Here’s our latest interview with a millionaire as we seek to learn from those who have grown their wealth to high heights.
If you’d like to be considered for an interview, drop me a note and we can chat about specifics.
My questions are in bold italics and his responses follow in black.
Let’s get started…
OVERVIEW
How old are you (and spouse if applicable, plus how long you’ve been married)?
I am 49 years old and my wife is 48.
We’ve been married for 18 years.
Do you have kids/family (if so, how old are they)?
Two kids.
Oldest is 13 and youngest is 12 (18 months apart).
What area of the country do you live in (and urban or rural)?
We live in the Mid Atlantic, in an urban/suburban area.
What is your current net worth?
Currently, our net worth is $3.97MM
What are the main assets that make up your net worth (stocks, real estate, business, home, retirement accounts, etc.) and any debt that offsets part of these?
- Cash (operating accounts): $50k
- Kids Education 529s: $250k
- Retirement (401k, IRAs, pension): $1.75M
- Investment Portfolio: $550k
- Company Stock: $500k
- Net Primary Home Value: $600k (40% Equity)
- Net Second Home Value: $220k (70% Equity)
- Other Property Value (non Real Estate): $51k
EARN
What is your job?
I am a financial services executive.
What is your annual income?
It varies based on performance and is comprised of a fixed/variable comp mix plus vested equity payout.
My best year (less than 5 years ago) was just over $1M. I average roughly $800k
Tell us about your income performance over time. What was the starting salary of your first job, how did it grow from there (and what you did to make it grow), and where are you now?
I’m on my second career.
The first (pre b-school) was low on pay, high on experience. I started out of undergrad making less than $30k.
I met my wife after 5 years of earning and we were married three years later. Our joint income in year one of marriage was about $160k.
We lived in a major city at the time. I worked during b-school and changed industries to enter financial services where I began as a junior executive. The program I was in allowed me to gain industry knowledge and advance to a mid level management position in three years.
We lived in a second-tier city with a much lower cost of living. I was having success and, with our first child’s birth, we decided to have my wife become a stay at home mother.
I continued to advance every couple of years and now roughly 13 years later I am a senior executive in a larger market for the same company with PnL responsibility.
What tips do you have for others who want to grow their career-related income?
Flexibility is an important factor and one that today’s emerging workforce is challenged by. Early in my first career, I was relocated 4 times in 12 years.
Experience was the big pay off for me and the opportunities didn’t exist in just one place. As a single guy with minimal roots, it was a simple matter of following the right opportunities with a plan.
The plan led me to bigger jobs of greater importance with more responsibility (and larger pay).
Once I got to the city where I would ultimately meet my wife, it was time for roots, so the plan evolved.
What’s your work-life balance look like?
Well, it’s not as good as I would like, but it’s better than it has been in the past.
A few years ago, I had a role with the company that had me on a plane and in hotel rooms on a weekly basis. During that time, my kids were young, but old enough to remember that dad “was always away.” My wife carried the load at home in some very meaningful ways during that time. I have some regrets about what I missed or wasn’t present for during that period.
More recently I was able to take a role that, although a somewhat lateral move, took me off the plane. It’s been beneficial to my work life balance without undercutting my earning power.
Do you have any sources of income besides your career? If so, can you list them, give us a feel for how much you earn with each, and offer some insight into how you developed them?
My career drives 100% of our operating income.
All returns and dividends are reinvested at this time.
SAVE
What is your annual spending?
It varies, but we generally spend 75-80% of earnings not including pre-tax or after tax savings and investing (which are the first items that come out).
What are the main categories (expenses) this spending breaks into?
We track spending at a high level (operating, discretionary, non-discretionary).
Our two biggest line items are mortgage payments at roughly $60k and taxes at about the same level (we don’t give Uncle Sam zero interest loans).
Do you have a budget? If so, how do you implement it?
We’ve tried, and failed, to implement budgets throughout our married life. They were much more important early on when income was much lower than it is today.
Now, we include spending in general categories in our quarterly and annual family business meetings and we give ourselves a “grade” to denote whether we are meeting our expectations or off the bead.
We use some of the usual aggregation apps to track and report along with our bank’s online capabilities.
What percentage of your gross income do you save and how has that changed over time?
We save 15-16% of gross income annually no matter the fluctuations in total compensation. That hasn’t changed much in the last several years (even in years when we should have saved more at high water points).
