Millionaire Interview 366

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.

This interview took place in April.

My questions are in bold italics and their 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 52 and have been divorced for 5 years.

Do you have kids/family (if so, how old are they)?

I have 2 children.

My daughter (22) will be graduating from college this spring and is planning on going to grad school.

My son (19) is finishing up his first year of college. With AP credits and dual enrollment during high school, he’s actually almost a junior. While he did receive a full ride scholarship, I recommend that every student look into these credits as it could shave up to 2 years off your college expenses.

What area of the country do you live in (and urban or rural)?

I live in a suburban area of a major city in the northeast.

After my divorce, I kept the house that we had owned for 20 years. With some fortunate timing, I sold that house last year at the peak of the market and downsized to a condo that still provides enough room for my children to stay with me while they are home during breaks.

What is your current net worth?

My current net worth is $1.85 million.

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?

Here is the breakdown of my assets:

Non-Retirement Investments – $620,000

• $7,000 Checking
• $559,000 Brokerage ($15k cash, $60k CDs (ladder of twelve, 12-month CDs of $5k each that mature monthly – this would cover my essential expenses for 1 year), $484k in low-cost stock index funds)
• $3,000 Crowd-funded real estate platform (Before the recent increase in interest rates, I used this platform to improve the return on my cash. However, the differential in rates is now not worth the additional risk or the time required to review each new investment. So, I have been moving off this platform as my investments mature.)
• $44,000 I-Bonds (I purchased most of this position when I-Bonds were first introduced in back in 1998 and their fixed rate was much higher than it is today. Fun fact: For the first few years, you could order I-Bonds using a credit card and pay no cash advance fees. Using the resulting points from my L. L. Bean credit card, I bought a set of high quality of luggage that I still use today. Thanks Uncle Sam!)
• $7,000 Health Savings Account (invested in low-cost stock index fund)

Retirement – $1,017,000

• Current Employer 401k – $500k (low-cost stock index funds – My employer very generously contributes 17% of my income each year.)
• Rollover IRA – $320k ($150k bond funds and $170k in low-cost stock index funds – Since it looks like we’re at the top of the rate hike cycle, I just moved into this bond position. Time will tell if this timing is correct. I will likely increase my bond position to reduce my overall exposure to stocks over the next year.)
• Inherited Pre-Tax IRA – $6k (income-based fund as I need to withdraw a few hundred dollars each year)
• Retiree Health Plan – $34k (This account functions very similarly to an HSA, though only my employer can add money to it. They contribute $3k / year and it currently accrues interest at a 4% rate. I can access it after I leave for health-related expenses.)
• Roth IRA – $157k (My income is too high to contribute directly and, with my rollover IRA causing pro-rata issues, I have not pursued any back-door contributions. I opened this account in 1998 and contributed the max until I hit the income threshold a few years later.)

Assets – $213,000

• Condo – $639k (Condos similar to mine resold last year for this amount. There haven’t been any sales this year, so it may need to be reset as the market has cooled.)
• Mortgage – $426k (As I mentioned above, I was really fortunate with the timing of my downsizing: In addition to selling my house at the peak, I was able to secure a 30-year fixed mortgage on my condo at 2.875%.)

EARN

What is your job?

I am a technology researcher for a large megacorp. As I enjoy the hands-on research, I have fought for years against the multiple management opportunities that they have tried to foist on me. While there would have been more income potential with a management role, I am plenty happy with my current income (and lack of management bs).

Plus, my job is really fun! I get to play with new technologies and see how they may impact the firm in the future. The scope of our research is tech that is 3-5 years from mainstream use. So, it is pretty cutting edge, which leads to a challenging and rewarding job.

What is your annual income?

Total: $308k

• Salary – $174k
• Bonus – $51k
• Company 401k contribution: $38k
• Stock compensation: $42k (This is an annual payout in cash – there is no opportunity to hold the stock longer.)
• Retiree health plan: $3k

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?

My first job was as a newspaper delivery boy and made $0.15 per paper delivered… 🙂

My first job out of college was as a software engineer in the early 90’s and made $38k / year. This was a great time to start in this field and my income has grown consistently over time.

Along the way, I completed my MBA and worked as a technical product manager for a few years. The small company that I worked for at that time was acquired and my product management job became less technical and more sales support. As such, I decided to leave after the acquisition and get back into hands-on development.

I have been at my current megacorp for 7 years and I typically get 4% raises on my base salary. However, since the bonus and 401k contributions are both based on that amount, it nets out to be an 8% raise.

What tips do you have for others who want to grow their career-related income?

Smile.

