Real impact of a salary cut

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FrugalFed
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Real impact of a salary cut

Post by FrugalFed »

My wife is thinking of moving into a related field (not immediately, medium-term) that would entail a likely salary cut. I am trying to be encouraging because I think we can afford it and she would be happier. I have suggested to her that the way to think about this is as follows -- her take home pay would be cut by much less that the gross salary cut number. Namely, subtract federal and state taxes (at marginal rate unless cut would take us down a bracket, not likely) as well as FICA from that number. For her, that would be over 37%.

I think I am explaining this correctly, but wanted to run it by you all to make sure I'm not missing anything. (Do set aside that one could argue that with FICA there is the issue that a lower salary might mean a slightly lower SS payment in the future, though for her it's probably minor. Also ignore that we could in theory get on the good side of tax phase-outs now or in the future, which could cut the other way.)

Thanks as always!
Last edited by FrugalFed on Sun Dec 06, 2020 11:06 pm, edited 1 time in total.
EnjoyIt
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Re: Real impact of a salary cut

Post by EnjoyIt »

peseta wrote: Sun Dec 06, 2020 10:33 pm My wife is thinking of moving into a related field (not immediately, medium-term) that would entail a likely salary cut. I am trying to be encouraging because I think we can afford it and she would be happier. I have suggested to her that the way to think about this is as follows -- her take home pay would be cut by much less that the gross salary cut number. Namely, subtract federal and state taxes (at marginal rate unless cut would take us down a bracket, not likely) as well as FICA from that number. For her, that would be over 37%.

I think I am explaining this correctly, but wanted to run it by you call to make sure I'm not missing anything. (Do set aside that one could argue that with FICA there is the issue that a lower salary might mean a slightly lower SS payment in the future, though for her it's probably minor. Also ignore that we could in theory get on the good side of tax phase-outs now or in the future, which could cut the other way.)

Thanks as always!
I did the same calculation when my spouse and I went part time. We cut out the least profitable portion of our time as we were in the top tax bracket. If that comes out to 37% marginal tax, then cutting pay by $10k is actually a $6.3k pay cut. For us it was even less because it phased us into Trump's qualified business tax deduction giving us even more tax savings. Plus we traveled less for work, required less work attire, less gas, less wear and tear on cars, more time to exercise making us healthier and hopefully cutting healthcare expenses in the future, more time to cook delicious healthy meals and less need to eat out because of being tired. I think this was easily over 45% of a reduction.
A time to EVALUATE your jitters: | https://www.bogleheads.org/forum/viewtopic.php?f=10&t=79939&start=400#p5275418
oldfort
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Re: Real impact of a salary cut

Post by oldfort »

What exactly is your question here?
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FrugalFed
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Re: Real impact of a salary cut

Post by FrugalFed »

oldfort wrote: Sun Dec 06, 2020 10:53 pm What exactly is your question here?
Just whether I am thinking about this correctly. I know some folks don't include FICA in marginal/effective tax rate calculations. It seems pretty obvious to me, but sometimes when I think that I have ignored something important . . .
IMO
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Re: Real impact of a salary cut

Post by IMO »

I really think you always need to take something like a salary cut into "the big picture." It is always a financial benefit to make more money, even if that money is taxed at around 40% on the gross amount. However, it really must be taken in context, and typically it's the net amount that you really need to consider when it comes to your family's personal situation. For example, if one of our salaries is say $150K and the other's is $100K (combined $250K) someone taking a $50K salary cut will have a financial impact, but it may or may not have a big practical effect day to day. It may affect one's retirement target date on possibly retiring, or may or may not have an appreciable effect on what one's retirement budget can be otherwise. It sometimes can be a reasonable compromise to look at the budget closely and find areas that you could mutually agree to cut that can help offset one person's decision to take a salary cut.

You can find the Social Security calculators that will be able to tell you how much one's benefit will be changed using different scenarios when you plug in various numbers. You've probably heard people talk about the 1st and 2nd bend, and surprisingly some who opt to retire early find that the "zero" years don't make as much of a difference as they expected.

What's probably most important is you mention it will make your spouse happier. I think that is key. If your happy in your work, it affects many aspects of life, and ultimately it often may mean you are willing to work longer. Leaving work early due to job dissatisfaction/burnout has a similar effect on things like a salary cut.