Now, that said, we did purchase our second home (waterfront) for 2/3rds cash during the most recent high water earning year. I’m not betting on it, but that small house on the water is an asset that is very likely to appreciate at higher than the current risk free rate.
What is your favorite thing to spend money on/your secret splurge?
The second home is new to our family. It’s on a body of water (although this isn’t the geography we want ultimately, we know now that waterfront will be important in retirement) and (shudder) we bought a small boat.
INVEST
What is your investment philosophy/plan?
I believe you have to assess where you are in your life stage and what your risk tolerance is no matter the market cycle.
Based on those factors, set up an asset allocation that will produce an acceptable return for the risk you are willing to take.
Then ride that allocation and rebalance and alter it as your life stage matures.
I believe managed accounts can help here (I’m also aware many will disagree with me). For a reasonable fee, managed accounts will provide some downside protection when compared to the market. The knock, of course, is the fee takes the upside edge off any return above the market average.
Low cost exchange traded funds for the S&P 500, for example, will return what the market does (high or low) for little cost. Low cost providers love to play in this space and in a down market, you get what you pay for. It’s easy enough during a bull market, more challenging in uncertain times.
For my part, I’m still 10+ years from retirement, don’t need income from my portfolio and have an above average risk tolerance.
My wife and I have done the full cycle of estate planning, have set specific objectives for retirement, kids education and some side projects. We used managed accounts for some down side risk protection and advice. I also happen to believe that if you strike the “noise” coming from the current volatility, we still have some reasonably good fundamentals in the declining months of this long bull market.
Given all of that, I’m long equities in our portfolio. I’m willing to sit to and through the end of this cycle and dollar cost average my investments into the start of the next bull.
Timing is a fools errand and the statistics show that if you miss the 5-7 best days in the market (usually happens early in the expansion of the business cycle), then you’ve missed 60+% of the upside of the new bull market. Again, that’s all based on information I see, what I believe and who I am (life stage and risk tolerance).
What has been your best investment?
As I said earlier, I’m an asset allocation guy.
The only individual stock I own is my company stock until it vests; it is then immediately invested in my asset allocation.
My advice would be to remember that diversity (risk mitigation) is the only free lunch in life and in investments.
What has been your worst investment?
An annuity that a shady “financial advisor” talked my wife and I into early in our marriage with a small inherited account.
Still have it, and yes, it’ll one day provide a certain amount of “guaranteed” retirement income. But I shudder to think how much our capital has been returned as ROI to an insurance company through time instead of our balance sheet.
It’s the right option for some. It was bad, non-fiduciary advice to us at that time.
What’s been your overall return?
My trailing two-year return on our invest portfolio is a touch over 22% through August 2019 versus an 18.4% return on the S&P 500 for the same period. Net of expenses by the way.
How often do you monitor/review your portfolio?
I track monthly and review with my wife as a part of our quarterly and annual family business meeting package.
NET WORTH
How did you accumulate your net worth?
When I came across your website I laughed out loud. Our financial life is, quite literally, built on the name of your site: Earn, Save or Invest. It’s not “sexy”, but it sells.
And…..We’ve been very lucky. Early on I/we built a career and our capabilities and got paid while we learned. Later, I was able to pour gas on that capability by getting my MBA from a top school while working. Yes, I took on a little debt, but the ROI on that investment has been unbelievable (and leveraging it has been unbelievably hard work).
I’ve spent nearly 15 years maximizing both my experience and education versus the biggest opportunities my firm has trusted me with and earned commensurate compensation.
When I recognized that I had high income potential, saving and investing became my life’s work.
What would you say is your greatest strength in the ESI wealth-building model (Earn, Save or Invest) and why would you say it’s tops?
Clearly it’s my career and earning potential. Frankly it’s the biggest off balance sheet asset that we have.
My experience and education met opportunity (and risk) and the ROI has afforded me a great lifestyle without (non mortgage) debt and the likelihood of a bright future.
What road bumps did you face along the way to becoming a millionaire and how did you handle them?
We’ve been fortunate, so it’s difficult for me to think that we’ve had road bumps.
I guess the biggest bump was during the portion of my career that involved significant travel. It took me away from my family at a critical time and proved the axiom, “there are some things money can’t buy.”
