Author Topic: Math Exercise: How to calculated minimum salary needed based on spending?  (Read 3039 times)

fallstoclimb

  • Handlebar Stache
  • *****
  • Posts: 1084
Let's say I had enough in investments that I thought I could stop contributing and just let it grow over time, and it would be enough for me to retire on when I was ready to retire.  (This is not the case, but we are living in fantasy-land right now).  Let's also assume I have a healthy emergency fund saved, no debt, etc.

So no saving is necessary and the total household income only needs to cover annual spending.  How do you calculate the necessary pre-tax salary needed to cover X amount of spending?  Obviously tax brackets matter here, and to simplify things let's assume that the household will just take the standard deduction. 

So if annual spending is $60,000, roughly how much does the household income need to be to cover that spending after taxes?

Just a thought exercise for a math-challenged person!  I'm not leaving my job anytime soon but I am kind of curious as to what our minimum necessary salary is at current spending levels.

gimp

  • Handlebar Stache
  • *****
  • Posts: 2348
I do the closed feedback loop. Plug a number into a tax calculator, see if it's high enough, repeat if not until you get the right number.

It's a lot quicker than working backwards, because I don't have to gather the numbers... "$x + y% if you're in this bracket, ok so let me start by adding my exemption and deductions, then figure out which money comes from what source and is taxed how, ..."

MDM

  • Senior Mustachian
  • ********
  • Posts: 10094
Also, the topic says "salary" but in the body of the post you mention "investments...I could...retire on".  Investment income in the form of dividends and long term capital gains is taxed much less than salary (in today's tax code).

gimp's advice looks good - just make sure you know (and tell the tax calculator) how much income is from salary and how much from dividends and long term capital gains.

sirdoug007

  • Pencil Stache
  • ****
  • Posts: 587
  • Age: 39
  • Location: Houston, TX
You really need to use a payroll calculator or you will miss the 7.65% in payroll taxes.

I did guess and check on this calculator assuming a single person and got about $81,000 to get $60,000 after taxes with no state income tax.

http://www.adp.com/tools-and-resources/calculators-and-tools/payroll-calculators/salary-paycheck-calculator.aspx

You can check the federal taxes with this tool: https://turbotax.intuit.com/tax-tools/calculators/taxcaster/
« Last Edit: July 31, 2014, 12:35:51 PM by sirdoug007 »

fallstoclimb

  • Handlebar Stache
  • *****
  • Posts: 1084
I do the closed feedback loop. Plug a number into a tax calculator, see if it's high enough, repeat if not until you get the right number.


Ha this is what I started doing and then I was like -- this is silly, there must be a better smart-person way to do this.  Maybe I was on the right track!

Also, the topic says "salary" but in the body of the post you mention "investments...I could...retire on".  Investment income in the form of dividends and long term capital gains is taxed much less than salary (in today's tax code).

To be clear regarding the investments:  I meant, let's say there's enough in my 401k that it will be ready for me when I'm 65.  Rather than retiring early, in this fantasy land I would just be working as little as possible, because I no longer need to save but still need income for the meantime.

This isn't actually going to happen, I'm just curious.  I guess it's similar to the calculations a family would make when figuring out if one parent can stay at home with a new baby for a couple of years (minus the increased cost of said new baby). 

I was thinking roughly 90K and it sounds like I was on the right track.  That is a high minimum household income! 

Cheddar Stacker

  • Magnum Stache
  • ******
  • Posts: 3719
  • Age: 42
  • Location: USA
Also, the topic says "salary" but in the body of the post you mention "investments...I could...retire on".  Investment income in the form of dividends and long term capital gains is taxed much less than salary (in today's tax code).

gimp's advice looks good - just make sure you know (and tell the tax calculator) how much income is from salary and how much from dividends and long term capital gains.

MDM, I believe what she means is stop working the career job at 35, find some more meaningful work from 35-60 while the savings grow, then retire at 60 from the retirement savings after not contributing anything else to it from 35-60.

So if annual spending is $60,000, roughly how much does the household income need to be to cover that spending after taxes?

I got $75K. Here's how:

$75K Gross
$20K Standard/Exemptions (MFJ)
$55K Taxable
$15K Taxes (15% Fed, 5% State, 7.65% FICA, 27.65% Total). I don't know your state rules, and the Fed rate is too high since it's not a graduated rate, but you said ROUGH right.

$75K gross - $15K taxes = $60K Net. It's not perfect, and it ignores all other deductions, credits, future kids, etc. Unless your state tax rate is crazy high you don't need $90K to net $60K. This is for married filing joint, not single.

Cheddar Stacker

  • Magnum Stache
  • ******
  • Posts: 3719
  • Age: 42
  • Location: USA
Correction from the last post, don't calculate FICA tax on the $55k, calculate it on the $75K gross. This mistake would likely net to the same result though as not using a graduated tax table, so the result would likely be about the same.

EDIT:

Here's a more exact calculation

 Gross                               76,168       
 Exemptions/Standard     (20,000)      
 Taxable                            56,168       
 Fed Taxes                          7,533    15.00%    Marginal
 State Taxes                       2,808    5.00%   
 Fica Taxes                          5,827    7.65%   
 Net                                  60,000       

So with a 5% state tax the answer is $76,168
« Last Edit: July 31, 2014, 12:43:29 PM by Cheddar Stacker »

NumberCruncher

  • Pencil Stache
  • ****
  • Posts: 612
I mean, you could put together a calculator in Excel or something that does this for you...but will need to do this calculation a lot in the future, plug 'n' chug is probably faster. :)

http://xkcd.com/1205/

fallstoclimb

  • Handlebar Stache
  • *****
  • Posts: 1084
I mean, you could put together a calculator in Excel or something that does this for you...but will need to do this calculation a lot in the future, plug 'n' chug is probably faster. :)

http://xkcd.com/1205/

Ha I love that comic!

....So with a 5% state tax the answer is $76,168

Thanks for doing the math for me!  That seems a lot better, because I felt that *needing* a household income of 90K was facepunch worthy.  Good to know I could make less than my husband and we'd be OK, if it was temporary or if we save enough now!