I know we had made a significant family decision to have one of us take a salary cut at one point, and it was the right thing to do at the time. In a similar sense, I made a decision to leave the workforce early than I had planned earlier in life, but it was the right thing to do. Having your SO support one's decision is very important, probably more so than the numbers.
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Re: Real impact of a salary cut

Post by IMO »

peseta wrote: Sun Dec 06, 2020 11:00 pm
oldfort wrote: Sun Dec 06, 2020 10:53 pm What exactly is your question here?
Just whether I am thinking about this correctly. I know some folks don't include FICA in marginal/effective tax rate calculations. It seems pretty obvious to me, but sometimes when I think that I have ignored something important . . .
I think it depends on if the salary amount is above or below what is taxed on the social security maximum.

My SO's works part time, and her work often requests if she can work more to help out. I always add up the fed/state marginal tax rate and add on FICA numbers and give her the advice "if you want to help out fine, but don't forget quite a bit of that is taxed, would you rather just take the day off?"

I should add, she is choosing to work, she doesn't have to work in our retirement calculations and my kid is probably the real beneficiary of the extra work.
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Watty
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Re: Real impact of a salary cut

Post by Watty »

peseta wrote: Sun Dec 06, 2020 10:33 pm I think I am explaining this correctly, but wanted to run it by you all to make sure I'm not missing anything.
What you explained makes sense but you may be missing two things.

1) If you keep the same lifestyle your fixed expenses will stay the same so any reduction in your income will come out of your disposable income. For example if you have $80K in fixed expenses(mortgage, food, utilities, etc) and if your after tax income is $100K and it is reduced to $90K then that is a $10K income reduction. When you look at your disposable income though it will have gone down from $20K to $10K so you would be facing a 50% reduction in your disposable income which you may notice a lot more when it comes to things like being able to save for retirement or spend on vacations.

2) She could be more of a bind if something happens to you like you die, get laid off, disabled or you get divorced.
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Re: Real impact of a salary cut

Post by 2tall4economy »

Wife exited the workforce a few months after we were married. At the time I was red-hot angry about it (young, bait and switch thinking, etc) but then I did the math and her ~60k salary ended up being like a $20k hit in real income (married tax bracket vs single and her significantly lower income vs mine)
You can do anything you want in life. The rub is that there are consequences.
Marseille07
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Re: Real impact of a salary cut

Post by Marseille07 »

2tall4economy wrote: Mon Dec 07, 2020 12:23 am Wife exited the workforce a few months after we were married. At the time I was red-hot angry about it (young, bait and switch thinking, etc) but then I did the math and her ~60k salary ended up being like a $20k hit in real income (married tax bracket vs single and her significantly lower income vs mine)
I think it's still morally wrong to exit the workforce unless it was agreed upon before marriage. Imagine the husband doing that.
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Re: Real impact of a salary cut

Post by 2tall4economy »

Marseille07 wrote: Mon Dec 07, 2020 12:34 am
2tall4economy wrote: Mon Dec 07, 2020 12:23 am Wife exited the workforce a few months after we were married. At the time I was red-hot angry about it (young, bait and switch thinking, etc) but then I did the math and her ~60k salary ended up being like a $20k hit in real income (married tax bracket vs single and her significantly lower income vs mine)
I think it's still morally wrong to exit the workforce unless it was agreed upon before marriage. Imagine the husband doing that.
Well, I can't say I disagree. But as I've posted in other places on this board, my choice was divorce or continue. But it couldn't let it keep eating me up.

I chose continue. Since then we've had kids and it's worked out since she essentially plays tackle while I'm working. Can't complain TOO loudly...
You can do anything you want in life. The rub is that there are consequences.
Valuethinker
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Re: Real impact of a salary cut

Post by Valuethinker »

2tall4economy wrote: Mon Dec 07, 2020 12:38 am
Marseille07 wrote: Mon Dec 07, 2020 12:34 am
2tall4economy wrote: Mon Dec 07, 2020 12:23 am Wife exited the workforce a few months after we were married. At the time I was red-hot angry about it (young, bait and switch thinking, etc) but then I did the math and her ~60k salary ended up being like a $20k hit in real income (married tax bracket vs single and her significantly lower income vs mine)
I think it's still morally wrong to exit the workforce unless it was agreed upon before marriage. Imagine the husband doing that.
Well, I can't say I disagree. But as I've posted in other places on this board, my choice was divorce or continue. But it couldn't let it keep eating me up.

I chose continue. Since then we've had kids and it's worked out since she essentially plays tackle while I'm working. Can't complain TOO loudly...
Most people, usually men, who have responsibility for young (or even teenage, or especially teenage) children for any length of time cannot wait to get back to work. I mean it's great when they are very small and learning things - but you have to have eyes 100% in the back of your head, total surveillance 24/7, they are little kill or hurt themselves machines.

But after that age it's the tantrums, the constant testing of boundaries, the fights between siblings, getting them to do their homework, getting them to school and X or Y activity on time. Seemingly constant rounds of dental and medical appointments.