While I was able to make some choices career-wise that didn’t have tremendous impact to our ability to save and invest, others on the journey may not be as fortunate.
An old risk management mentor of mine always said, “make sure you are getting paid for the risk you are taking”. I would alter it to say, “make sure you are getting paid for every minute you are away from the things that really matter (just another form of risk).”
What are you currently doing to maintain/grow your net worth?
I am at or approaching my maximum average compensation. There will be a little variability, but given the horizon of working years I want to have ahead, I’m near a peak.
My charge is to keep going strong career wise, keep saving and investing within our risk tolerance (and adjust it for capital protection as our life stage changes) and keep a close eye on liquidity and cash flow requirements.
One of our biggest risks in my view is negative operating leverage. Positive operating leverage means that our income grows faster than our expenses. To date, that has never been a problem. But as my average income maximum approaches, the growth rate there will be negative, zero or low.
That said, we’ll have to create mechanisms that keep our expenses at or below the same growth rate (0% or negative).
Do you have a target net worth you are trying to attain?
Everyone should have a “number”. You can determine it several ways and, in fact, triangulating a number is probably the best advice.
My favorite “back of the envelope” method is to take your current income, discount it by 25% (or don’t, if you want to be conservative), then divide it by 3% (historic inflation) or 4% (assumes 4% withdrawal rate over the course of a normal retirement period). The 25% by the way is an assumption that you won’t spend as much to live in retirement as you do now day to day. This might be wishful thinking given healthcare costs at 20% of GDP.
Now, take your net worth and current year into account; the rule of 7 doubles that number every 7 years. Based on your retirement horizon, how many times can you double? How does that number compare to the “back of the envelope” number? If the second number is less than the first; you’ve got work to do. If the first is greater than the second, you still have work to do…..the rule of 7 only matters if everything in the future works just like everything that got you to this point. If anything changes adversely, all bets are off.
How old were you when you made your first million and have you had any significant behavior shifts since then?
We crossed the million dollar net-worth market just after I turned 40. Haven’t deviated from my framework and path since then.
What money mistakes have you made along the way that others can learn from?
I would have searched harder for free money for my education. Those loans stuck with me much longer than I liked.
I would have gotten better grades in undergrad and started from a different experience level sooner in my career.
I would’ve also started saving earlier.
What advice do you have for ESI Money readers on how to become wealthy?
One of the ratios I track judiciously is the percentage of earning assets to total assessments.
The old adage is that your money is working for you…..well how much of it is actually working or earning through time? I’d like to get into the 75%-80% range. Today we are at about 77%.
To be clear, this does not include our real estate and shouldn’t for others calculating unless the asset is truly an investment.
The only other thing I’d say here feels a bit redundant. Maximize your earning power and potential early and often, take calculated risks, save at least 15% and invest using appropriate asset allocation for your life stage.
FUTURE
What are your plans for the future regarding lifestyle?
My plan is to be financially independent in the next 5 years.
For us, that means passive income could replace active income and we are not bound by whatever business decisions corporate America (and my firm) need to make that would take me “left” when the things that matter to my wife and I are on the “right”.
I love my job (as much as anyone can love a role), so I’ll do it and continue to progress as long as our financial and life objectives can be lined up with what the firm needs/wants me to do.
If all continues to plan, six years from now we will be playing with “house money”.
What are your retirement plans?
Financially we will keep investing beyond retirement; using an appropriate asset allocation for that life stage.
Living on the water has become an important piece of the future for me, so that’ll help determine the ultimate location.
I’ve seen examples with clients and others where retirement without purpose is a bad thing. I have interests including, entrepreneurial ones, that might be served in retirement as well.
Are there any issues in retirement that concern you? If so, how are you planning to address them?
Health costs. My doctor would say I have work to do (weight) and that challenge begins in earnest this year.
MISCELLANEOUS
How did you learn about finances and at what age did it “click”?
Learned late, clicked even later.
I didn’t get any personal finance thinking from my parents. Great people, just didn’t know what they didn’t know.
As a result, my kids are (probably overly) money conscious and understand assets, liabilities and expenses better than most.
As far as clicking, a lecture near the end of b-school gave my thinking form, function and a framework. A retired Wall Street guy came in and gave an hour long workshop on personal finance for “high income” earners. It was a masterclass. I recorded it and I still listen to it from time to time.