No, seriously – this is my number one tip! If you always have a genuine smile on your face, everyone will want you on their team and you can pick and choose the opportunities that are best for you. Further, I have received multiple gifts from senior execs (weekends at their ski houses, Ryder Cup tickets, etc.) that nobody else received because they liked me and knew that they could count on me.

For the Formula 1 fans here, think Daniel Ricciardo. Even after his recent dismal stint at McLaren, his infectious smile is still everywhere as the reserve driver / marketing genius for Red Bull. No other former driver has that type of marketability and it is all because of his smile.

What’s your work-life balance look like?

After my divorce, I received full custody of my (then) high school aged children.

Fortunately, because I had committed to only individual contributor roles throughout my career and had built up a lot of goodwill, I was able to convert my role to mostly work from home (even pre-pandemic). So, I was able to juggle everything pretty well. Now that my kids are in college, this has become much easier.

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?

No. I focused on growing the income at my day job.

Unless you are entrepreneurially minded and want to eventually get out of your 9-5, I always recommend that you focus on your main career. This will ultimately also help with your work-life balance (see above).

SAVE

What is your annual spending?

My current annual expenses are $72,000.

I find great joy in a simple life and have found that increasing my spending does not increase my happiness.

That being said, I think I live a very large life! I live in a new condo, drive a car that looks and runs like new (despite being 5 years old now), eat great food, and travel extensively.

What are the main categories (expenses) this spending breaks into?

• Housing: $38k (including mortgage, insurance, HOA, heat, electric, water, maintenance)
• Transportation: $3k (paid cash for a new, but non-flashy car and drive less than 10k miles / year)
• Food: $4k (I actively dislike dining out – the quality is much below what I can make at home – and I love shopping at Aldi!)
• Travel: $12k (My one splurge is definitely travel! I currently take several international trips a year and plan to increase my budget to $20k next year after I retire.)
• Everything Else: $5k (phones, internet, clothes, streaming services, misc)

Eagle-eyed readers will notice that I do not have a line item for health insurance listed here. The reason for that is that my children and I receive our coverage through my ex-wife’s employer plan.

The other line item that is missing is taxes. While I plan to perform tactical Roth conversions once I retire, I could theoretically pay no tax if I were to just live off the capital gains, qualified dividends, and principal of my non-retirement funds until Social Security kicks in. Given this, I am not budgeting for taxes, per se. Any decision to do Roth conversions will introduce a taxable expense that will be taken into consideration at the time it is done.

Assuming the TCJA expires as planned in a couple of years, I’m planning to convert into the 20% bracket for now and then adjust as necessary. As I have a long time horizon to perform these conversions, I should be able to do very small amounts along the way to minimize my overall tax.

Do you have a budget? If so, how do you implement it?

I have always been frugal and have never really kept a budget. With a savings rate well north of 50% for most of my career, I didn’t see the value in it.

However, in my early retirement decision-making process, I decided to document my spending for the past year to make sure that I didn’t miss anything.

For the past year, I have tracked every expense on a spreadsheet. I don’t think of this process as budgeting, per se. It is more of a tool to help with my retirement decision process. Once I do retire at the end of the year, I don’t foresee keeping this up.

What percentage of your gross income do you save and how has that changed over time?

Even at my first job, I contributed to my 401k and saved $100 / month for about a 10% saving rate.

Over time, my income increased much faster than my expenses and my savings rate is now around 60%.

What’s your best tip for saving (accumulating) money?

Automation is your friend. Automate the contributions to your 401k and non-retirement savings and then spend lavishly with everything left. You can’t spend what you don’t see.

Over time, this simple strategy will lead to wealth.

What’s your best tip for spending less money?

Shop at Aldi! Even when my kids are home during breaks, I struggle to break $100 / week.

Yes, they only sell one version of each item, but do you really need to choose from multiple brands of sugar?!?

What is your favorite thing to spend money on/your secret splurge?

Travel.

As a way to subsidize my habit, I do a light amount of credit card hacking – usually one new card a year. Yes, this is a rabbit hole you can tumble down and really make a lot of money.

However, I also like to minimize the amount of time I spend on this ‘part-time job.’ So, in addition to the new card of the year, I focus my spend on my Amex Personal Platinum and Amex Delta Platinum.

Yes, these 2 cards have $1,000 combined in annual fees, but I get at least 3x that in benefits in return. Further, my travel experience is greatly enhanced by free lounge access and consistent flight upgrades on Delta.

INVEST

What is your investment philosophy/plan?

I mostly invest in low-cost index funds.

Some additional return might be able to be found in more active approaches, but the additional time required to achieve those potential increases is not for me.

This tradeoff is especially stark since most active investors do worse than index funds over the long term (even when they spend more time at it).

