Millionaire Interview 412

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.

It’s a long one so I’ll be breaking it into two posts to keep things manageable.

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 my lovely bride is 51. There are two glorious weeks each year when we have the same numerical age.

We have been married for 18-1/2 years. This is written from my perspective but it has been reviewed for accuracy, anonymity, and sanity.

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

We have two boys, 28 and 24. Both are living on their own and “off the payroll.”

Who’s doing the math there? Yes, we were both married previously. We each came in with one son, but they’re both “ours.”

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

We live in a suburb of a semi-major city in America’s heartland.

This is a moderate to low cost of living area.

What is your current net worth?

Including our house per standard methods, our net worth is $4.8M.

Just writing that number down blows my mind. It seems like just yesterday I said to myself, “With $5M, I’d be wealthy beyond my wildest dreams and would immediately stop working for ‘The Man.’” Funny how attitudes change.

I’ve read (perhaps on ESI money) that the typical goal is about 2x whatever one has. Those goal posts keep moving if you let them.

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?

Our assets are primarily in stocks – much is locked up in retirement plans, but once I realized that early retirement was a legitimate option we’ve worked to accumulate resources to bridge the gap from retirement to age 59-1/2.

• Tax sheltered: $3.2M, 21% of which is Roth, the rest is pre-tax.
• HSA: $93K
• Brokerage: $963K
• Cash: $160K
• Home equity: $371K is ours + $80K owned by the bank = $451K Zillow valuation

Our employers didn’t offer the Roth 401(k) option until 2015 (mine) and 2020 (wife). Fortunately, by the time that option was available we were already maxing out our contributions and the Roth option effectively raised that cap for us.

Sure, the number on the 401(k) website grows at the same rate either way, but dollars in the Roth column are much more valuable when we pull them out because Uncle Sam already got his cut.

I jumped into the high deductible health savings plan with the HSA option when it was first offered through my employer in 2008 because we were still young and bulletproof. I wish I had used it as an additional retirement savings vehicle back then, but it wasn’t until 2016 when that light bulb turned on.

I’m not sure if I was ahead of the curve, but now my strategy parallels the latest conventional wisdom: max out HSA contributions, pay health care expenses out of pocket and let investments grow within the HSA. I have many years of receipts so we can reimburse ourselves with a large chunk of that account at any time.

I write the last two paragraphs with the full benefit of hindsight and perhaps a little amnesia about scarcity in my early adult life. When I first entered the workforce in 1995, I didn’t contribute to my Roth IRA for a few years. I rationalized this by saying that I’m investing in my 401(k) with pre-tax money, and if tax rates stay the same, one would have mathematically identical spendable money in retirement for a given amount of foregone disposable income by either method.

That remains true (to the extent that the tax rate assumption is true). And precious few 20-somethings just out of college (myself included) feel like they have lots of money to save, so I should just be happy that I contributed enough to get the full employer match.

EARN

What is your job?

I am an engineer at a major defense contractor and my wife works part time as an HR professional at a different company.

I’m in a “lead” position, which is one step short of management (where overtime pay gets cut off). I chose this career path because it allows me to remain technical and avoid most of the drama associated with management duties. And until you move into the executive ranks, the pay is comparable. That’s a huge blessing – I have this option available without limiting my career progression.

What is your annual income?

Our combined W-2 income was $340k for 2023.

I’m curious if any ESI readers or interviewees have ever run these numbers, but I discovered something almost beyond belief. I keep records, and if I optimistically assume my wife’s income was the same as mine before we got married, our lifetime W-2 earnings are $5.1M. Considering we’ve paid $1.3M in federal taxes, Social Security, and Medicare…my head just exploded: our net worth is about the same as our lifetime earnings. Wow.

Right now, I’m thanking my 20-something self for making the decision to save.

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 graduated with a BS in engineering in 1993 into one of the worst job markets ever in the defense industry. Fortunately, I had grad school already lined up, and while 1995 wasn’t much better, the internship I had in 1992 helped me get my foot in the door at $37k per year. That felt like hitting the jackpot – even before noticing that most of my contemporaries were having trouble even getting interviews. I’ve had steady progression within the same company with occasional promotions to a current salary of $157k + 5%-8% bonus.

