What sort of economic circumstances might a new engineering graduate (EG) face, and how might this extend over their career? Each year I hear students and young engineers express questions or anxiety over issues like debts, salaries, home buying, graduate schools or other vexing fiscal issues. But for those of us mentor-types that are already several decades past university, we may not be as familiar with the existing state of affairs young folks need to handle. Thus I wanted to compile typical current metrics as a refresher.

Engineers are fond of using dimensionless parameters to characterize the essential behavior of systems. These provide an intuition about the nature of the problem. Parameters such as Reynolds numbers or isentropic efficiencies give us generalized clues without the need to refer to a host of other project-specific characteristics about fluid flow or equipment to interpret behavior. In the same fashion here we can try to transform specific recent statistics from the United States of America (U.S.) into dimensionless parameters that can better describe challenges graduates across countries and epochs face. What might “dimensionless profiles” of income, expenses and opportunities look like over your several decades in the workforce? Can one lead a pleasant life as an engineer? When can you buy your Audi?

Challenge #1: avoid buying one of these early

Assumptions

Analysis of any situation starts with assumptions, and to the extent that anyone’s conditions will differ, naturally so will results. Here are some basics I’d assumed:

  1. Objective: take current incomes for “average” (or median) engineers and similarly average household expenses and see how EGs could fare compared to other Americans and their own life goals.
  2. Location: in the U.S., people generally make and spend more on the coasts and in the big cities, and less in the middle of the country and smaller towns. By translating income and expenses however to dimensionless ratios we may reduce these distortions to be more generally applicable across locations.
  3. Market: Millennials currently are graduating into a strong job market with low unemployment in the U.S. (~4% overall) that offers a plethora of entry level engineering opportunities. It would be great if this were the case for all countries and times, but it is not. When I graduated in the early 90s, the job market was a bit dismal. Anyway, we will assume at year 0 the person has a position in hand and they maintain one throughout the analysis period (no gap years).
  4. Inflation: this analysis will neglect inflation by using “real” versus “nominal” return assumptions, so there are no cost of living adjustments for salary and expenses. One would however expect some real increase in salary over time, as one is promoted. The challenge would be to what extent one allows “lifestyle creep,” or increases in expenses over the rates of inflation.
  5. Rockets: we are not designing rockets here, and economic predictions never have great precision, so these rudimentary calculations are done on an annual basis over a 40 year career. Admitted that this introduces some distortions compared to carrying out month by month calculations, but any projections that distant are quite speculative anyways.
  6. Taxes: assume a combined tax rate of 30% on gross salary, and ignore deductions. No perfectly reasonable strategies such as IRAs or 401ks considered, just to keep the math basic and conservative. If you are wise with tax strategies, great.
  7. Returns: assume investments earn a real rate of return of 5% (5% higher than inflation). One thing is certain: they won’t deliver precisely that number.
  8. Stupidity: assumes one does not have a hot flash that leads to doing something stupid like putting it all on the third horse in the fourth race, Pets.com, timeshares or redundant spouses. We all make mistakes but let’s assume they are minimized and omitted for simplicity.

Average Household Expenses

Let’s lead with costs: how much do people spend annually? The U.S. Bureau of Labor Statistics (BLS) provides detailed historical data, and we’ll take their numbers from 2016. Note that these are for all households surveyed. Thus their average age (50.9 years), number of people per household (2.5), and income ($75k) may be higher than expected for an EG, unless you have been in school for thirty years and already have a spouse and half a child.

Here is a high-level summary of the U.S. average annual expenditures as reported by the BLS:

Let’s strip off about 2k in savings from this, as we will account for investments separate from expenses. You likely would not be in a job with a pension plan, but will be paying into a social security system regardless. So say that the average household in the U.S. has expenses of $55k per year.

These numbers are not dimensionless yet, but we’ll get there soon. We’ll be interested in the ratio of after-tax income (I) to expenses (E): I/E .

If I/E>1, you have a surplus of net income that can be diverted to iNvestments (N; or net worth/nest egg). Thus I-E=annual contributions to N. Accumulated Investments also (ideally) provide a positive rate of return.

If I/E<1, well, that won’t last long.

Average Engineering Graduate Income

The BLS has encouraging information for prospective engineers. There’s a link here to a summary for the profession overall. The 2016 median annual wage was $91,010. However, one has to delve a little deeper and across disciplines to find sources that show median entry level salaries. They generally appear to be in the band of $60-70k. Let’s take $65k as an assumed annual salary for an EG. Taking off 30% for taxes, this would leave one with about $45k for take-home pay.

(I was also curious in the entry-level salaries for geoscientists. According to Payscale.com, for geologists in the U.S. this might be around $51k, pre-tax. A bit less than engineers perhaps, but the ability to do some freelance prospecting for precious metals and and gems should more than compensate. Going forward though I will use the engineers’ metrics)

For this EG, the ratio of after-tax income to U.S. median household expenses (I/E) would be 45/55=0.82. Thus a first observation is that an average entry-level engineering salary is not enough to support the level of an average U.S. household’s expenses. Perhaps this should come as no surprise, but until I ran the numbers I was overly optimistic that this might be the case.

So, several things will need to happen to keep the I/E at a reasonable level.

Assume I (after-tax) escalates from $45k at year 0 to $90k at year 30. This is a doubling over 30 years, or say an average real growth rate of 2.34%, on top of cost of living adjustments. That seems in line with the span of salaries we see today when comparing new and veteran engineers.

$55k in E seems more than adequate for a new EG that is accustomed to living as a college student for perhaps $20-24k per year, and may be single for the purpose of this analysis. So let’s assume E after graduation slowly ramps from $35k at year 0 and then escalates by the same factor as I over 20 years, until such point as it reaches $55k, and then will stay constant in real terms at that value.

