve now (or you could try to achieve a 70 year life expectancy in both periods, and again my money is on 2013).
I also think it's a little unfair to discuss education and ignore things like the ability to take essentially every MIT course for free.
I guess you could say I'm nitpicking. But the way I see it is that a 1958 Vette vs a 2012 Miata is not even close to an apples to apples comparison. If someone sold a 2012 Miata back in 1958 it'd probably have gone for many millions of 1958 dollars. Just like a $50 cell phone or $1000 laptop or skype video chat that we take for granted now would have been immeasurably valuable back then.
I do think this is pretty cool stuff, I just think it dramatically overstates the cost in 2012 of achieving the actual 1958 standard of living.

[buzz]

Online learning is an excellent tool, but remember that the majority of college students aren't paying to learn; they are paying for the degree that will supposedly be a ticket to a job that will afford them a nice life.

(I have been in a large state university the past four years. It's the sad truth. I wish I could say I was above that, but I would be lying. At least I got out of there with a degree and without debt)

[Spartan_Warrior]

SMH... Can anyone even see my posts? They appear here when I log-in but don't show up when I'm logged out (and thread post count drops from 175 to 169). Just wondering. I thought they'd been deleted for a minute but it seems to be just more forum fuck-ups.

[jennypenny]

C40, that chart is great.
I keep thinking about those education numbers. They've gone up even more than I thought. Personally, I would factor that into median income numbers. I'd love to see numbers comparing the cost of education required vs. the salary received in different fields over that time span. That might show some incomes have dropped less when you factor in education costs (teachers? nurses? trades?) but others have dropped more because of the cost of obtaining the degree for the field (doctors? lawyers? social workers?).
Overall, I would think median incomes have dropped more than stated earlier if you factor in the cost of entering the work force, especially for those jobs that now require a degree that didn't before.

[jacob]

Education now includes modern sports centers, the $1M/year football coach, $200 key-activated textbooks, IT-labs,... and have you seen those administrative centers where the money gets distributed. They're the fanciest buildings of all of them. Why? Because all that borrowed money (from the future and at artificially low interest rates<-that's effectively a subsidy) must go somewhere. Since students aren't getting smarter and learning still requires actual studying, the money is spent elsewhere on things that are largely irrelevant to learning.
In short, the college experience costs what people can pay.
It's the same story with health insurance. You're not getting better health---you're getting more MRI machines.
Now if you look at what learning costs ... well, that's bloody cheap. I've learning enough economics just by reading the right textbooks which are easy to find on amazon (it would have been much harder to find the right "syllabus" 50 years ago, where a lot of study material was proprietary---however, now all teachers pretty much use the same "systems") to "hang" with at least associates degrees if not bachelor degrees. Total cost after reselling those books? Less than a hundred bucks.
So learning costs have gone down. Education costs have gone way up.

[GandK]

@buzz said: "Online learning is an excellent tool, but remember that the majority of college students aren't paying to learn; they are paying for the degree that will supposedly be a ticket to a job that will afford them a nice life."
This. I agree. It's not about the education, it's about the piece of paper that proves you can successfully follow a series of instructions over time... a far more important skill in corporate America than independent thought.

[secretwealth]

Thanks for the work, C40--again, it's great to have data points. I personally don't agree with some of your comparisons (I still view the car issue differently), but really the only resulting disagreement is on how much the middle class is being squeezed, not on whether the middle class is being squeezed.
So, to go back to the original point of the article: yes, essentials are on the whole getting more expensive, especially if you weight the average, since food costs are such a small portion of overall costs (and I agree food is one of the few categories of essentials that has gotten cheaper).
Now the question is whether a squeezed middle class is good (surprisingly, some here seem to think so), how to combat this issue (unfortunately, this discussion would just devolve into libertarian vs. social democracy talking points), and what alternatives people should consider (I think we'd all vote for ERE).
The implications of this trend, I think, we can all agree on: it'll be harder for the middle class to maintain the lifestyle of the previous generation, it'll be harder for the middle class to retire early, and it'll be harder to subsist in retirement once you're there. I don't know how anyone can give a hearty thumbs up to this trend.

[J_]

It is not a thumbs up or down, it is an economy down-movement which you predicted some weeks ago obviously in another direction. Will see how 2013 really develops. The generation-thing which intrigues you is a non issue, there exists not something as a specific purpose of "a generation" .

[secretwealth]

"it is an economy down-movement"
But the trendline is over 30 years old.