(Part One of Two)
The largest post–World War II economic expansion, which occurred during the Clinton administration, was trumpeted as the vehicle that sent tens of thousands of African-Americans into the middle class. Recently, the U.S. Census heralded African-American income growth as the highest in history, increasing every year since 1980 and declining for the first time in 2001.
Hidden in these feel-good statistics is a troubling reality, and the choice between affluence and poverty that every African-American individual and family must make, because joining the middle class is no longer a viable choice!
For most Americans, “middle class” is not an income level but a lifestyle. It means owning a home; taking one or two vacations a year, as well as a few side trips and a weekend or two with friends; owning a car; and paying the children’s college fees. It also means living a full and happy life in a safe community and, at retirement, having the financial freedom to travel, lavish gifts on the grandchildren and engage in activities that the heart desires. If money is left over, there will be a generous inheritance for the children and/or the grandchildren, university or church.
Economy.com puts the annual household income of the middle class between $32,000 and $49,000. In 2001, the median annual household income for African-American families was approximately $29,470. Adjusted for federal taxes, that gives a median take-home income of roughly $25,749.
The average U.S. household spends about $8,216 a year on food and another $1,040 on fuel and transportation. If you assume spending the normal 30 percent of income for housing ($736.75 per month), the African-American family on average will spend $8,841, leaving only $7,652 per year, or $638 per month, for tithing, clothing, child care, gas-electricity, medical-dental insurance, entertainment, repairs, personal grooming and saving for retirement and the children’s education. Thus, while the average African-American family generates income above the poverty line (that line being drawn at approximately $21,000 in household income), its lifestyle and financial security are only marginally better than that of those below the poverty line.
Yet, even higher levels of income may not be sufficient to achieve a solid middle-class lifestyle. Let’s assume your annual household income is $150,000. With the Bush tax cuts, you will pay about $32,180.50 in federal taxes (assuming no deductions). Medical-dental insurance for your family of four will cost approximately $10,000 annually; and tithing to your church, parish or local charity will amount to another $15,000 annually. To save for your two children to attend an in-state university, you would have needed to save $12,630 per child per year in 2002.
Food costs average $9,000 annually if you forgo regular dinners out, and transportation costs, including car payments, fuel, insurance and maintenance for two cars, could easily run $10,000 per year. The family vacations, holiday trips and outings with friends could cost you $9,000 annually, while your clothing bill for four may well exceed $12,000 annually. If you buy just an average-size home, you will pay approximately $17,000 per year in monthly housing payments, excluding maintenance. The average cost of a new home in the United States is $215,500. You need approximately $28,000 for the down payment and closing costs just to get the house.
Thus, to live the middle-class lifestyle and still save for your children to go to a state college, you will have consumed $139,440 of your $150,000 annual income, leaving you with a paltry $10,560, or $880 per month, for any unanticipated expenses and retirement savings. Not exactly the cushion that one would expect from a middle-class life. To be sure, there is room to cut costs. But does cost cutting really come to mind with a middle-class lifestyle?
The challenge for African-Americans is to generate sufficient wealth to sustain such a lifestyle into and through retirement. To comfortably sustain this lifestyle, without reliance on earned income, one would need total investable assets of approximately $2.2 million, or an average net worth of at least $2.5 million. Since the median net worth of African-American families was $6,166 in 2002, the probability of significant numbers of African-American families achieving this level of wealth is extremely remote.
David Hinson is founder of Wealth Management Network in New York City, 646-375-2388.