This results in an I/E of 1.29 at the start that remains constant for the first two decades, since both I and E are increasing, and then accelerates as one is making more in their 40s/50s and E is kept steady in real terms.

Ratios of Income, Expenses and Investments

For this base case as one maintains I/E well over 1.0 and adds to investments, they grow due to contributions and returns. Total investments (N) could be expressed as a multiplier of expenses (E) for that year, or N/E.

If one subscribes to the 4% Rule of Thumb (while acknowledging its weaknesses), that states that when you hit a N/E around 25 or greater, you may have a great deal of flexibility to pursue other opportunities (“financial independence”). Take time off, switch away from a bad job, work for lesser pay at some life dream, do volunteer work, etc. Or spend more and curb the rise in N/E.

Figure 1 illustrates how these ratios might evolve over time.

Figure 1: Base Case

Base Case Observations

Let’s consider some observations for this “base case” engineering career income, expense and investment profile:

  1. The profile does not reflect “lumpy” expenses or income discontinuities. These might be student loan payoffs, house down payments, new cars, job changes and promotions, gifts etc. Those will happen. But we will assume those are smoothed into the annual parameters.
  2. A new engineer that can maintain a ~30% savings rate for the first several decades allows one to build up a nice portfolio by their 40s; a N/E around 10 let’s say. But the real acceleration comes once I/E escalates dramatically and compounding on N can take effect. This may be after a couple decades once one is established in their field and expenses have settled down to a steady-state level.
  3. Under this base case one might have a N/E>25 within about three decades. Do what you like after that. Keep working at something you like and let that N/E curve continue to grow, or make different choices knowing you have options.
  4. Engineering appears to be a decent career if you are suited for the rigor. With even a single EG’s average starting salary, one can build up I to accommodate average household expense levels within about 10-15 years. Leaves you time to find a spouse in your 20s and 30s, have some kidlets, have a parent stay at home if they choose. It looks quite manageable with these statistics. There is Shockingly Simple Math behind solid finances that isn’t unique to engineers, but they do have a strong ability to establish high I/E and N/Es swiftly.
  5. The astute might note “this N/E ratio is illusory, since one can simply manipulate E down to make the ratio as high as you want.” The more astute would say: yes.

Alternative Case 1: Big Debt

The unfortunate reality in the U.S. is that many students are saddled with significant debt. The average 2017 graduating student appears to have accumulated about $40k. Inflation of the cost of education and these debt levels were not what many senior engineers or professors would have been accustomed to burdening themselves with when they graduated decades ago. Add fears of the market imposed from the 2008 financial crisis, and mix in uncertainty regarding the future of the U.S. healthcare system, climate change and/or the rise of the nanobots, and it’s no surprise that Millennials have valid questions regarding how well their 50+ year old predecessors are managing the country.

Let’s say a new engineering graduate walks out of school with additional debt over the base case equal to their first year’s projected expenses of $35k (or about 80% of their starting after-tax I, if you prefer that). Their starting N/E would be -1.0. Figure 2 shows this profile over time.

Figure 2: Starting N/E=-1.0

With simply a change in the starting N/E ratio from 0 to -1.0, this incurs a drag that will take around 4-5 years to overcome just to get back to a N/E of 0. Over time they can catch up, but to reach comparable N/Es down the road, they will be several years behind the base case candidate, and this is for a rather aggressive I/E around 1.3. No surprise here but if you are in debt, get out as fast as you can if you want to have more options in the future. But, not insurmountable over time if you are in that circumstance. They still may make it to a N/E over 25 in three or four decades. The math would look worse of course for people with N/E>2.0 or so, seems like one could spend a decade just getting back to even.

Alternative Case 2: I/E manipulation

There are a variety of ways to manipulate the I/E ratio upwards, even for an average engineer. I am certainly average myself at best in most respects, so no shame there. Let’s say the easy answer of increasing our personal I is off the table due to our averageness. Well, decreasing E is simply a matter of a touch of discipline and simplicity that anyone can apply, regardless of brilliance. Another common avenue available to most people of any geography or career path is to add a spouse who contributes more in I than they consume in E. Through whatever mechanism, let’s say a household can increase I/E from 1.29 to 2.0 (say, starting at $80k/40k).

Figure 3 shows this indicative profile. This scenario of basically living on half of a typical after-tax engineering salary, or adding a second one, can drive the N/E ratio up over 25 in less than two decades. Achievable for someone average yet mindful.

Figure 3: Starting I/E=2.0

Don’t let economics drive you into a rough marriage, but a good I/E spouse might be worth a decade in terms of N/E acceleration – just sayin’.

Conclusions

The job market and current metrics in the U.S. are encouraging for engineers embarking on their careers. Still, they don’t allow ridiculous levels of fiscal irresponsibility. Consider:

  1. Entry level engineering salaries are not quite at the state to allow instantaneous lifestyle inflation up to average U.S. household levels. Seems one would want to curb their new graduate enthusiasm to keep up with the older Joneses. Lifestyle can rise gradually over time if one desires.
  2. Average U.S. student debt levels that are around the level of annual engineer salary (or an Audi) induce a handicap of several years in terms of building up investments.
  3. Levers to improve I/E ratios also increase your margins and flexibility. Engineers inherently have strong I and an array of tools to reduce E, being inherently resourceful, and savings rates in excess of 20% of I given prevailing metrics should be very achievable by even someone average. As an aside, there are economic arguments to be made in favor of marrying engineers. Probably also non-economic ones against (separate topic).

Engineering can provide a solid economic foundation for your life, and the world needs your talents applied. Sure, students have anxiety about jobs and debt, but once you get on even an average horse, when you contribute your talents to world betterment and establish a solid I/E, these recent numbers from the U.S. show you can grind out progress steadily.