First, he broke down the mythology about high income……it’s not what you make, it’s what you keep (and what you put to work for yourself).
Then, he talked about some debt basics…..basically run from debt and sunset any debt you have as quickly as you can.
Lastly he touched on the priorities he and his wife used to think about their financial lives. I still use this framework in every one of our quarterly and annual business meetings.
Think about it like a pyramid. Strong Foundation on the bottom: set aside (after maximizing eradication of your debt) 6-9 months for your emergency fund (monthly cost to operate for you and your family times 6-9 months).
Next maximize your savings to retirement. Obviously take every dollar your employer matches (in his words, “that’s just free money, if you don’t take that you are stupid!”). Remember your number and time horizon here; what do you need to save and invest to make that a reality.
Next children’s education. It is very important for my wife and I to have our kids graduate from college debt free.
Next your home; not as an investment per se. Don’t overbuy.
Once you’ve got an ‘A’ grade for all of that, buy a toy or two for yourself.
Lastly, always keep in mind family support, charity and donations (especially to future school options).
We grade ourselves on each and course correct as necessary. And remember, they are prioritized, so we over index as necessary.
Definitely don’t get to work on the higher levels of the pyramid before you cement the foundation and feel exceptional about your plan to attack the second and third rung.
I reached out to him years after I graduated just to thank him for his insight.
Do you have any favorite money books you like/recommend? If so, can you share with us your top three and why you like them?
The Millionaire Next Door – Should be required reading in high school or college. The more clients I meet who are of means and not generationally wealthy, the more this book is reinforced to me.
The Wealthy Barber – A fun, little read that helped reinforce a lot of concepts from MND.
Principles: Life and Work – This is a new one for me, but he seems to have synthesized the precepts of what comes after the great idea and the grand plan…..execution.
Do you give to charity? Why or why not? If you do, what percent of time/money do you give?
We do.
The framework we use from that lecture long ago called for it, particularly in education (as alumni and for our kids educations).
A couple of years ago as a part of one of our annual meetings we developed a list of philanthropic categories: arts, education, social action. I wish that I could say we do a meaningful percentage. Truth is we don’t, BUT I can say that since we’ve become more intentional our hard dollar gifts have grown by a meaningful percentage every year and I can provide a corporate match, so real impact is within our reach.
I do give significantly of my time and my wife and I serve on a number of boards.
Do you plan to leave an inheritance for your heirs (how do you plan to distribute your wealth at your death)? What are your reasons behind this plan?
As I mentioned earlier, we have developed a full estate plan including a will.
For reasons I won’t go into, our plan is a bit complicated in its fiduciary construction and care giving instructions for our kids.
If we move forward according to our current trajectory, we will certainly leave some inheritance. That said, we expect both of our kids to fulfill on their educational promise and seek a career that provides meaning for their lives independent of whatever they inherit.
Anchors Aweigh says
Like the back of envelope calculation……but one thing does not take into consideration is any social security or pension impact. I like to calculated the value of my social security and pension projected amounts and count those in. My “net worth” or just count social security as “gravy” to our plan
MI 157 says
Thanks. I don’t count social security at all. I’m a gen x guy and we were always told it wouldn’t be there when the time came. If it is, great. There is a small pension in my retirement bundle in the article. Great benefit from some employers, but sadly fewer each day.
Millionaire 124 says
What have you done / plan to do to make your W-2 income more tax efficient ?
Also –
Did I understand your savings rate to be around 15-% with an income in the $800k range ?
Millionaire 124 says
I just read some of the many comments here.
Thanks for sharing your story and congrats on your success.
As a high income earner with a W-2 income, you are square in the crosshairs of the Fed Govt for taxes. We should thank you but that fact concerns me – and it’s likely going to rob you of a fortune over time.
My personal goal (and yours perhaps ) should be to reduce taxable income. Period – every day – by any leans legal and reasonable. You might find some tax efficiencies outside of the market. The most wealthy pay a much lower realized tax rate – although the most wealthy tend to file under 1099 status.
Just take good care on the tax side.
And thank you for your share!
MI 157 says
Now this is an issue that keeps me up at night. And the truth is I haven’t done much about it. I have access to a deferred compensation plan, but it’s a very complicated decision made more complicated by the current tax structure that goes away in a few years. The whole premise is to lower current earning rates (and tax brackets) for times in the future when your earning will be lower organically (and so will your bracket). In all likelihood, my taxes after year 5 will be higher, not lower than they currently are. My income, again, is not simply taxed at the normal earning rate either.
