Getting by . . . on $400,000 a year

This article is part of a series on the economic downturn and its impact on different income groups. Click here to read about a family getting by on $60,000 and another on $32,000.

The rich feel the pain of the recession, too. Sort of.

On paper, Augustine Fou would seem to have little to fear. He and his wife earn around $400,000 a year. He has a solid marketing job and a doctorate from the Massachusetts Institute of Technology. His wife, Lisa, is a dentist with her own practice. They bought a one-bedroom apartment on Manhattan's famed Fifth Avenue five years ago, and it's still worth considerably more than they paid.

See inside a Fifth Avenue apartment

All the same, Fou and his wife are cutting back. Instead of going to the movies, they rent videos. Restaurants are reserved for once-a-quarter special occasions, rather than their monthly date nights. They now buy necessities at Wal-Mart and spend more time surfing the Web for sales than ever before. And though Fou admittedly "splurged a bit" on toys for his 3-year-old son and 9-month-old daughter during the holidays, he held off on the bulk of the shopping until the stores were taking down the decorations.

"We were waiting for the good deals," Fou said. It's the economy, he explained. "We know we have fixed costs like the mortgage and [private school] tuition, but we don't know if we will still have a job. So that is really what makes me nervous." (Their 3-year-old already attends preschool.)

Talk back: Could you get by on $400,000 a year?

Such is the impact of recession on the rich. Fearful for their jobs and still reeling from the steep drop in the value of investments that once seemed to guarantee financial security, families earning more than $250,000 a year -- those in the top 1.9% of household income -- are tightening their purse strings. And it will take a lot more than $800 in tax savings, the kind of relief found in the $787 billion stimulus plan, to get this group spending again -- particularly with their taxes set to increase in 2011.

"They have definitely cut back . . . and they will continue to cut back in 2009," says Milton Pedraza, the CEO of the Luxury Institute, a research firm specializing in high-end consumers and goods. "The reality is that most of these people are self-made. They are regular Janes and Joes who work extremely hard for that money, and they are responding in a rational sense to what is going on out there."

Are the rich immune?

It's difficult to quantify just how much high earners have reduced spending. Data on personal consumption don't tie the spending to particular income groups. But the cutbacks are clearly visible in the annual and quarterly sales declines reported by the retailers most dependent on them, such as those in luxury- and premium-goods businesses, the airline industry and the automobile industry.

Retail spending is down overall, but high-end chains have seen particularly startling declines. Saks, the owner of Saks Fifth Avenue, reported a 14.4% sales decline for its fourth quarter, which ended Jan. 31, compared with the same period a year ago. Neiman Marcus Group reported a 22.8% drop in comparable store sales for the same three months. The retail industry overall saw a 2.8% decline during the November-December holiday season, according to the National Retail Federation. The federation expects sales for the first half of 2009 will be down 2.5% from a year ago.

Cutbacks by affluent consumers are clobbering automakers and airlines. Last year was the worst year for automakers in more than a decade, with vehicle sales falling 18% for the "big six" -- General Motors, Chrysler, Ford, Toyota, Nissan and Honda. The number of passengers booked on U.S. domestic flights declined 3.3% in the first 10 months of 2008, according to the Bureau of Transportation Statistics.

At the moment, the uneasiness among high-end consumers is more about fear than real economic hardship. Though unemployment has risen for college-educated professionals, it remains relatively low, hovering around 3%. That's a lot lower than the 10% rate for workers without college degrees. But reports of layoffs at companies such as Citigroup, Microsoft and law firm Clifford Chance have made it clear that even the highly educated are not safe from the ax.

"They are worried about their jobs; they are worried about their access to credit," says Rebecca Blank, an economist with the Brookings Institution. "All of that is going to make people much more cautious as to what they are going to spend . . . and consumer confidence is crucial here."

Consumer confidence -- a measure of how consumers feel about the strength of the economy and the availability of jobs -- is now at its lowest level since the Conference Board began its confidence survey in 1967.

Tell us: How are you cutting your spending?

Wealthy consumers typically have more money at risk in investments than the average person and consequently are more likely to have taken a substantial hit from the wreck of the stock market. With the Dow Jones Industrial Average down around 40% from its October 2007 highs, the damage has been extreme in many cases. Even those who entrusted their capital to high-end hedge fund managers have had hefty losses. The average hedge fund was down about 18% in 2008, according to Hedge Fund Research, a firm that studies the industry.

Then there's the bloodbath in real estate. America's affluent families have joined the rest of the nation in looking on with dismay as the value of a single-family home has fallen about 18% in just the past year, as measured by the S&P/Case-Shiller 20-city index. (New York City home values have held steadier than most, however.)

"All their assets got killed," the Luxury Institute's Pedraza says of the wealthy. "It is an across-the-board assault."

The loss of capital has left many affluent families feeling more vulnerable than ever before. No longer can they rely on the cushion of capital to see them through the loss of a high-paying job. The loss of a salary would mean the loss of the lifestyle they have grown accustomed to.

Talk back: Has economy made you more frugal?

Take Fou and his wife, for example. Despite their income, Fou says he and his wife have little in savings and certainly not enough to support the family for any length of time should one of them lose a job. Nearly every dollar they earn is spoken for.

"One would think we are living well, but I can tell you reality is pretty much breaking even," Fou says.

