The "New" Millionaire Next Door
In 1998 a book came out titled "The Millionaire Next Door" by Dr. Thomas Stanley and Dr. William Danko. The good doctors preached a simple formula to becoming a millionaire; live well below your means and choose your occupation wisely. They said the neighborhood millionaires were most likely to be small business owners who saved and sacrificed for decades, in order to be able to retire without fear of outliving their money. When they said choose your career wisely, they should have also said choose your union (and clueless state legislators) wisely!
Todays new millionaires next door are not the small business owners creating jobs and wealth for their communities. No, todays millionaires are state employees, policemen, firemen, and especially teachers. Not only do these private sector workers make 30% -- 40% more than their public sector neighbors in annual salary, they totally blow them away in retirement benefits.
Now I live here in beautiful Mt. Lebanon, PA. where our school is ranked in the top 6% of all public schools in the nation, and I love it, I'm just not sure how much longer I can afford it. The top teacher salaries in Mt. Lebanon are now over $94,000 (the average is slightly more than $60,000). While $94,000 is certainly respectable the real kicker is the guaranteed pension plan. My local elementary school just had a party to celebrate the retirement of three of our educators, now we don't know exactly what these teachers were earning, but considering the number of years service we can safely assume that it was at least near the $94,000 number. So what does this retiree have to look forward to in retirement? A lot! Lets do the math:
The formula is pretty straight forward, a teacher gets (2.5 x the number of years worked) times the average for the three highest years salary for the rest of his or her life.
So if our retirees started fresh out of college at the age of 22 and worked to 62 (40 years), they would get (2.5 x 40) 100% of their three highest earning years. Lets say our retiring teacher's three highest earning years average a conservative $85,000. They could expect to receive $85,000 per year for life (plus health care benefits). Assuming a life expectancy of 87 (25 years in retirement), what would the size of that retirement portfolio have to be? $1,400,000. That is the net present value of a guaranteed $85,000 per year for 25 years discounted at 4% annual real return ( which assumes no inflation). This is a very generous assumption, historically a real after inflation, return of 2% is more likely. If we assumed this 2% real annual return the nest egg would have to rise to $1.7 million. Not that our newly retired millionaires need to worry about the markets or their investment returns, their returns are guaranteed by you and I!
In Mt. Lebanon our school tax millage rate for '09-'10 is 24.11, the schools projection for '14-'15 is 33.11, an increase of 37.3% over four years.
Now my house is assessed for $524,600, so here is the scary math:
Mt. Lebanon school tax (24.11 mills): $524,600 x 0.02411 = $12,648
2014 est. Mt. Lebanon school tax ( 33.31 mills): $524,600 x 0.03331 = $17,474
An increase of $4,826, and rising.
So I'm paying $17,000 a year to send my daughters to public school, and when they graduate I'll still pay $17,000+ per year.
Here are some of the other tax numbers:
Municipal Property Tax (4.97 mills): $524,600 x 0.00497 = $2,607
Allegheny County Property Tax (4.69 mills): $524,600 x 0.00469 = $2,460
My total property taxes are north of $17,500 and will soon be north of $23,000 (nearly $2,000 per month)!
What does this mean for the average Mt. Lebanonite?
Mean Home Value $250,000.
Median Household Income $77,385
Mt Lebanon School Tax: $250,000 x 0.02411 = $6,027
Municipal Property Tax: $250,000 x 0.00497 = $1,242
Allegheny County Property Tax: $250,000 x 0.00469 = $1,172
Total Property Taxes: $6,027+$1,242+$1,172= $8,441
Now this number will increase by at least 37% over the next four years to $11,564.
What does this mean to our typical neighbor?
Let's say our frugal neighbors put 20% down on their $250,000 home, and have a good mortgage rate of 6% fixed for 30 years.
Home Mortgage: $200,000 (6% for 30 Years) = Monthly Payment $1,200
Monthly Property Taxes: ($11,564/12) = $964
Other Taxes (On Income of $77,385):
Approximate Federal Income Tax: $6,000
Approximate PA State Income Tax (3.07%): $2,375
Approximate MTL Muni Tax (1.3%): $1,006
MTL Local Service Tax (2 wage-earners): $104
Total Monthly Income Taxes : $790
Net Monthly Income (Total Income - Taxes): ($6,449 - $790) = $5,659
Property Taxes & Mortgage ($964 + $1,200) = $2,164
Monthly Mortgage & Property Tax Payment as a Percent of Monthly Net Income: ($2,164/$5,659) = 38.24%
According to financial experts the maximum recommended after-tax expenditure on housing should be no more than 33%, in Mt. Lebanon we will be a full 5% over that recommendation.
I'm not sure how this is going to end, but something has got to give. Either the tax-payers are no longer going to be able to live in their communities, or the "guaranteed" pensions may not be so "guaranteed" if the state is forced into a pre-packaged bankruptcy (politely called a restructuring).
I'm so happy that my oldest daughter wants to become a teacher ... she'll be my retirement plan!
Link to PSERS presentation HB 2497 And The Pension Rate Spike:
Be careful out there,
Chris Wiles
This article contains the current opinions of the author but not necessarily those of the Rockhaven Capital Management. The author’s opinions are subject to change without notice. This article is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.
The only problem with your logic here Chris is that taxpayers do not pay for a teacher's pension. At least not in Ohio where I live. The STRS system is funded through teachers paychecks. We are required to put 16% of our paycheck into the retirement system with no guarantee that the system will even be around when we retire. By the time I have retired, I will have given STRS over a $1,000,000 out of my paycheck. I currently bring home $22,000 cash every year and owe over $5,000 a year in college tuition. Perhaps people who have been in the field for awhile have it good, but things are changing for the new generation. What other field would require 4-5 years of education and result in a $17,000 annual salary out of the gate? There is also no sense of security and you have to practically walk on eggshells whether you are around parents, administrators, or the public. It's just not right to continue to pick on teachers without living in their shoes.
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