Middle Class Families Making It Work

We interviewed a number of families who are living well on a modest income and saving for their goals.

Ask Americans whether they belong to the middle class and the answer is likely to be yes. In fact, 70% of adults identify as middle class, according to a recent online survey by Northwestern Mutual—a figure that has held steady for years.

Yet today, only 50% of adults actually live in middle-class households, according to the Pew Research Center. That percentage has been steadily shrinking since 1970, when 61% of adults were considered middle class.

Who is middle class? Definitions vary, but Pew defines middle class as families with two-thirds to twice the U.S. median household income, after adjusting incomes for household size and the cost of living in specific areas. According to Pew’s most recent calculations, a middle-class family of four nationally has a household income of $53,369 to $160,107. The income ranges are often higher in cities on the coasts, such as New York; San Jose, Calif.; and Washington, D.C. Some of the lowest ranges are in the Midwest and South, such as Michigan City, Ind.; Mobile, Ala.; and Spartanburg, S.C.

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Since the ’70s, every decade has ended with a smaller share of people in middle-income households than at the start of the decade. The number of people who have moved up the income ladder is slightly higher than those who have slid downward, says Rakesh Kochhar, Pew’s associate director of research and coauthor of the 2016 report America’s Shrinking Middle Class.

The contracting middle class is tied to a number of factors. “Chief among them is the decline of middle-class jobs,” says Richard Clinch, executive director of the Jacob France Institute, a research center at the University of Baltimore. Back in the 1970s, the country had a large base of unionized manufacturing jobs that provided a path to the middle class, he says. But over time, those jobs have been eliminated by automation or moved overseas. There are now plenty of high-skill, high-salary jobs, as well as low-skill, lower-paying jobs that don’t require more than a high school diploma, he says.

The decline of the middle class could have adverse effects on the U.S. economy because it could reduce consumer spending and even discourage some people from investing in a college education if a diploma is no longer seen as a sure way to climb the economic ladder.

Competing Priorities

Lynn Dunston, a certified financial planner in Denver, says his middle-class clients struggle to balance competing priorities, especially choosing between saving for retirement and saving for college. “Those are the conversations we have on a weekly basis,” he says. The middle-class families we interviewed say they live comfortably, but their lifestyles are often modest, without much discretionary income.

(Image credit: Photo by Lucy Hewett)

That’s the case with Joel and Amy Williams, of Fruitland, Idaho, a small city of about 5,000 people that gets its picturesque name from the surrounding apple orchards. Amy, 48, teaches eighth-grade history at Fruitland Middle School; Joel, 54, is the band director at Fruitland High School. The household income for the family of four is about $106,000. “If I was making this much money and living in New York City, we would be destitute. It wouldn’t work,” says Joel. The cost of living is nearly 5% less in Fruitland than the national average, largely because of modest housing prices, reports Sperling’s BestPlaces.

That said, the Williamses’ income hasn’t grown much. They’ve had two pay cuts and a pay freeze since 2009, says Joel. Pay raises in the past few years have only now brought their income slightly above what it was in 2008, he says, but rising health insurance premiums eat up some of those gains.

Their budget doesn’t leave much room for extras, including investing outside the state pension system they’ve paid into for years. Vacations are typically camping in the mountains or traveling with the high school marching band for an annual performance or competition. And it’s difficult to set aside money for another looming expense: college for daughters Mikayla, 15, and Annika, 13. The couple have been putting $50 a month into college funds for the girls since they were born. The grandparents are also salting away a bit for the girls’ college.

Adam Van Wie, a certified financial planner in Jacksonville Beach, Fla., says that middle-class families may be catching a break at last. In the past year, he has noticed a big turnaround among his clients, thanks to an improved job market and rising stock prices and home values. Some are jumping to better-paying jobs, and older workers, who mothballed retirement plans after the recession hit, are “getting comfortable with the idea of not having a job and living off their savings.” Still, he says, being in the middle class today seems to require two incomes.

But being middle class is about more than just income—it’s also about attitude, says Rebekah Barsch, vice president of planning for Northwestern Mutual. The company’s annual poll finds that middle-class families tend to be optimistic about the economy and assume responsibility for their financial future. “They figured out a plan to have their income meet their expenses,” she says.

Here we profile four middle-class families. Plus, we spotlight tax breaks and programs to help middle-class families save for retirement and college and make health insurance more affordable.

