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Software Engineer Salary – Cost of Living vs. Retirement Savings

What's up everyone. Sam here from Byte-by-Byte.com. And today I want to talk about why cost of living is a more complicated subject than you might think when considering your software engineer salary. Alright so you've probably heard about cost of living before, especially if you're considering different job offers that are in different cities. And you know this is something that's really important to consider because simply put a $150,000 in San Francisco is gonna be very very different than a $150,000 in another city. So for example if you considered San Francisco versus say Denver, the cost of living is going to be drastically different. And that's because of all these different factors. You know housing is gonna be cheaper in Denver, food is gonna be cheaper, entertainment is going to be cheaper, and there are lots of cost of living calculators out there where we can actually compare the numbers.

And I want to dive into one of these real quick here so this is the cost of living calculator from Nerd Wallet and I'll link to this in the description below in case you want to take a look for yourself. But we can just put in our city that you want to consider the software engineer salary for and then the relative salary in the city that you're considering moving to. So in this case we see $93,000. And basically what this means is that if we were making a $150,000 in San Francisco we could take a job in Denver making $93,000 and we would be able to live exactly the same lifestyle. So obviously you can see here it does break it down a little bit the cost of a two-bedroom apartment is going to be dramatically different depending on where you live. So obviously you know we're talking about less than half the price in Denver or 59% lower in this case. And other things are gonna be cheaper too. Like food is just expensive in San Francisco in the Bay Area. And that's just a fact of life. And so you have to consider all of these different factors and this is a good starting point for when you're considering cost of living in different areas.

This might be that you know you're looking at two different job offers or it may be that you are considering moving to another city. And whatever it is it's really good to take a look at this sort of thing. But the problem with calculators like this is that they're not showing you the whole picture. And the reason they're not showing you the whole picture is that they are assuming that you are spending 100% of your income on living expenses basically. So between housing and food and everything else. And what that means is that you know if I can afford a two-bedroom if I'm spending all of my money in San Francisco and I'm paying for a two-bedroom and I'm eating out and I'm doing all these things I could do exactly the same thing in Denver. But the problem comes when we start to think about actually saving for retirement.

Software Engineer Salary – Retirement Savings

Software engineer salary and cost of living calculations

And here we can see this graph and basically what this graph is showing you is that if we save 10% of our income off of a $150,000 salary versus a $90,000 salary we are ending up with dramatically different amounts of money at retirement. And in this case it's over a $1 million difference. If we consider just like average 7% interest and all that sort of stuff. And so when we consider living in one place versus the other we have to not just consider that one number and how they compare, but if we want to have the same amount of money in retirement we're going to have to be actually spending more in savings as a proportion of our total income when we live in a lower cost of living area. So for example if we wanted to live in Denver we would be saving more like 15% or 18% of our income as opposed to San Francisco where we're only saving 10%.

And these are factors that you have to think about when you're actually doing this calculation because otherwise you're just going to do it based on this one number and that's actually going to as you can see from the graph, dramatically affect where you end up at the end of your career. And you also you do have to think about your goals here because if you're planning on staying in the same city then the cost of living in retirement is gonna be cheaper so it doesn't in that sense it doesn't actually matter. But I think there are a lot of fixed costs in retirement that we sort of assume that we're gonna be able to pay. So like you want a boat, or you want to move to another city, or you want to go on vacations. All of these sorts of things that you're gonna want to do probably in your retirement are gonna have fixed costs regardless of where you live.

And so you have to be sure that you are compensating for that when you consider cost of living. So when you're doing this what I would recommend is that you actually subtract the savings first and subtract some fixed amount. So how do we actually do this calculation? And consider our retirement. So let's assume that we are saving for example $30,000. So we're gonna save 20% of our income. If we're living in San Francisco that means that if our income is $150,000 we're going to be saving $30,000. And that means that our remaining amount of money is $120,000. Right cuz we're just subtracting the $30,000 from the total. Now with that $120,000 to have the same lifestyle in Denver we would have to be making as you can see 70 roughly $75,000.

But if we consider that we're actually trying to save $30,000 a year regardless of where we live, $120,000 of living expenses plus the $30,000 that we want to actually be putting in saving is going to result in the relative amount of the relative salary that we're going to need is actually going to be $75,000 plus that $30,000 that we're saving. So even though when we put in this number originally we saw that we only needed to be making $95,000 we actually if we're we actually are going to need to be making a $105,000 if we want to put the same amount of money into retirement. So this is the sort of technical little change here but this is a really important thing to consider when you're actually considering different job opportunities.

I think it's really easy to get sucked in with the simplicity of something like this cost-of-living calculator. But there's just more to it that you need to consider. So I want to highly recommend that when you're considering those job offers you make sure that you take retirement savings into account. And that's all I got for you guys today, so if you like this video please hit subscribe below. And if you want to download my free ebook on dynamic programming to help you in your interviews you can do that at DynamicProgrammingBook.com. And I look forward to talking to you guys again soon.

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Sign up for my weekly emails and I’ll show you how to become an interview rockstar, solve brutal coding problems, and get the dev job you deserve.

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