You Need Equity To Live In Silicon Valley:

The other day we were modeling our typical client’s spending when we realized something disturbing – an average Bay Area-based young couple has to own equity in a business if they hope to send their kids to a good university and be able to retire well.

Investing well alone can’t get you there.

Our analysis found you need to work for at least one company where your equity stake can generate at least a few hundred thousand dollars after tax to make your economics work in the Bay Area.

The problem is the hole that opens up in a typical couple’s budget when they are in their late 30s. Three big pressures converge then: the mortgage on your expensive Bay Area home, and the dueling needs to fund your retirement and your kids’ college early so that you take advantage of compounding.

That’s why we say: You need equity to live in Silicon Valley.

Our example of a Silicon Valley couple

To do our analysis we had to make a number of assumptions about a young, professional Silicon Valley couple[1]. We started with 30 year olds. We assumed they earn a generous $250,000 per year and spend $60,000 per year on items not related to supporting children.  The couple’s income and spending grow at an inflation rate of 3% per year. Their income stops at age 65, when they retire, but they begin drawing social security at 70.

They buy a house when they turn 30 for $1 million financed with a $200,000 down payment and an $800,000 mortgage. The mortgage has a 3.75% fixed interest rate for 30 years. For context, a 3.75% interest rate is historically low.

Federal and state taxes represent 45% of income, and savings are invested at 6% a year.

The couple has two children, one when both are 30 and the other when they’re 32. Each child costs about $22,000 a year to support. (This number includes housing costs for the United States. In Silicon Valley, we think $22,000 is the cost without housing). The couple needs to save $1,100 per month for 18 years to afford to send each child to private college. Alternatively, they could save $6,500 per child per year for 18 years to afford to send their kids to a public university.  (Unfortunately, families that currently earn $250,000 per year do not qualify for financial aid at most universities.)

Your top priority

For purposes of our analysis, we assumed the couple would first save for their kids’ college, rather than their retirements, because college costs come first chronologically – and sending your kids to a good school should be your top priority.

You can see our spending assumptions and savings model in the spreadsheets linked below, and if you download them, you can insert your own numbers and play with the assumptions.

You’ll notice a few disconcerting things from the spreadsheet.“Other savings” is the amount left over after mortgage payments, real estate taxes, income taxes, annual spending (which includes adults and kids), and college savings.  In other words it is the equivalent to a family’s annual profit or loss. “Cumulative savings” shows how the family’s assets (aside from hard assets such as real estate) grow or decline over time. It is the amount of savings to date compounded at a constant assumed investment rate (we assumed 6%) plus the current year’s savings.

After putting aside what their kids need for college, our couple has nothing left for retirement savings by Year 3. By Year 4, the couple has negative cumulative savings (i.e. they owe money) even after giving up on their retirement savings plan. Cumulative savings remain negative through Year 21.

A year after their second child goes to college, the couple has enough left after expenses to save for retirement again.

It could be worse

Some of these assumptions are aggressively generous. For example, we assumed our couple could afford the $200,000 down payment on their home. We treated the entire annual mortgage payment as tax-deductible for the 30-year mortgage period. In reality, a decreasing percentage of the mortgage payment is tax-deductible over time, which leads to higher taxes and less savings. We assumed the couple would not spend any additional money on their children after they sent them to college (even though the kids will still need spending money). A growing number of recent college grads move back home after school; 56% of all adults aged 18-24 are living with their parents, according to the U.S. Census Bureau.

More conservative assumptions on these items would probably add at least $150,000 to the couple’s cumulative spending. That means the couple would likely dig themselves a $420,000 hole rather than the $270,000 hole displayed in the spreadsheet. Add in the down payment on their house and you’re up to $620,000 and that’s after tax money! To finance the shortfall, you could borrow some of the equity value you have built in your home, but that won’t make up the whole difference. It’s also a high-risk strategy, as we learned during the financial crisis. (If home prices drop, you end up owing more than your home is worth.)