What has been your best investment?

My best investment has been in my career…

$300k annual cash flow on an initial investment of $35k in student loans from my undergraduate degree and $96k in cash spent on my MBA.

What has been your worst investment?

I once started my own business.

While I was able to ultimately sell it, my overall hourly rate was much less than minimum wage. It was a great learning experience, though. However, the opportunity cost is hard to ignore.

What’s been your overall return?

Given my bias towards low-cost index funds, my returns are in line with the overall market.

However, since my divorce 5 years ago, my net worth has grown at a CAGR of 20% per year. This shows the power of a high savings rate: Even though the markets have been rough as of late, my overall net worth has increased every single year.

How often do you monitor/review your portfolio?

I admit that this is not ideal, but I look at my portfolio multiple times per day.

As an index investor, I know that I shouldn’t bother, but I find it interesting to look at the pre-market news and then see how it plays out during the day.

One of my goals after I retire is to wean myself to once per week. It is my hope that this will then eventually change to monthly and then quarterly.

NET WORTH

How did you accumulate your net worth?

Other than the $20k I received from my father when he passed away, I accumulated my net worth entirely on my own.

While I was fortunate in my career choice, I also worked hard to be the best person at my job in every company I have worked.

This, combined with finding great joy in a (mostly) minimalistic lifestyle, has led to the growth of my net worth.

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?

Ultimately, the most important part of the ESI model is Earn.

While there is no limit to earning, you can only reduce your expenses so much (plus, index investing is boring and out of your control…).

What road bumps did you face along the way to becoming a millionaire and how did you handle them?

The biggest one was getting divorced.

At the time, we had a joint net worth of $1.3 million. This was split in half and I instantly lost my second comma.

Regardless of the fact that this set my early retirement plans back several years, this was the right decision for my children and me. If anything, it focused my resolve to be a better father and be better at my job.

What are you currently doing to maintain/grow your net worth?

Through the end of this year, I’m continuing to work, max out my 401k contributions, and put the remainder of my earnings into my non-retirement accounts. This might be boring, but boring works!

Speaking of retirement, in the past three years, I have focused more on growing my non-retirement assets. Since I will be retiring several years before 59.5, I will be leveraging these funds to get me to the point when I can start withdrawing my retirement funds penalty free.

Do you have a target net worth you are trying to attain?

It would be nice to hit $2 million, but that is only because it is a round number. I am very comfortable that the net worth I have already accumulated (including Social Security) will support a very enjoyable lifestyle for the remainder of my lifetime.

While my projected retirement expenses of $80k will be 4.5% of my investable assets to start, this rate will go down to about 3.3% once Social Security kicks in at my FRA. Even if my benefits are reduced in the future, I doubt that they will be completely eliminated.

In a worst-case scenario, I could drop the $20k of annual travel and still have a very enjoyable life.

How old were you when you made your first million and have you had any significant behavior shifts since then?

The first time I hit a million was when I was 42. I was shooting for 40, but was happy with 42.

After my divorce, it wasn’t until I was 48 when I got that second comma back.

Other than learning how to run a single-parent household, nothing has really changed. I’m still the same boring, but consistent, saver and investor.

As I near retirement, I am slowly shifting some assets into income-producing funds. As they say, I’ve already won the game. So, it’s time to stop playing.

What money mistakes have you made along the way that others can learn from?

Other than getting divorced…

Fortunately, I don’t think I’ve made any egregious mistakes. I definitely could have optimized some things.

For example, when I started my own business, I had very low income for two years. I didn’t think about doing Roth conversions during those years. At the time, I remember being happy that I paid no taxes. Now, I wish I would have paid more taxes by doing a conversion or two.

What advice do you have for ESI Money readers on how to become wealthy?

At the core, the ESI model for becoming wealthy is simple (not necessarily easy, but simple): Increase your income, decrease your expenses, and invest the gap.

The only addition I would make to the model would be add a Time component: ESIT. The trick to making this model work is to be consistent over a (sometimes) long period of time. The duration of Time needed will depend on the size of your gap. However, if you follow the process for a long enough time, wealth is inevitable. After all, it is only math.

FUTURE

What are your plans for the future regarding lifestyle?

I am planning on retiring in January of 2024, after the annual bonuses have been paid.

I am planning on increasing my travel budget to $20k / year which should allow for three big trips per year and spending the winter in New Zealand (see below).

What are your retirement plans?

As I have gotten older, I have found that I don’t like the cold northeast winters like I used to.

I looked into spending 3 months in Florida (The Villages are nice!!), but even modest accommodations in Florida run $1k / week (or $12k for January – March). I then looked into geo arbitrage and found that very nice places can be had in New Zealand for half that price during those months.