Finding Ways to Save With Less Income

Middle-class couples with two incomes often struggle to invest for retirement, save for college for the kids, and finance a move to a larger home. Brad and Ruthie Archer, of Buffalo Grove, Ill., are trying to do it on one income.

ahead interview

(Image credit: Photo by Lucy Hewett)

Ruthie, 35, is a manager in Walgreens’ health systems programs and pharmacy operations. Brad, 42, a former IT trainer for a consulting firm in Chicago, has been a stay-at-home dad for five years; he homeschools the couple’s two older children, Ruby, 8, and August, 6, and cares for Ember, 2. The family’s annual income is about $105,000, and they give 10% of that to faith-based organizations.

“We wanted to make sure we were really invested in the lives of our kids,” says Brad. “So that meant one of us staying home.” When they made that decision, Ruthie’s job paid a few thousand dollars less than Brad’s, but her commute from their home in the northwest suburbs of Chicago was shorter. Plus, her job offered more opportunity for advancement, so it made more sense for Brad to stay home.

They prepared for life on a single income by taking a personal finance class through their church. The Archers were savers to begin with and already had the recommended six months’ worth of living expenses in an emergency fund (see 7 Smart Ways to Build Your Emergency Fund). The class taught them how to track where their money goes and encouraged debt-free living. Using part of their emergency fund, they paid off a car loan and about $15,000 in student loans so that the mortgage was their only debt. “It gave us less in savings, but it gave us more monthly income,” Brad says.

Having one parent at home saves thousands of dollars each year in day-care costs. But one income also means trade-offs. Vacations, for instance, are road trips to family reunions, not Disney World. Their monthly grocery budget is a lean $350, with lunches often consisting of sandwiches made on Brad’s homemade bread. “We buy meat only if it’s under $2 a pound, which is not very often,” Ruthie says. They downsized to a single car for two years after their other one needed expensive repairs. Each parent is limited to a $40 monthly allowance to spend at, say, Starbucks or a restaurant.

The couple shuns credit card debt, though Ruthie doesn’t hesitate to apply for a card to get a 20% discount from a retailer—and then promptly cancel it. “I know it messes up my credit score, but I don’t care,” she says.

Brad says their decision to homeschool the kids was not about finances; it was about wanting to be involved in the children’s education. He expects to continue homeschooling the kids until they reach middle-school age.

The Archers work with an accountant and a financial planner, who have helped them with taxes, life insurance, estate documents, and retirement and investment advice. For retirement, Ruthie has about $81,000 in her Walgreens 401(k) and contributes 4% of her pay to get the full employer match. Brad gradually converted his tax-deferred retirement savings into a Roth IRA—now worth about $83,000—so withdrawals in retirement will be tax-free. (He and Ruthie had enough charitable deductions to offset taxes on the conversion.) Ruthie also received a modest medical settlement several years ago, and the couple contributed 20% of it to a donor-advised fund that will allow them to make charitable gifts over time. They invested the rest in a diversified portfolio of funds. Saving for college for the kids is a future goal, although Ruthie’s parents have already started a college fund for each grandchild.

Ruthie says middle-class families today have a tougher time financially than those of her parents’ generation, largely because of housing. The Archers bought a 1,200-square-foot house in 2007, just before the recession, for $305,000. About a year later, it was worth $220,000. Though they are no longer underwater on their mortgage, they haven’t built up enough equity to be able to sell their house and buy a bigger one. When Ruthie was growing up, her parents—a minister and a seamstress—moved frequently and often saw that their houses had sizably appreciated in value when they sold. She doesn’t see that happening today.

Ruthie’s promotions and pay raises over time have given the Archers some wiggle room in their budget. Even so, they admit that it has been difficult to break out of their frugal ways. “I still feel guilty whenever I spend money. It’s like PTSD,” says Ruthie. Adds Brad, “I have literally driven up to a Taco Bell, about to get something, and right before I get to the speaker, I think, I don’t need this. And I drive away.”

Get a Head Start on College Savings

With the average cost of a four-year education at an in-state public college topping $80,000 (see 10 Best Values in Public Colleges), it’s no wonder middle-class couples are having trouble balancing saving for college with saving for retirement.

The best way to prepare for college is to start saving early. Every dollar you sock away means one less dollar you need to borrow. And you don’t have to save the full amount. Aim to save one-fourth to one-third of the projected sticker price. Loans, scholarships and income can make up the rest.

States make saving easier. Almost all offer a 529 college-savings plan that allows you to invest money (often as little as $25 at a time) and later withdraw it tax-free for college bills. More than 30 states give a tax break to residents contributing to their state plan (see our story Best College Savings Plans). In Illinois, where Brad and Ruthie Archer live, joint filers can deduct up to $20,000 in contributions to the state plan.

