Is 150k in a HCOL area equal to 70k in a LCOL area?
March 08, 2021
Short answer: no
Long answer: read on (=
I see the sentiment expressed in the title thrown around quite a bit online, specifically Reddit. Let's throw some things into a tax calculator, make some simple assumptions, and see if this is actually true!
Scenario 1 (HCOL, San Francisco):
- Suppose you're single and work in San Francisco, a notoriously HCOL area
- Let's say you earn a total compensation of 150k, and get a 50% employer match up to 6% of your income
- We'll assume you make the maximum 19.5k 401k contribution every year, and your employer matches 9k
- Stick that into a tax calculator, and you get ~88k/year after taxes, and 28.5k/year in your 401k
- You can split a 2 bedroom apartment for about 1.55k per person, according to this website
- Let's say you spend an additional 1.45k on food, utilities, and random stuff to get a nice round 3k expense per month
- 88k - 12*3k = 52k left in your bank account
- After accounting for expenses, you have ~52k/yr after-tax money you can save and invest, as well as 28.5k/yr in your 401k
Scenario 2 (LCOL, Oklahoma City):
- Suppose you're single and work in Oklahoma City. According to this website, OKC is cheaper than the US average (I'm Canadian, please don't judge me if this was for some reason a terrible choice)
- Let's say you earn a total compensation of 70k, and get a 50% employer match up to 6% of your income
- We'll assume you make the maximum 19.5k 401k contribution every year, and your employer matches 4.2k
- Stick that into a tax calculator, and you get ~42k/year after taxes, and 23.7k/year in your 401k
- Suppose you eat no food, pay no rent, have no utilities, and have no expenses, and are basically a ghost
- With zero expenses, you have ~42k/yr after-tax money you can save and invest, as well as 23.7k/yr in your 401k
As you can see, cost of living can be a significant expense! I accounted for 36k/yr expenses for living in San Francisco, and that's a pretty insane amount to just spend in my opinion. However, the cost of living argument doesn't seem to hold up when the pay differential is that huge.
Maybe it'll make a bigger difference if you're looking to settle down and raise a family. I'm a little too young to bother thinking about that though, so you can go through the exercise yourself if you want!