As the cost of real estate in Denver continues to creep upwards, we are often asked how much is needed in salary to live here. If you search the web for this answer, you will likely find a salary that necessitates the cost of buying an “average” single family home in Denver. Typically, what is missing in this calculation is the additional savings needed to retire, savings for children’s college education, and the cost of childcare when both parents are working outside the home.
Therefore, we have created a case study for a working couple both age 35 with two children, one in elementary school and an infant. This couple has recently purchased a home that cost $500,000 with a 20% down payment. Together they have already saved $60,000 for retirement and $10,000 for their first child’s college education. Their goal is to save for the cost of four years of undergraduate tuition at CU Boulder for each child. Because each spouse works full-time, they need full-time childcare for their infant, and after-school/summer care for their elementary school aged child. Each spouse has access to benefits through their respective employers, including a 3% match on 401(k) contributions, health insurance, disability insurance, and life insurance. Because their employers offer high-deductible health insurance plans, they also contribute the maximum family contribution to a health savings account. Each spouse is paying into Social Security and anticipates collecting 75% of a projected benefit at age 70. Their goal is to be able to retire at age 65 and access Medicare benefits. In this case study, the couple needs to bring in a household income of approximately $200,000.
There are a couple of key notes:
- This couple would have been approved for a much higher mortgage loan based on their income. However, in order to accomplish all their other goals, they needed to keep their mortgage payment (Principle, Interest, Taxes, and Insurance) just under 15% of their gross income (banks typically approve approximately 30%).
- If one spouse stays home to raise the children, the cost of childcare is greatly reduced. In this case study, the working spouse would need to earn a gross income of approximately $160,000.
- The assumed gross income replacement need at retirement is only about 35% of their current $200,000 household income. This is because the mortgage is assumed to be paid off, saving for retirement is accomplished, the kids are financially independent, and their taxes have reduced.
- This case study makes several assumptions and is intended to be based on averages. The figures can be easily argued as too high or too low depending on many factors.
If you would like to speak with a CFP® professional about reaching your financial goals, please call Sharkey, Howes & Javer at 303-639-5100.