And don’t let the steep sticker price of top-tier schools put you off. About six dozen schools—including the Ivy League colleges—offer “no-loan” aid packages, says Mark Kantrowitz, a college aid expert. For instance, Princeton offers aid to nearly 60% of students, with the typical package reducing the annual cost to less than $14,000 (see 10 Best Values in U.S. Colleges).

Dealing With an Unexpected Job Loss

When Nathaniel Crocker, of Charleston, S.C., was working as a certified enterprise architect designing IT infrastructure systems, and his wife, Martha Menard, did occasional stints as a scientific research consultant, their income ranged from $210,000 to $240,000 a year. But in April 2016, Crocker, now 59, was laid off from his company “out of the blue” after working there for 10 years. At the time, Menard was between consulting gigs and not bringing in a paycheck. Their income from work and dividends last year dived to $65,000.

Martha Menard and Nathaniel Crocker at White Point Gardens, Charleston, SC

Martha Menard and Nathaniel Crocker at White Point Gardens, Charleston, SC
(Image credit: Photo by Lucy Hewett)

“The timing couldn’t have been worse,” says Menard, 62. The couple had just signed a contract to build a larger house in Charleston and had been planning to put their condo in a beach community on the market. “Fortunately, we hadn’t gone any further than that because we couldn’t qualify for a mortgage,” she says. They also had to put on hold a plan to supercharge their retirement savings as their son finished college.

Fortunately, they had a financial cushion. Crocker received about six months’ salary as severance, and on top of that the couple had squirreled away six months of living expenses. They sold their condo—using the proceeds to invest, pay off some debt and boost savings—and moved into a two-bedroom apartment. And they slashed their spending. “We basically cut all the discretionary spending out of our budget,” Crocker says. “Everything.”

About 10 months after Crocker’s layoff, Menard found a full-time job as a senior researcher for a tech start-up. The job provides health insurance for them at about half of the $1,310 monthly premium they had been paying to continue coverage with Crocker’s former employer under COBRA. Besides her salary, the couple has also relied on what Menard describes as one of their best financial investments: dividend-paying stocks. Almost their entire retirement nest egg of about $300,000 is invested in such shares.

Menard, who handles the couple’s investments, began in 2008 to pile more money into the shares of companies that regularly increased their dividends. After Crocker left his job, he rolled his 401(k) into an IRA that is also invested in dividend stocks. After the layoff, those dividends generated $10,000 a year to help pay expenses.

For Crocker, the job hunt has been difficult: lots of enthusiastic calls from recruiters followed by multiple interviews—then a “thanks, but no thanks” because he is overqualified. Even “dumbing down” his résumé by stripping it of his titles and accomplishments didn’t help. He suspects that his high former salary—something recruiters demanded to know—and his age, which can be discerned through Google, prevented him from landing work.

After getting nowhere for 14 months, Crocker struck out on his own and launched an IT consultancy. The business was slow to get off the ground, so six months later Crocker took a job at a Lowe’s home improvement store, earning $14 an hour.

“It has been demoralizing,” he says. “My identity for the last 25 years has been someone who is able to solve problems and work in a high-tech industry. That’s where I get my self- worth from.”

But the couple’s fortunes are improving. In February, Crocker started working on a contract basis for $45 an hour with a placement agency, where he is able to work at his old skill level designing IT systems for clients, and he quit his job at Lowe’s. He figures that if work remains steady, as expected, the couple’s household income will once again reach six figures—enough to pay the bills, replenish their emergency fund and jump-start retirement savings.

Crocker’s hiatus from work means the couple may retire a couple of years later than they envisioned. But their retirement was never going to be a full work stoppage anyway. Both enjoy work. “It keeps life interesting,” Menard says.

Make an Emergency Fund a Priority

Nathaniel Crocker and Martha Menard always had an emergency fund. After Crocker was laid off, the couple added to it, using part of his severance pay. “It gave us more runway for Nate to look for another job,” says Menard.

In the following months, the fund—along with belt-tightening—protected their retirement nest egg. “I have many friends who got laid off and wiped out their retirement savings in the two or three years it took them to find a job,” Crocker says.

An emergency fund typically should have enough savings to cover three to six months’ worth of living expenses (see 7 Smart Ways to Build Up Your Emergency Fund). You can seed an emergency fund with a tax refund, or set up automatic transfers from your checking account to savings every pay period until you reach your target. The money should be FDIC-insured and liquid. Consider a savings account at an online bank, such as Popular Direct or Goldman Sachs Bank. Online banks pay higher rates than brick-and-mortar banks.