Next door has 2 little boys and has had nearly 5 months of closed schools + summer holidays. Now the rules are quite strict about bringing them to school, the time slot they must arrive (for that Year of class) etc. Parents working in and around that - 2 hours on, 2 hours off between them.

The parents just look exhausted, shattered, haunted even.

Work is (mostly) easier than this. Maybe not if I was an ICU doctor or nurse or ran a big warehouse, but office work.
Last edited by Valuethinker on Mon Dec 07, 2020 8:56 am, edited 1 time in total.
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Re: Real impact of a salary cut

Post by Valuethinker »

peseta wrote: Sun Dec 06, 2020 10:33 pm My wife is thinking of moving into a related field (not immediately, medium-term) that would entail a likely salary cut. I am trying to be encouraging because I think we can afford it and she would be happier. I have suggested to her that the way to think about this is as follows -- her take home pay would be cut by much less that the gross salary cut number. Namely, subtract federal and state taxes (at marginal rate unless cut would take us down a bracket, not likely) as well as FICA from that number. For her, that would be over 37%.

I think I am explaining this correctly, but wanted to run it by you all to make sure I'm not missing anything. (Do set aside that one could argue that with FICA there is the issue that a lower salary might mean a slightly lower SS payment in the future, though for her it's probably minor. Also ignore that we could in theory get on the good side of tax phase-outs now or in the future, which could cut the other way.)

Thanks as always!
You only live once. If your spouse would be happier, that's going to go a long way to you being happier, too.

Unless you are saving for a very specific financial goal, such as buying a house, it's better to make the move and trim your cloth to the sail (nautical expression) - make your lifestyle and savings goals fit around that.
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Re: Real impact of a salary cut

Post by lthenderson »

peseta wrote: Sun Dec 06, 2020 10:33 pm My wife is thinking of moving into a related field (not immediately, medium-term) that would entail a likely salary cut. I am trying to be encouraging because I think we can afford it and she would be happier.
We made the decision eight years ago to go from two salaries to one and it made a world of difference in our lives. While your spouse isn't giving up working completely, I would look at all the hard to put a number too benefits of working in a field that pays less like less stress, more time to spend with family, etc. These hard to assign dollars to things are really what have made the transition the most enjoyable for us. Another big benefit is by having a spouse with the ability to shoulder more at home responsibilities allows the other working spouse to focus more on their career which for us, had huge financial benefits. My working spouse now makes more than both of us together eight years ago by a considerable margin.
EnjoyIt
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Re: Real impact of a salary cut

Post by EnjoyIt »

2tall4economy wrote: Mon Dec 07, 2020 12:23 am Wife exited the workforce a few months after we were married. At the time I was red-hot angry about it (young, bait and switch thinking, etc) but then I did the math and her ~60k salary ended up being like a $20k hit in real income (married tax bracket vs single and her significantly lower income vs mine)
As long as she is doing her fair share for the family this could be a winning strategy. I have a friend, nurse who works a lot and her spouse is a stay at home dad. She works a lot of overtime and extra shifts. Full time for a nurse is 3 days a week. She easily works 5 and sometimes 6 days a week. Her husband takes care of the kids, wakes up and makes sure she gets breakfast before work, lunches packed for work and dinner is ready when she gets back. He even fills up her car for her so that she doesn’t waste time on such things. Her job is to make money and his job is to run the house. It is a team effort that appears to work very well for them. I have a sense that they plan on retiring early when both kids are out of the house.

I have another friend whose spouse quite work when they got married. She does nothing around the house but watch TV and plays video games all day long. She barely does anything with the kids and frankly a waste of space. Her husband does almost everything and I don’t see it being a team effort. I know I’m judging, but I can’t help it to see my good friend taken advantage of like this.
A time to EVALUATE your jitters: | https://www.bogleheads.org/forum/viewtopic.php?f=10&t=79939&start=400#p5275418
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Re: Real impact of a salary cut

Post by SmileyFace »

If you file jointly you need to look at the overall impact of the cut (e.g. if your effective tax rate goes down it means you get to keep more of BOTH of your salaries).
There might also be other financial impacts depending upon what this job/career change is (commuting costs, clothing costs, etc.).