See where their money goes

Such a statement may border on the incredible for readers unfamiliar with the cost of living in America's big coastal cities. That's the main reason Fou and his wife have not been able to save money: They live in Manhattan. The cost of living in the Big Apple is more than twice the national average, according to the Council for Community and Economic Research's Cost of Living Index. Fou's and his wife's salaries, taken together, are roughly equivalent to a combined income of $180,000 in most other places. That's still a lot in Kansas but not quite so stratospheric as $400,000.

Taxes are particularly high in New York City. Families making more than $90,000 pay 3.65% of their income to the city in local taxes, in addition to 3.65% in state taxes. Families earning more than $357,700 also pay a 35% federal tax on all their income above that amount. Add in a 13.05% city property tax for condominium owners and folks such as the Fou family pay about half of their income to the government.

Now let's talk about their apartment, which they own. The apartment is probably worth more than $1 million, even taking into account a modest recent decline in real-estate values in the city, but at less than 800 square feet, it's pretty tight. When all is said and done, Fou and his wife figure about half their after-tax income goes toward housing. Broadly speaking, housing prices in New York are four times the national average.

A quick tour of Fou's apartment suggests a lifestyle that's less than luxurious. The one-bedroom unit is in a modern building in the heart of the city -- close to public libraries, schools, restaurants and museums, as well as to Fou's job and his wife's practice -- and that's a big plus. On the other hand, the apartment is furnished modestly. The art on the walls consists of the kids' creations or Fou's own photographs, enlarged and framed.

A new 46-inch flat-panel television -- Fou's big holiday purchase, bought after Christmas when prices dropped -- is surrounded by bookcases filled with children's tales purchased at Wal-Mart and a garage sale, Fou says. The bedroom, which would be spacious for a couple, is snug, with a crib and a small child's bed along one wall and a full bed at the other.

Graphic: The child care crunch

Fou and his wife are searching for a larger space. However, they feel priced out of the city's two-bedroom apartments. Fou, a Dallas native, is reluctant to leave the city because he doesn't want a long commute to cut into time with his family. Plus, he enjoys taking his kids to the city's many wonderful museums, parks and art exhibits. With all of that in mind, the couple have kept the idea of a move on the back burner.

"We can't afford to buy the next place up from here because the mortgage will triple," Fou says. He's hoping real-estate prices will drop further or the couple's income will rise to make a move possible.

The other big items in the couple's household budget are child care and education. About one-third of the family's after-tax income goes to the cost of a nanny and preschool tuition for Alex, Fou and his wife's 3-year-old son. Those costs could rise in the next couple of years if the family decides to send both kids to private school.

In this economy, however, private school isn't a given, says Fou. Though both he and his wife attended private schools and enjoyed them, they are concerned that they may not be able to afford the tuition. Costs range from about $6,000 a year at local Catholic schools to $30,000 a year at elite high schools and have been increasing at the rate of 6% a year.

"Given the financial constraints, Alex may have to go to public school," Fou says. "We are trying to get him into gifted and talented (public) programs."

Right now, the sixth of the couple's take-home income that remains is divided among food, miscellaneous spending and vacations. Of that amount, the vast majority goes to grocery bills.

One thing Fou won't compromise on is organic food. For him, it's a health issue for his kids. He reads newspaper articles about melamine-tainted milk, which poisoned hundreds of thousands worldwide in 2008 and killed four infants, and sees no other option than to shell out more than $4 for a half-gallon of organic milk from FreshDirect, a grocery-delivery service. He and his wife make additive-free baby food at home, by cooking and pureeing fresh food.

"There are things we can skimp on, but not this kind of stuff," says Fou.

Readers talk: Best tips for cutting costs

Fou and his wife haven't eliminated all of their entertainment expenses. Fou still plans to take the family on a winter vacation this year. He wants his son to get on his first pair of skis. But instead of flying to Colorado, they'll probably rent a car and drive up to Vermont for a long weekend. It's unlikely they will visit their families in Texas anytime soon, given the cost of airfares. So Fou purchased a webcam to ensure the grandparents can still see the kids regularly, albeit virtually.

With nearly every dollar accounted for, any increase in the couple's nest egg will be a result of an increase in the value of the apartment or a spike in his 401(k) account. But Fou isn't holding his breath. Though Manhattan real estate has maintained its value better than many other places, Fou knows his home is unlikely to be worth what it was at its high anytime soon. He is afraid his family's safety net has frayed.

If Fou were to lose his job, he would turn to credit. Aside from the mortgage, Fou says he has few debts. He pays off his credit card, in full, at the end of every month, he says. He hopes his solid credit history would allow him access to a large credit line. He worries that in the current economic climate, the credit card companies will charge outlandish interest rates, even to people with good credit.

"Pretty much the only recourse would be to put it on the credit cards," says Fou. "And right now I hear all the banks are cutting back anyway, so credit might not materialize."

As far as Fou is concerned, there is "nothing" the government can do to allay his concerns about the credit and labor markets. To feel secure enough to spend more, he will have to see banks lending and businesses hiring. Even then, he's not sure it will spur him to spend on items other than, perhaps, private school tuition. The recession has him focused on saving, not spending.

Asked about the $800 tax rebate President Barack Obama has planned, Fou said he has any rebate earmarked for the 401(k) and a long-term savings account for the kids' college tuitions.

Saving more will help give Fou and his wife security for the long term. Doubtless they will be able to spend more in the future. But that won't help the economy this year.

Produced by Darragh Worland

Published Feb. 12, 2009