Old definitions of ‘a lot’ don’t hold true

If the couple can come up with the money to plug the hole in their budget then they will be able to ultimately afford to retire at their pre-retirement spending rate, and send their kids to good schools. But that assumes both members of the couple work until they are 65 with no breaks in between.

An annual income of $250,000 seems like a lot of money. But home prices in the Bay Area are so high that the old definitions of “a lot” don’t hold true anymore. You could buy a much less expensive home, but then you have to start worrying about the quality of your kids’ schools and the length of your commute. All in all it’s a tough conundrum.

(As an aside, there is a chicken-and-egg argument about whether high real estate prices drive the equity culture in Silicon Valley. You could say the same about finance and New York, or government and Washington, D.C..)

Are there other sources of a few hundred thousand dollars? Some people are lucky enough to inherit money or get big gifts from their families. You might be in an industry, like finance, that pays bonuses that large. In Silicon Valley, your best chance of generating the cash you need to get you from here to there is to work for a company that offers an ownership stake that can become liquid in a reasonable time period.

You’re most likely to earn a valuable equity stake if you follow our career advice and join a company with momentum early in your career. We encourage you to pay attention to the equity part of your compensation package, consistent with the industry standards we display in our compensation tool. If you were to join a mid sized company with momentum, it’s not out of the question you could receive a 0.1% stake that could be worth at least $1 million pre-tax to you if the company goes public. Joining a company that achieves great success will also put you into position to later earn a much larger equity position at a hot startup that could earn you well more than that.

Over 20 years you should have at least five shots at a big outcome. Managed well, one or more of your equity stakes should be able to address the shortfall required to retire comfortably. If you live in Silicon Valley, you have to play the equity game. Not doing so will leave you with a hole too deep to dig out.

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International Moving Services

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We understand that an international move is one of the largest moves you can make, and we recognize the importance of providing a moving strategy that will allow you to fulfill all the needs of your international moving process. We have studied and examined what works, and our time tested moving methods have allowed us to consistently complete successful moves for our customers.

Once you have chosen us as your moving provider, our moving team will begin preparation for your international move. From packing your belongings to taking inventory of each item, we are detailed in how we handle our moving process to ensure that all your items are accounted for as they are packed, shipped and delivered to your new international destination.

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Pack Like a Pro:

Start packing the right way

Before you decide to do your packing yourself, consider the responsibilities. Sure, it takes time and energy to get the job done right, but doing it yourself can be a real money-saver, even if you're paying a mover to load the truck. For example, if you've hired a professional mover, you can still opt to pack all or some of the goods yourself, thus trimming the price. To find out just how much you can trim, ask your moving coordinator when you get an on-site estimate.

Packing Guidelines for Your Professional Move

If you decide to do some of the packing yourself, you'll need to have everything properly packed and ready for loading when the van arrives. In other words, all packing must be completed the evening before move day. Only the things you'll need that last night, the next morning and immediately at your destination should be left for last-minute packing.

As for how you pack—that will be expected to meet specific standards. Moving company representatives will inspect your boxes and if they think items are improperly packed or cartons are susceptible to damage, they may refuse to load the items until they are repacked.

A word to the wise: Generally things from garages, attics and storage spaces, such as holiday decorations and sentimental items are the ones that need to be repacked. Look for cartons that are torn, ripped, soiled, will not close or cannot be sealed. Replace those with fresh boxes. Another repacking giveaway is if you can hear the contents rattle when you shake the box. In that case, add more insulation.

What Should You Pack?

Obviously, not everything will fit in boxes. As a general rule, furniture and major appliances will be wrapped and padded by your moving professional. Items requiring professional disassembly and/or crating (such as slate pool tables, chandeliers or large glass table tops) are best left to the professionals.

Box Basics

Use new, high-quality packing materials specifically designed for moving to better ensure your items will safely arrive. Professional moving cartons come in a variety of shapes and sizes that are specifically suited to fit a variety of household goods. Look into barrels, for example, as they are great ways of loading a lot of odd-shaped items into one large container.