Recovering From the Great Recession

Cesar and Valerie Beltran, of Northglenn, Colo., will always remember the Great Recession as the time they “lost everything.”

(Image credit: Photo by Lucy Hewett)

From 2001 until 2008, the couple owned a successful meat market in a shopping center in Las Cruces, N.M. But in 2008, a new landlord brought in a big-box store that competed with the Beltrans’ store, and the loss of customers along with the recession killed off their business, Valerie says. They couldn’t find other jobs in the city or someone to buy their house after the real estate bubble burst. The couple filed for bankruptcy a year later and moved their family to Valerie’s home state of Colorado, determined to begin again. “We wanted to get back what we had and then some. So we worked very hard,” says Valerie, 48. “We realized it’s okay to lose everything and start over.”

To rebuild their credit and finances, the Beltrans worked at government jobs for a few years. Cesar, 52, served as a USDA meat inspector; Valerie became an interpreter for a county social services agency. They became business owners again in 2014, and although their small tortilla factory was profitable, the Beltrans had bigger dreams. They sold the factory in 2016, and later that year they launched Beltrans Meat Market & Grill—a grocery store, butcher shop and restaurant—in Northglenn, about a dozen miles north of Denver. The business has already exceeded projections, says Valerie, who is also a part-time real estate agent. Today, the couple’s household income is about $75,000.

The Beltrans are a close-knit family—a bit like the Brady Bunch, Valerie says. She and Cesar each have two children from previous marriages, and they have two sons together, with the children’s ages ranging from 17 to 31. The two youngest live at home and work in the store and will take over once their parents retire.

Right now, Cesar says he enjoys working and would do so every day if Valerie let him. Though he studied chemical engineering in his native Mexico, he inherited an entrepreneurial gene from generations of Beltrans who ran their own businesses. “I like being my own boss,” he says. The failure of the first store, though, was a severe blow, Cesar says. “But as I always tell my wife, ‘If we lose everything, we can start over. I came to this country only with a dream. I can start again.’” (Cesar met Valerie 24 years ago when visiting a cousin in Colorado, and they married within a year. He has since become a U.S. citizen.)

College bills so far have not been a problem for the Beltrans. The parents took out a $10,000 education loan for one son. The two eldest paid for college themselves, mostly through grants and loans. And instead of college, one son joined the Coast Guard and another joined the Merchant Marine.

As with many small business owners, the Beltrans are largely responsible for their health care and retirement plan. The couple opt to pay the federal fine for not having insurance rather than buy family coverage. When they need health or dental care, they pay out of pocket in Colorado or fly to Mexico, where medical and dental care costs much less, Valerie says.

The Beltrans recently met with a financial adviser about setting up a SEP-IRA, a retirement plan for small business owners. But the foundation of their retirement plan is their four-bedroom house on 10 acres they purchased in 2013 when the market was weak. Since then, the house’s value has nearly doubled, to $690,000, says Valerie. They make extra payments on the $300,000 mortgage, aiming to sell the house at retirement to buy smaller places in Mexico and Colorado, where they will split their time.

Lower the Cost of Health Insurance

Millions of taxpayers, including the Beltrans, choose to pay the penalty for not having health insurance. But the cost of a chronic illness or an injury without the safety net of health insurance can devastate your finances. “People need insurance, and you are at risk when you don’t have it,” says Karen Pollitz, senior fellow at the Kaiser Family Foundation.

When shopping for coverage, check out the government exchanges during open enrollment. Healthcare.gov can direct you to your state’s exchange and policies available in your area. Many middle-class families may not realize they qualify for a tax credit—available only if you buy a policy through an exchange—to help pay premiums if they don’t have coverage through work. The credit is available if your income is up to 400% of the federal poverty level—which equates to $48,240 for singles and $98,400 for a family of four.

Check the Health Insurance Marketplace Calculator at KFF.org to see if you qualify for a credit. For instance, Colorado parents with two teens and $98,400 in income would be eligible for a credit worth $8,250 in 2018—nearly half the cost of a silver plan on the exchange.

Adapting to a Frugal Lifestyle

Rocky and Sage Lewis, of Akron, Ohio, used to live in Medina, an affluent Cleveland suburb, but they moved to Akron in 2002 partly because they could buy a house that was twice as big for the same price. Now, with an $840 monthly mortgage payment, they live well on a $75,000 annual income.

Sage and Rocky Lewis with their son Indiana at the homeless shelter they run in Akron, Ohio on April 8, 2018.

