So, yes. For now, these companies are giving college grads enough money to retire by 35 (assuming the college grads are halfway financially savvy).
Source: I am a recent college grad at a FAANG.
Idea being that average market returns are 7%. So if you use 5% per year, you will never run out.
You get paid well into six figures but have "to camp in an RV for a decade", and then you retire with a $40K income. You could have just gotten a $40K job at some place* that didn't kill your soul! In ten years, you'd be making at least $60K. And if you burned out for whatever reason anyway, you could go on disability.
*by place, I mean either employer or city.
If you are invested in low cost index funds, most assume you can safely withdraw 4% a year and not deplete your principal. If you're retiring at 35, you might want a greater safety margin, so let's say 3%. That gives you 60K a year.
How do you retire on 60K a year? Obviously take what I'm saying with a grain of salt as I'm a relatively young person and haven't done any of this yet. But...60K is the median household income in the US, so half of families in the US live on less. If you're retired, you can probably save in ways others can't. For instance:
* Housing. You don't need to stay in a high cost of living city, so move to a much cheaper area (maybe a college town).
* Education. You have much more time, so send your kids to all public education, and use your extra time to educate them further.
* Debt. You have a ton of assets. Why hold any debt?
* Automobiles. Bike instead, if you're physically able.
* Health. Probably the hardest one since insurance in the US is tied to employment. I understand the recommended approach here is to pay out of pocket for a plan, but many have trouble with this. Of course, the standard advice is to use the extra time you have due to retirement to stay as healthy as possible, but I acknowledge this isn't a perfect plan.
[1] https://www.mrmoneymustache.com/ [2] https://www.madfientist.com/
There's more debate as to what would be a safe withdrawal rate over the long term without depleting principal, but I expect 3% would be a bit on the high side, although not unreasonable if one has a backup like part-time work.
Of course, that's assuming you withdraw 3% of the initial amount each year and adjust for inflation. Obviously if you only withdraw 3% of the current amount each year you'll never run out, by definition, but you might end up with shrinking spending money.
Still, just a nitpick. I agree with you in principle for sure.
Past results do not guarantee future performance. People in the FIRE community generally look at market performance since the final decades of the XIX century. For many, even these numbers do not guarantee anything, as the growth during these days reflected USA entering its golden age. Who knows if it will last through XXI century.
at this point a reasonable response is "there are no guarantees". If the 4% rule was back-tested through the great depression and generally came out fine, it's probably in the right ballpark.
As another FIRE blogger puts it, "3% or less is a near sure bet as anything in this life can be"
https://jlcollinsnh.com/2012/12/07/stocks-part-xiii-withdraw...
In addition, we're talking about a real withdrawal rate; a 4% real rate of withdrawal will be approximately a 6% nominal rate assuming inflation sticks around 2%. It's very unlikely you're going to maintain that from a balanced portfolio over the long term without depleting principle at all. Might be possible with an all-stock portfolio if you get lucky, but significant chance of failure if you get a poor sequence of returns.
Family with kids in a big, expensive city? Probably not.
Monthly expenses = 3k mortgage+ 500 property taxes + 2k daycare for one child(or 529) + 1.5k for food and other = 84k
Without compounding interest you need 10 years to get 2m, and these salaries are for 5+ or more years of experience. (And you need down payment, etc.).
Living in those areas is expensive.
If you are making 500k, that's a different story :-)
Now I wonder how many of these jobs are 100% work from home. I'm not sure a salary doubling could take me away from my family and into commuting an hour a day. But I mean, if they're going to pay me to engineer in my pyjamas, sure! =)
You'd have to pay me 10 times more than I get now, with a huge hiring bonus, to make me move to San Francisco. I'm not alone in this thinking. This is why the market rate is high.
Part of that is sort of circular, due to the bidding war for housing. Part is that some people just hate the political insanity. Part is that people have family connections elsewhere and they have hobbies that are incompatible with San Francisco.
Using that number means I'm roughly at par with a FAANG salary given my level. But it's not like the FAANG engineer is setting fire to that 240k. Depending on where you are in your amortization schedule 20-80ish % of your payment goes to principle. And my 500k house is probably going to be worth 800k in 10 years while the bay area house would be 4.5-5 million. When you take that into account I'm probably at 70% of an equivalent FAANG position.
The more important thing to look at here is risk. FAANG salaries and bay area real estate prices are out of whack with the fundamentals. If you get in and out without the bubble bursting you're sitting pretty. If it bursts or even has a 10% correction the FAANG engineer is way behind.
[1] https://sfbay.craigslist.org/sby/apa/d/cupertino-3-bedroom-3...