With my deferred comp plan, you have to make the decision to defer the year prior to execution and I don’t know what my compensation will be next year. Lots of moving parts.
As an employee vs. an entrepreneur, I don’t have a lot of options to lower my w2 beyond that. If I’m missing an opportunity here that would be very valuable information for me. Thanks.
Millionaire 124 says
I understand. It just makes me grit my teeth. I think that the deferred compensation can be great. I was able to take advantage years ago of deferred comp at a 7% rate and that was pretty darned lucrative. Now I cannot and I get a better cash-on-cash return with real estate anyway.
I wish I could say that I know. I went to my accountant a few years back – and I’m 1099 – and asked “is there any more I can do to reduce taxes “? She told me – “no”.
At your level, I’m sure that you are surrounded by people with the same dilemma and people who can advise you. It would probably be worth pursuing. And you’re right – I feel like tax rate are going up at some point and it’s very likely in 20 it could be downright nasty. Tax rates in this country are low by comparison and I’m bracing for lots of changes. Whew. I guess that it’s a “beautiful dilemma “ but it’s still tough to give back that much money.
Good luck and i hope that you have a great holiday.
Jules says
Very well done! I’d love to hear more about your expenses given you are spending up to 80% of your huge income. Wow!! Also, seems like you should have more cas on hand for emergencies or sharp market drops. The financial services industry is known for laying people off especially high income earners. Doesn’t that make you nervous?
MI 157 says
Seems to be a lot of concern about my income/expenses. Frankly, I’m less concerned with that side of my financials than the balance sheet side, but I’ll respond as long as my responses don’t compromise my identity/geography . First, my gross compensation isn’t all taxed at the same rate (as some of you high income readers will attest). I won’t be more specific here other than to say my blended rate is closer to 45%. About expenses – I’ve already said what my primary mortgage is annually, property taxes (to answer another question posted) is a major expense. Add to that independent schools for my children and other operating expenses and I arrive at the roughly 75-80% figure I shared in the story.
MI140 says
Great interview, but it seems like there is a missing piece. Your average income is 800K, you are saving 16% ($128,000), so that leaves 672K. Your two biggest expense line items are mortgage and taxes at 60K each, so that’s (672K-120K,) that still leaves 552K. What generally smaller items under 60K that arent taxes or mortgage add up to make your spending over a half a million dollars per year?
Bob says
I suspect thats property taxes, no total taxes.
MI 157 says
Thanks. As I said above, my compensation is taxed at a blended rate approaching 45%. You are correct in that the savings rate is on the gross. Start there and the calculations you outline below change greatly. I/we could always stand to reduce expenses (I impress that on the household during everyone of our business meetings).
Mike says
So you spend about 250k annually. Big whoop. Why is everybody freaking out. Dude you make an amazing income and have a kick ass net worth for your age. Great job!
Happy1 says
Good interview. Excellent example of how education (career)and hard work makes a difference in income. Not clear length of time making $800K from interview.
MI 157 says
My income has certain risen through time. I’ve been in the ballpark of income mentioned in the article for 6-7 years.
Happy1 says
Thank you for your response.
Reader says
So are your brokerage and retirement accounts invested in managed accounts? There seems to be some push back right now against low cost exchange traded funds and you seem to share the sentiment? I’ve basically taken a boglehead-like approach with a 3-fund vanguard portfolio, all in admiral shares. Is your argument that the money would be better invested in a managed account?
MI-94 says
Interested in reply here. I an interested in thoughts on allocation and investment vehicles. I am an all index fund guy and have been for year, but always interested in others thoughts on this subject.
MI 157 says
People will disagree with me here and I’ll admit I have a bias as someone in the industry. What I will say is that a managed account from a good provider offers downside protection in all areas of the business cycle for what I consider a reasonable fee. I’m not someone who looks to get something for nothing, but I do hold my advisors accountable for performance against agreed upon benchmarks. And I have absolutely received beneficial counsel that proved very helpful as the complexities of my financial picture played out. As I pointed out in the article, the trade off is ROI on the upside, (don’t confuse brains and a bull market).
