“Cost of Living” is a phrase that is thrown around quite often in financial discussions and comes up when negotiating the salary for a particular position. Without getting too deep into the economic mud of Consumer Price Indexes (CPI), it is important for pharmacists to have a general understanding of how price inflation impacts the value of the cash in their wallets. Inflation is simply a term economists use to describe the change in price of a good consumers buy.[1]

Where you live is also an important factor in cost of living, since a pharmacist living in San Francisco is estimated to spend 64% more on basic living expenditures compared to a pharmacist living in Phoenix.[2] As pharmacy school comes to an end, a student has to evaluate different options around post-graduate education and career opportunities. Cost of living indexes provided by the United States Census Bureau may be helpful for graduates to take into consideration when weighing positions and residency or fellow programs located in different areas of the country.

The difference in salaries misunderstood by candidates during job searches can impact decision-making. Pharmacist A taking a position that pays $120,000 annually in one city may be less appealing than Pharmacist B in a comparable position paying $90,000 (25% less) in a city where the living costs are 30% less. If we dig into this example a little further (See Figure 3), we can see where a position with a smaller salary in a less expensive city compares.

Assuming, both pharmacists put away 5% in a pre-tax retirement account, have a 30% tax liability, and a $300/month employer-sponsored insurance premium, Pharmacist A is saving more dollars ($500 vs. $375) in retirement, but is paying more dollars in taxes ($2,850.00 vs. $2,137.50). This closes the disposable income gap, as Pharmacist B started out $2,500/month down ($10,000 vs. $7,500) but now makes only $1,662.50 less after-tax income as compared to Pharmacist A.

The cost of basic living expenses is where Pharmacist B really starts to gain ground. Assuming both pharmacists have the same exact tastes in houses, cars, and food, the 30% discount for Pharmacist B reduces the amount of money spent to acquire these items. For example, the $2,900/month housing costs for Pharmacist A would only cost Pharmacist B $2,030/month (reduction of $870 dollars a month). After living expenses are covered, Pharmacist B actually has a larger discretionary income than Pharmacist A despite making $30,000 less each year!

Figure 1: Monthly Discretionary Income comparison for similar pharmacists positions with different salaries and different cost of living estimations.

Pharmacist A – $120k Pharmacist B – $90k Income (Revenue) $10,000 100% $7,500 100% Pre-Tax Retirement Contribution ($500.00) (5%) ($375.00) (5%) Tax (30% tax rate) ($2,850.00) (28.5%) ($2,137.50) (28.5%) Insurance ($300.00) (3.0%) ($300.00) (4.0%) Disposable Income $6,350.00 63.5% $4,687.50 62.5% Housing ($2,900.00) (29.9%) ($2,030.00) (27.1%) Transportation ($1,644.00) (16.4%) ($1,150.80) (15.3%) Food ($1,144.00) (11.4%) ($800.80) (10.7%) Discretionary Income $662.00 6.6% $705.90 9.4%

Living costs can be managed in many different ways to increase discretionary income (which we will discuss in another post) but when comparing salaries it is important to estimate disposable and discretionary incomes to have a better idea which position is more financially lucrative.

[1] Boskin MJ. Consumer Price Indexes. The Concise Encyclopedia of Economics. 2008. Library of Economics and Liberty. Accessed Oct 20, 2013 at http://www.econlib.org/library/Enc/ConsumerPriceIndexes.html.

[2] U.S. Census Bureau, Statistical Abstract of the United States: 2012