Other Supplies

• Bundles of packing paper (clean, unprinted newsprint)
• Bubble wrap, tissue paper or paper towels for delicate items
• Rolls of PVC tape (don't use masking tape or cellophane tape)
• Tape dispenser
• Broad-tipped markers for labeling
• Scissors or sharp knife for cutting cartons
• Notebook and pen or pencil for listing contents of cartons as they are packed
• Labels or stickers for identifying boxes

Wrapping How Tos

Before packing cartons, you'll need to wrap most items to protect them from scratching and breakage. There are a variety of materials available, including bubble pack, foam peanuts and tissue. However, most professionals use bundles of clean, unprinted newsprint (available at your moving supply store).

Start by placing a small stack of paper on a flat, uncluttered table or countertop. Round glasses and jars can be rolled up in two or three sheets of paper; always begin from a corner of the sheet and fold the sides in as you roll. Large or odd-shaped items require a similar technique. Place them in the center of the sheet and bring the corners together. (It may be necessary to flip the item over and wrap it again from the other side.) If in doubt, use more paper! When the corners come together, secure them with tape.

Before packing each carton, line the bottom with a few inches of wadded paper for padding. Then place large, heavy items on the bottom and lighter, more fragile items on the top. Plates, books and things of a similar shape, should be loaded vertically to utilize their own maximum structural strength. Don't overload cartons; keep them to a manageable weight. Fill in any voids and top off loaded cartons with wadded paper. Then tape cartons securely to avoid shifting while en route.

Labeling Hints

Imagine packing away a truckload of boxes and then having them delivered to your new home. How can you tell what box goes where? Because you've labeled them. Follow these tips to thwart confusion.

• Use a broad, felt-tipped marker.
• Clearly mark your name, the room it should go to and contents on each box.
• Indicate "FRAGILE" on delicates; "THIS END UP" where appropriate.
• If available, include your bill of lading (or invoice) number on every box.

Tips From the Pros

Most movers suggest you start with out-of-season items. Next, pack things used infrequently. Leave until the last minute things you'll need until moving day. Here are some more helpful hints.

• Empty drawers of breakables, spillables, non-transportable items and anything that would puncture or damage other items.
• Pack similar items together. For example, don't pack a delicate china figurine in the same carton with cast-iron frying pans.
• Keep all parts or pairs of things together. For example, curtain rod hangers, mirror bolts and other small hardware items should be placed in plastic bags and taped or tied securely to the article to which they belong.
• Wind electrical cords, fastening them so they do not dangle.
• Wrap items individually in clean paper; use tissue paper, paper towels or even facial tissue for fine china, crystal and delicate items. Colored wrapping paper draws attention to very small things that might otherwise get lost in a carton. Use a double layer of newsprint for a good outer wrapping.
• Use newspapers for cushioning only. The ink can rub off and embed itself onto fine china.
• Place a two- or three-inch layer of crushed paper in the bottom of cartons for cushioning.
• Build up the layers, with the heaviest things on the bottom, medium weight next and lightest on top.
• As each layer is completed, fill in empty spaces firmly with crushed paper and add more crushed paper to make a level base for the next layer, or use sheets of cardboard cut from cartons as dividers.
• Cushion well with crushed paper; towels and lightweight blankets may also be used for padding and cushioning. The more fragile the item, the more cushioning needed. Be sure no sharp points, edges or rims are left uncovered.
• Pack small, fragile, individually wrapped items separately or a few together in small boxes, cushioning with crushed or shredded paper. Place small boxes in a single large box, filling in spaces with crushed paper.
• Limit carton weight to about 50 pounds. Avoid overloading cartons but strive for a firm pack that will prevent items from shifting; the cover should close easily without force, but should not bend inward.
• Seal cartons tightly with tape except for those containing items that must be left open for the van operator's inspection.
• As you finish with each carton, list the contents on the side of the carton (for easy viewing while stacked) and in a special notebook. You might want to number and/or code the cartons as well.
• Indicate your name and the room to which each carton should be delivered at destination. Tape a sign on the door of each room at destination corresponding to the carton labels so movers can get the cartons into the proper rooms quickly.
• Put a special mark (the number 1, or the letter A) on cartons you want to unpack first at destination.