Sage and Rocky Lewis with their son Indiana at the homeless shelter they run in Akron, Ohio on April 8, 2018.
(Image credit: Photo by Lucy Hewett)

Much of the family’s income comes from a digital marketing firm, SageRock Inc., which the couple launched 18 years ago. In its heyday about a decade ago, the firm employed 20 people and had 25 clients. But after the Great Recession, demand for marketing services dropped off and the firm laid off workers. Today, Rocky, 44, is the only employee serving a handful of clients. Sage, 47, left the business last year to launch a charity to help the homeless and isn’t collecting a salary yet. “I thought there just needs to be something more in life, more than a paycheck,” he says of the career move.

The Lewises live comfortably but frugally. They rarely eat out. Both drive used cars (his: a 2010 Ford F-150; hers: a 2006 Pontiac Vibe). Rocky cuts Sage’s hair, and her mother trims hers. (Since their son, Indiana, 13, became a teenager, he prefers a $15 professional cut.) Vacations usually involve campsites, not hotels.

The family lives in a duplex and rents out half of it for a sum that nearly covers their mortgage payment. They also own an office building in downtown Akron that they bought when looking for office space for their business, calculating that it was a better deal to buy than lease. Rent from other tenants largely covers the $2,500 monthly mortgage. The couple also own another rental property: a mortgage-free house inherited from Sage’s mother.

Rocky says they spend money and sometimes even dip into savings, but only for things that are important to them. For instance, she worked part-time when Indiana was younger so she wouldn’t miss that time with him. And they budgeted for less income again last year to allow Sage to follow his dream of opening The Homeless Charity.

The Lewises, with the help of Rocky’s mother, have set aside about $30,000 for college for Indiana, although the Lewises stopped adding to the fund during the recession. They are questioning the value of four-year colleges that charge $45,000 or more a year for a liberal arts education that doesn’t guarantee graduates will land well-paying jobs. Rocky wants Indiana to take a year or two off after high school to find out what he would like to do with his life before he enters college. (Right now, the answer is game coding.) Rocky also floats ideas to him about considering the trades, entrepreneurship, or a combination of community college and a state school.

The Lewises say they are confident about financing their retirement. Besides the rental income, they invest regularly and have accumulated a collection of mutual funds, life insurance and an IRA for a nest egg worth about $400,000. Rocky envisions their retirement will always entail some sort of work for pay, not because they will need the money but because they enjoy using their skills and contributing.

“I just don’t see it being too much of a problem, unless we get hit with the medical stuff,” Rocky says.

While frugality plays a large part in the family’s lifestyle, Rocky admits she occasionally thinks, What if? “Every once in a while I will look at someone in a really beautiful car or I will go and visit one of my friends who has a brand-new kitchen with a giant island and I’ll think, Wow, if I would just go and be a marketing director somewhere and make six figures, I could have this stuff,” she says. “It doesn’t take me very long to then say, ‘But I really love the freedom I have, and I really love how happy my husband is every day when he comes home from that charity.’”

Take Advantage of Tax Breaks

Here are some credits and deductions aimed at middle-income families.

Child tax credit. Starting in 2018, the child tax credit doubles, to $2,000 per child under age 17. The credit phases out once adjusted gross income (AGI) exceeds $200,000 for singles and $400,000 for joint filers.

Deductible IRA. Workers without a retirement plan at their job can deduct all of their traditional IRA contributions, no matter how much they earn. (You can contribute up to $5,500 a year to an IRA in 2018, or $6,500 if you’re age 50 or older.) If you have a workplace plan, you can take a full or partial de­duction if your modified AGI is less than $73,000 if single or $121,000 if married filing jointly.

American Opportunity Credit. This credit is worth up to $2,500 of the cost of college tuition, fees and course materials paid during the year. To qualify for a full or partial credit, modified AGI must be less than $90,000 for singles or $180,000 for joint filers.

Dependent-care credit. Families with children younger than 13 may be eligible for a credit of up to 35% of $3,000 in child-care expenses for one child or $6,000 for two or more. There are no income limits, but the credit gets smaller as income rises.

Eileen Ambrose
Senior Editor, Kiplinger's Personal Finance
Ambrose joined Kiplinger in June 2017 from AARP, where she was a writer and senior money editor for more than three years. Before that, she was a personal finance columnist and reporter at The Baltimore Sun, and a reporter and assistant business editor at The Indianapolis Star. Ambrose has a master's degree in journalism from the Medill School of Journalism at Northwestern University, and a bachelor's degree in art history from Indiana University.