The cost of living is higher, but it's well under the increase in pay for being in the area. My current living situation is actually pretty cheap; I split a 4BR house, live 7 min from work, and pay $1650/mo for my portion of rent/utilities.
Most people I know tend to get 2BR apartments and split it with someone, usually paying $2000-2500/mo.
I'm not going to claim renting is universally bad, as it has some upsides (mainly flexibility), but it's definitely financially less savvy than buying, and is generally something you wouldn't want to optimize for at high salary.
Homeownership is advertised as owning an extremely leveraged illiquid asset whose margin calls take years, which is the only reason why it works for people that don't have enough cash to be financially independent another way.
If the only way people save is "force saving" by diving headfirst into something that sucks all of their other assets in, sure.
How could we make housing a terrible investment?
* It should be illiquid. We’ll make it something that takes weeks, no – wait – even better, months of time and effort to buy or sell.
* It should be something that locks its owner in one geographical area. That’ll limit their options and keep ’em docile for their employers!
* It should be leveraged! Oh, oh this one is great! This is how we’ll get people to swallow those low returns!
(copied from amusing thought experiment for another perspective: https://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terri...)
That said, I bought a place to live anyways.
Also, houses here tend to all be over $1M, good ones well over $1.5M. The average sold house price last month in Palo Alto was $2.76M with an average ~1900k sqft: https://www.redfin.com/city/14325/CA/Palo-Alto/housing-marke....
Additionally, I'm slightly concerned about a possible real estate bubble + I'm not sure if I plan to live in South Bay for 5+ years (the usual amount of time needed to keep your house for it to be worth it financially).
It's not that I can't afford a house, I can; I'd just rather have my money in an index fund and rent instead right now.
By the time you're 35, you'll probably have a family with kids. You don't want a long commute to spend more time with said family so your 2000 sq.ft. house on a 7000 sq.ft lot will cost between $1.5M to $2.5M.
You won't get any needs-based financial compensation to send your kids to college, yet chances are that you don't want to deny them going to the best college that they'll accepted to. Add another $200K per kid if they're going to a UC school.
Everything is going to be a bit to a lot more expensive than elsewhere. Childcare, the electrician and plumber who charges $175 per hour (they need to live too), eating out etc.
$400K in yearly pre-tax compensation reduces to something like $250K after tax?
There's no way you're going to retire at 35, unless you're willing to give up on a lot of niceties of life before bailing. I don't know anyone who did.
2000sqft is a larger home, but not absurd if you're married and have two kids.
But if I had to choose one thing where I have no problem spending more than what is strictly needed, it's going to be the place in which I'll be spending the vast majority of my time for the rest of my life.
If it makes you feel any better: for the low end of my range ($1.5M), you're not going to get that 7000 sq.ft. You'll be buying a house on a 3500 sq.ft. lot, so the argument still stands.
Obviously, it can't grow like that forever - even professional couples have problems pooling together money for a down-payments on decent median priced homes.
And while you're building equity by owning, you're also kind of stuck to keeping up with salaries / career trajectories.
But you know, with higher salaries comes more purchasing power. And then you also have foreigners parking their assets in the housing market, similar to what's happening in NYC and Vancouver.
It's hard to compete even with a nice $500k salary, when some foreign investor can casually overbid you with millions in cash.
Sounds a bit dramatic, yes, but that's life in most cities with hot markets and high salaries.
No
> Is silicon valley really that expensive?
Yes yes yes oh my god yes. Rent eats most of the difference. 300$/mo for a parking space, etc. However, non-local things (like amazon purchases) are the same price everywhere, so you still have lots of purchasing power for those things.
> Or are they literally giving college grads enough money to retire by 35?
Only if you play it right. If you have a high-earning spouse or are willing to live with multiple roommates into your thirties, have no kids, rent an apartment, and live modestly + save diligently. Want to live alone and get food and drinks with your friends every day? That will seriously handicap any strides towards financial independence until you're nearing the 300k range, and even then it takes you from "rocketship bank account" down to "really great life". Very much a first world problem, but if the goal is "retire at 35", the distinction matters.
You have to keep in mind that a 1br apartment in a second tier area will run you like $2k, and that will not be an especially nice apartment. That seriously cuts into the "retire in 10 years" plan.
That's the bottom line -- cost of living is so high the salaries need to be high too, or people won't accept them.
This is it.
All the answers about Bay Area Cost of Living are just as applicable for people making $150k and would be the same answers if those were the "high salaries" being paraded around.
All thats happened is that the tech sector has multiple of the largest publicly traded companies in the world, all in one place, and its brushing up against the compensation style that the finance sector has had for decades, which has always been divorced from cost of living and closer to the value brought to the organization. Its a good deal with a lot of potential to get better, or the market slows down and it gets worse.