That said, there is a lot of pressure in the industry driving fees down….that is likely a Pandora’s box that won’t be closed until we see a real bear market. This is my opinion, people will disagree.
Matt says
Second some other comments here. For someone with a very large but variable income, I’m not sure that its financially wise to think of your expenses as a % of your income. 80% of $1mm is a crazy spending level. I wouldn’t know how to begin to spend that kind of money in a year. I get that some of it is taxes, but surely that leaves well over $500K a year on non-tax spending!?!
Shouldn’t your expenses be somewhat level year after year? And then your savings level varies depending on if you make a $1mm vs. a $800K in a given year. I’d love to see a breakdown of your spending.
If FIRE is really a priority here, seems like cutting spending could shave years off your retirement date.
But, if early retirement isn’t a priority, then by all means, keep the US economy going!!!
MI 157 says
Not going any deeper on my expenses, but see my earlier answer for some explanation. Early retirement isn’t a priority, but retirement is. I’ve had a chance to talk to a lot of people who retired early and regret it deeply. Some bored and feel underutilized and marginalize. I think in terms of financial independence (ultimately) and do something you love or like a great deal.
Our plan is to hit our number and relocate to a much lower cost area (but close to the water) when retirement is imminent.
Dave says
I’m sorry I just don’t see how this is helpful. This guy averages $800k in compensation per year – he’d have to be really bad with money to not be a millionaire.
Of course we don’t get a lot of income history to figure out how long he has been earning at this level. We do get that they were making $160k combined when they were married and somehow over the past 18 years they went from $160k to $800k. He made over $1mil within the last 5 years. Which, by the way, fantastic for him just not that helpful for us readers.
What is my takeaway here supposed to be – earn a crap ton of money and you too can be a millionaire?
Joey says
yes… dude you realize ESI… E is the first letter for a reason…
ESI says
Hahaha…what Joey said.
Jules says
Dear ESI,
How about a few Retirement Interviews sprinkled in between these Millionaire Interviews. We need some inspiration! Please make that one of your New Year’s goals. Xo
ESI says
I can’t make them up — people need to volunteer for them!
If you know of anyone, send them my way.
Maverick says
Congrats on being in the double comma club, but I agree with other comments, income/assets/expenses don’t compute. I also don’t include my residence as an asset as I have to live somewhere (expense).
Tim says
Can you sell your house and get a cheap rental instead, and invest the cash? The answer is yes…. Home Equity is definitely an asset.
Maverick says
Not “equal in kind.” Sure, you could buy an old van and live by the river in a third world country. Now go price the rental rate of his 600k house. You’ll find it’s on par with home ownership. See J.L. Collins blog post.
R says
Not sure why we get such strong reactions for high income every time. Can’t we all not learn from what the guy did to get there? I think there are tons of lessons in there on how to maximize E
ESI says
It’s the “he makes a lot so his results aren’t valid” and “I could have done the same with that income” objection.
Happens frequently unfortunately:
https://esimoney.com/how-to-ignore-the-basics-of-personal-finance-and-still-become-rich/
MI 157 says
I will be the first to admit I’m lucky. I also sacrificed comfort for experience early, went to school and leveraged my degree fully, worked my tail off and created value for my company. I do believe most people can do the same thing (with a little luck sprinkled in), but I know many people that made different choices along the way and had a different outcomes.
Mel says
I do not get it. How does one get to 3.9M from avg 800k salary if 80% is spent? And savings of 16%
What am I missing?
MI 170 says
He has half a million in company stock and perhaps another half million in pension from his company (he didn’t give the retirement breakout), I’m assuming both were awarded and in addition to his income. He’s purchased several properties with a fair amount of leverage and he’s wisely invested well into six figures every year during one of the best bull markets ever…I’m not seeing a disconnect.
MMiguel says
I think the negative reactions are as much to the “how its made” as it is to the “how much”. For example, I don’t see small business owners, or r.e. landlords, or physicians get attacked with the the same ferocity as banking/Wall St/financial services. That is unfortunate as would think this readership would get that financial services is a vital part of our capitalist economy, and by and large while it ain’t necessarily rocket science, most things, including most ways to get rich are not rocket science. It does require a stomach for high stress, zero job security, and a dog-eat-dog grind.