But - not all decisions in life need to be financially driven (at least not as a primary factor). It's hard to put a price on increased happiness - and normally increased happiness for a spouse means increased happiness for the marriage and both parties.
My spouse started a new career when we had our first child as a homemaker. The new salary was $0 but the lifestyle change was priceless for both of us in many ways.
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FrugalFed
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Re: Real impact of a salary cut

Post by FrugalFed »

Thanks so much for everyone's thoughts. I ran the numbers with some lower estimated salaries and showed my wife how the impact to our family finances wouldn't be nearly as drastic as she was fearing. We should be able to pull this off because some big childcare expenses will be coming off the books in the future (e.g., oldest starting kindergarten). Appreciate the insights as always (especially the thoughts of those who made decisions in this lane).
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Re: Real impact of a salary cut

Post by suemarkp »

I think its easier to see the other way around -- you're going to get a $50K pay raise and you do the math and start thinking about how you will spend or invest all the new money. But by the time you get your check, the money isn't what you thought because of higher taxes or maybe higher medical costs. Then when you do your income taxes you see other things you may have run into like NIIT or phaseouts of things. When my wife was still working, I knew that if I got a 4% pay raise, I'd probably only see about 2.5% in my check.

So yes, the pay cut isn't nearly as bad as it seems unless you're both low income.
Mark | Somewhere in WA State
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Re: Real impact of a salary cut

Post by 2tall4economy »

Valuethinker wrote: Mon Dec 07, 2020 8:53 am
2tall4economy wrote: Mon Dec 07, 2020 12:38 am
Marseille07 wrote: Mon Dec 07, 2020 12:34 am
2tall4economy wrote: Mon Dec 07, 2020 12:23 am Wife exited the workforce a few months after we were married. At the time I was red-hot angry about it (young, bait and switch thinking, etc) but then I did the math and her ~60k salary ended up being like a $20k hit in real income (married tax bracket vs single and her significantly lower income vs mine)
I think it's still morally wrong to exit the workforce unless it was agreed upon before marriage. Imagine the husband doing that.
Well, I can't say I disagree. But as I've posted in other places on this board, my choice was divorce or continue. But it couldn't let it keep eating me up.

I chose continue. Since then we've had kids and it's worked out since she essentially plays tackle while I'm working. Can't complain TOO loudly...
Most people, usually men, who have responsibility for young (or even teenage, or especially teenage) children for any length of time cannot wait to get back to work. I mean it's great when they are very small and learning things - but you have to have eyes 100% in the back of your head, total surveillance 24/7, they are little kill or hurt themselves machines.

But after that age it's the tantrums, the constant testing of boundaries, the fights between siblings, getting them to do their homework, getting them to school and X or Y activity on time. Seemingly constant rounds of dental and medical appointments.

Next door has 2 little boys and has had nearly 5 months of closed schools + summer holidays. Now the rules are quite strict about bringing them to school, the time slot they must arrive (for that Year of class) etc. Parents working in and around that - 2 hours on, 2 hours off between them.

The parents just look exhausted, shattered, haunted even.

Work is (mostly) easier than this. Maybe not if I was an ICU doctor or nurse or ran a big warehouse, but office work.
I think that’s probably true for many jobs. As a senior exec and partial owner of the company I work for though, I can assure you the stress can be quite high. I have hundreds of people who seem to be hurt themselves machines :)
You can do anything you want in life. The rub is that there are consequences.
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Re: Real impact of a salary cut

Post by 2tall4economy »

EnjoyIt wrote: Mon Dec 07, 2020 10:21 am
2tall4economy wrote: Mon Dec 07, 2020 12:23 am Wife exited the workforce a few months after we were married. At the time I was red-hot angry about it (young, bait and switch thinking, etc) but then I did the math and her ~60k salary ended up being like a $20k hit in real income (married tax bracket vs single and her significantly lower income vs mine)
As long as she is doing her fair share for the family this could be a winning strategy. I have a friend, nurse who works a lot and her spouse is a stay at home dad. She works a lot of overtime and extra shifts. Full time for a nurse is 3 days a week. She easily works 5 and sometimes 6 days a week. Her husband takes care of the kids, wakes up and makes sure she gets breakfast before work, lunches packed for work and dinner is ready when she gets back. He even fills up her car for her so that she doesn’t waste time on such things. Her job is to make money and his job is to run the house. It is a team effort that appears to work very well for them. I have a sense that they plan on retiring early when both kids are out of the house.

I have another friend whose spouse quite work when they got married. She does nothing around the house but watch TV and plays video games all day long. She barely does anything with the kids and frankly a waste of space. Her husband does almost everything and I don’t see it being a team effort. I know I’m judging, but I can’t help it to see my good friend taken advantage of like this.
My situation is much like the first. My daughters 5th birthday was today. I provided just a little input into presents and otherwise just got to hug her and eat homeMade filet mignon and scallops with bearnaise sauce and some birthday cake and put my daughter to bed.

The house is a bit messy for my taste (everyone needs something to fight about I suppose) but otherwise she’s quite good about managing the household so I can concentrate on work.
You can do anything you want in life. The rub is that there are consequences.
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