Since I’m going to travel hack the cost of the flight to $0, I plan to spend $8k (which includes some car rentals, but not food / etc. which should roughly remain the same) to stay in New Zealand each winter. On top of this, I should easily save $300 / month on reduced utilities costs at my condo.

Other options I am considering include moving to Florida and purchasing a house outright with cash, living full-time in an RV for a couple of years, and a multi-year, around-the-world cruise.

Any of these options would decrease my overall spend. None of these should be necessary, but saving more is always nice.

From the financial side, I am considering the use of a 72t for the 5 years prior to turning 59.5 in lieu of performing Roth conversions. The reason for this move would be to maintain the size of my non-retirement accounts in case I decide to move to The Villages (like all the cool kids are doing these days) and need to pay cash for a home.

While this move may not be as tax efficient as converting that same amount into a Roth IRA, I think the additional tax may be worth it for the flexibility it provides. Also, the recent changes to calculation of the 72t maximum withdrawal amounts have made this approach much more viable.

Are there any issues in retirement that concern you? If so, how are you planning to address them?

The only concern I have right now is that I’m single. Given my focus on giving my children the best possible remainder of their childhood – while juggling a full-time job and running a household – I haven’t dated at all since my divorce.

Now that I’m mostly an empty nester, I’m starting to be open to the possibility of adding a female presence back into my life. (Hey, maybe we should start an ESI dating site!!) If I should be lucky enough to find a new partner, I don’t know how that may impact my planning. Hopefully, she’ll also be an ESI reader, so this won’t be an issue!

MISCELLANEOUS

How did you learn about finances and at what age did it “click”?

While I didn’t realize it while I was growing up, my family was lower-middle class. Neither of my parents had a college degree and the years that we came home from deer hunting empty handed were pretty challenging. Fortunately, the fishing was always good and we had a very large vegetable garden. I always thought of those as fun hobbies – in reality, they were necessary survival tactics.

Unfortunately, my parents only focused on the S of the ESI model. While their Earning capacity may have been limited, they never did any Investing. Their idea of Investing started and stopped at bank CDs.

Fortunately for me, my first job out of college was at a small software company that built financial services software. So, I was exposed to investing immediately after college and that put me on the right path. Since this was pre-internet, I credit this job with much of my success.

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?

• Your Money or Your Life by Vicki Robin and Joe Dominguez — If there were to be a bible of personal finance, I think this would be it. Having the right mindset about the role of money is required before wealth can be realized and this book does the best job I’ve seen in laying out how to think about money. I had the wonderful opportunity to spend a week with Vicki a few years back. While her views on wealth redistribution are a little far out there for my tastes, she is one of the nicest people you’ll ever meet.
• The Millionaire Next Door by Thomas Stanley — Growing up in a small farming community devoid of wealth, I had no idea what actual wealth looked like. The only view I had was Robin Leach’s “Lifestyles of the Rich and Famous.” This book was the first time that I learned what it took to truly be rich, instead of just looking rich.
• The New Century Family Money Book from Jonathon Pond — Since I didn’t have any personal finance background when I started my first job and this was pre-internet, I went to the book store to do some research. There weren’t many books to choose from in 1993, so I bought this one and still have it in my library today. In it, he covers all of the major financial decisions that one would face in a lifetime. While some of the content is now dated, the foundations are as solid as ever.

Do you give to charity? Why or why not? If you do, what percent of time/money do you give?

This is another area that I hope to improve on after I retire.

Through my company, I have setup a donor advised fund. They offer matching contributions to it similar to a 401k. I’ve put money into it each year to get the match, but haven’t done much with it. I hope to find a smaller charity where I could have an outsized impact with my donations of time and money.

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?

This is probably my biggest financial struggle: How can I balance setting up my children for success without ruining their drive to achieve it on their own?

So far, I think I’m doing ok with this. Both worked through high school and into college and are as frugal as me. Sometimes I think I was too good with my teachings as they won’t spend the money they do have when they really should. “So what if my phone screen is cracked, I can still make out most of it…”

To date, I have setup Roth IRAs for them and gift them the full amount that they can contribute each year. I plan to do this every year going forward. This way, it’s a gift that will really set them up financially, while not being something that they could waste (not that they would anyway).

I also plan to help them out throughout their lives when it could make a difference and not just with a really big sum when I die. At that point they’ll (hopefully!) be in their 60s or 70s and it won’t have any real impact on their lives.

Items on my list to help them with are first/last/deposit for their first apartments, matching payments on their student loans, down payments on first cars/houses, and family vacations. There should still be a sizable amount at the end that they could then pass onto their children.