I do agree with posters who are saying there are some gaping holes in logic and detail here. But, I get it – one of the reasons I have not done the MM interview is that I’m just not willing to provide the level of detail that would make it interesting and informative. Ah well.
ESI says
I think you’ve hit on the issue. The people who fill out these interviews spend a lot of time completing them and each is comfortable sharing what they like.
Personally, I’m good with that and learn something from everyone even if the “only” thing we learn (again) is to focus on E-S-I. 😉
MI 157 says
Thanks for your comment. This has been a really interesting experience as I generally only speak about these topics to my wife and our financial advisors. When I have complete transparency with those folks, I/we don’t see as many holes as have been pointed out here. Again, we stay mostly on the balance sheet side of things and my family’s values and priorities drive the discussion versus anything else. I think this has been useful and I’m going to use some of the productive comments as an agenda item in our end of the year business meeting.
MMiguel says
M-157,
Congrats on achieving a very nice lifestyle and NW. We have a lot in common, though I’m a few years older than you (and hence a couple mm more on the NW barometer).
Like you, I’ve spent a decent chunk of my career(s) in financial services. Unlike you though, wife and I have had some side gigs to help generate income and NW (like real estate). Like you, I have seen the rare but occasional $1mm paycheck in the past, though these days its somewhat less as I am on the home stretch of my work-life. My average earnings are a bit lower than yours, especially as my end of career comp has stagnated though as a perfectly acceptable trade-off, my quality of life as improved immensely. I simply cannot and will not work as hard as I did in my 30’s and 40’s without sacrificing health and family. Like you, I went through long periods of neglecting both in order to get where I am today.
Like you I’ve had a lot of my comp paid in stock options, which though it impacted cash flow in the beginning, eventually turned into a windfall of sorts later on. I get that you probably live in an expensive metro area, you probably pay a truckload in taxes (income and r.e.), you maybe pay for private schools for your kids equivalent to college tuition, etc. It probably costs a lot to be you. I know it costs a lot to be me.
And like you, I have a second home akin to a weekly vacation and can vouch for the huge money pit such a luxury represents. I can also vouch for the fact that it is worth every dime. And like you, my number for financial independence is over $5mm, which is a figure many readers would consider absurd. It’s all relative. I like knowing I could just quit if I were willing to make some adjustments, but I also like living a certain lifestyle that requires a high income for as long as I can manage it having a lot of fun and without too much stress.
Some readers have commented that your savings relative to income seems out of whack. Honestly, I can’t much make sense out of the numbers you’ve given – and I am very much a numbers guy. But, whatever, I can’t say that I would disclose everything either. You did say that you’re planning to work another 10 years or so. I’d only say that I’ve seen many fine careers cut short. Not that folks can’t find another job, but replacing an income like yours can prove difficult. If I were you, I’d approach each day as if it could be your last big paycheck – not from a sense of fear, but from a sense of preparedness.
One thing you introduced me to was this concept of the earning assets ratio. That is clearly a financial institution concept I had never though of applying to personal finance. I estimate mine is around 75% (because I’m carrying a ~$1mm in cash and equivalents right awaiting an investment oppty). So, thanks, I will have to pay more attention to that.
Dan says
I think you just gave your millionaire interview….
MMiguel says
LOL, yes but without having rotten fruit thrown at my head…
MI 157 says
Thanks. Sounds like you might be where I am heading. The earning asset thing is a tough number to push where housing values are high. I started tracking it about 7 years ago and the slight improvements I’ve made correlate with upticks in overall yield.
MMiguel says
I see your point – I too live in a highly appreciated metro area, but its helped the equation as investment property has gone up in value too. It was a little bit challenging to decide how to allocate r.e. assets. My city residence is income producing and could be fully leased out to the tune of six figures annually – in retirement I won’t need to live in it, so I classified that in earning assets. I put $1mm cash and the value of my semi-rural “retirement” home into the non-earning category.
One more question – how do you handle (mortgage) debt in the calculation – Do you ignore it or only include the equity in r.e.?
MI 157 says
I ignore it. For me it’s any asset that generates income (rent, dividend, returns of any kind) over total assets. Appreciation of RE works in the numerator and the denominator at the same rate, so they’d cancel out in the ratio. I’d have to think a bit more about the context behind the math if you just used net equity in RE. I think it might work fine, but I’d need to think deeper about the implications of doing so.
Dr. GFG says
Thank you for the interview, MI-157. I think it’s very helpful and informative. Some of us are not trying to retire in our 40s. A vocation can provide a ton of satisfaction (cerebral, social, et cetera). I think you are balancing life goals…you have an impressive net worth, but you are also enjoying your income in your present years. People should remember that not everyone is guaranteed longevity or a specific number of years.
If we look at a year when you made 800k. You paid approximately 360k in federal/state/county taxes (according to your blended tax rate of 45%). If you saved 15% of gross income, that amounts to 120k. Your expenses were then 320k, 120k of which was mortgage and property taxes. So, your other expenses were approximately 200k or 16.6k/month. That’s not unreasonable. People that critique you will either a) probably not earn your level of income and imagine that they would do something different with respect to savings (although hypothetical/theoretical vs. realized actions are very different things) or b) only judge you against their perceived ideal, namely, maximizing savings and investing and limiting expenses according to their standards. Not everyone wants to live off 100k per year. I guess they think you should show up to your parking space as a financial services executive in a Honda Fit (rather than a Mercedes).
I have a question with regard to your savings. Does this include your 401k contribution, employer matching, company stocks, IRA, 529s, and/or HSA? Or is this just money that you save that goes into after tax brokerage accounts.
MI 157 says
Thanks for the reply. Not worried about others judgment as I sit here honestly.
My retirement bucket as listed includes 401k contribution plus employer match, current pension, and 3 IRAs (one small one is the annuity story I told in the article; a mistake to be sure). Kids education bucket consists of two 529 plans (one for each). The investment portfolio listed is part of a savings/investing strategy as we contribute annually to it; generally same amount every year either lump sum during expansion or dollar cost average in on the downside.
MI-94 says
Based on MI-157’s income his expenses although on the high side are by no means way out of line. Although many interviewees here are super frugal and live way below their means (i aim to be one of these), it is not a requirement. He should not be getting any negative feedback for choosing to enjoy some of the money he EARNED. I consider myself super cheap and somehow we spend over $100k per year on an income of around $300k. If the income were doubled or tripled i might be OK going higher on the spending. Folks forget that our income tax is very progressive, the tax rate applies the last dollar earned. When you get up there, your effective tax rate approaches 50% (mine is near here in CA), so although there seems to be high income, Uncle Sam gets a huge chunk of it. There is this fantasy by some that high earners don’t pay taxes…Absolutely not the case. If the income is old fashioned salary, no way around the taxes that i have found (that is legal).
Give MI-157 a nice long slow clap for doing awesome on the E and the I side of the equation. Yeah maybe his S could be higher, but – he earned it and he has the right to enjoy it while young and he is still on track for FIRE young. Good job!
Happy1 says
Absolutely agree
MMiguel says
Well-stated. I spend somewhere in the $250-$300K range, so similar to MI-157 (my retirement budget is $200K). It’s easy to do if you live in a big city and own more then one home. Add kids and private schools, and luxury travel, etc. and you can easily spend another $100K.
In my case, savings is not a huge priority because I’ve hit my “number”. Short of winning the lottery, increasing my saving rate isn’t going to move the needle much on NW at this point. What will make a big difference is deferring the need to draw on assets as long as possible – which is to say as long as I enjoy work, don’t mind the big city thing, and my health holds up.
For M-157, they sounds very confident in their future earning potential, and already have a pretty nice asset base with which to cushion bumps in the road.
seclawyer says
In determining whether I’m on track or not, I pay little attention to current income, except insofar as it helps me determine how much I can save and invest currently.
I (have come to) pay close attention to current expenses, making pro forma adjustments for my hypothetical retirement, adding (and subtracting) reserves, taxes, cushions and other amounts. Take a multiple of that (say, 33X, because equity valuations are so high) and, voila, there’s the number.
Current income would only be relevant if it equaled current expenses. For those who LBYM, as the OP does, it’s not important.
In brief, anticipated spending (not income) determines one’s target FI number. I’m guessing the OP knows this and is just making ultra-conservative assumptions in his calculations.
As others with high current income have noted, it is harder to save a lot currently from such income than others realize. Aggressive progressive taxation and normal standard of living expectations for upper middle class households are both extremely expensive. The OP is to be congratulated for his persistently hard work, for his wisdom acquired from trial and error and for his solid and conservative plan.