I never chased the money; I chased excellence and the money followed. My company offered a tuition reimbursement benefit, so I earned a second master’s by the time I had been employed for six years (don’t be too impressed – it felt like a diploma mill). This job provided an unending opportunity to learn, whether from formal internal training, mentorships, a challenging assignment, or just hanging out with smarter more experienced people. I’ve always been naturally curious in general and more specifically in love with our products, so learning was never a burden or a chore. Before I knew it, I was seen as a go-to guy by my peers.

I noticed a pattern, and I’m curious if other ESI readers have seen the same: Technical/STEM careers (potentially excluding IT) appear to start out with good pay, but salary growth is relatively slow and consistent. In contrast, working in the field generically described as “business” one starts with a significantly lower salary, but those professions have the potential for significant advancement in responsibility and pay if they prove themselves.

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

While I can’t complain, I don’t claim to have the secret to optimizing pay. I’m more about figuring out “the rules,” understanding what I can change and what I can’t and optimizing within those constraints. I’m a terrible poker player – my bluff shows right through, so I can’t imagine pounding on the boss’ desk demanding a raise or I’ll quit because I might be invited to exercise Choice B. And the big megacorporate structure is set up to limit the manager’s ability to make salary changes.

But on the flip side, I’m not an indentured servant – if I find a better gig, I can leave at any time. The trouble is, if I want to remain in the defense industry (where my skills and passions are well aligned) in this particular city, I have one choice for an employer. Given those constraints beyond my control, I’m very happy with the choices I’ve made.

My advancement was fast relative to my peers, and I attribute that to:

• Do your job and do it well. This includes impressing the *right* people, who are not necessarily managers.
• Be the guy the managers know they can give a job to and know it will be done right.
• Never say “that’s not my job.”
• Be a low-maintenance employee. I had no idea how big this was until some of my peers chose to take the management path. The amount of time they spend on office drama and other things I would not consider “mission critical” is ridiculous.
• Get along well with your coworkers. I’m a semi-introvert (say, 4 on a scale of 10), but in a room full of engineers I’m probably a 7. But when you honestly believe that you work with some of the smartest people on the planet, it’s easy to treat everybody as you would like to be treated yourself.

What’s your work-life balance look like?

When my wife went part time, we were already eyeing early retirement and I got a bit jealous of her freedom on Fridays. So, I started to use the company policies to my advantage. We earn PTO on a weekly basis and have a cap on how much we can save. In my early days, I always envied the old guys who had to periodically take a day off or they’d lose it.

Over the years, the company instituted flexible schedules so I could work a little extra some days and get a day off without withdrawing 8 hours from my time-off bank, then they merged what was formerly “sick time” with “vacation time” into one PTO bucket. Little by little, I edged my way toward that cap (while still taking time for family vacations) until now where my PTO bucket is nearly full (and now I’m one those old guys). I rearranged my weekly schedule to allow me to be off most Fridays with my wife and still have PTO for special occasions. I’m an engineer – we’re optimizers. That’s what we do.

It took a little while for the pattern to become established, but now it’s just understood by our coworkers that any e-mail they send on Friday won’t get answered until Monday. I get a little bit of snark in the office from coworkers and my boss’s boss, but most will smile and admit their jealousy. And I continue to receive top ratings on my performance reviews.

With that schedule, for both of us it means we have an intense Monday – Thursday with regular 3-day weekends. I have the benefit of leaving my work at the office (actually it’s a requirement), but my wife will stew about work things over the weekend while I do my best to distract her. Her going part time reduced the off-hours work contacts to nearly zero. We made the situation we wanted, and we couldn’t be happier.

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?

Aside from investment income, no. I do a little teaching at a local university with a retired coworker, but it’s a minimal time commitment and if I were doing it for the money I’d go hungry.

We used to have rental property, but by an amazing stroke of luck decided to get out of that business right before the world lost its mind over a virus: we sold one in December 2019 and the other in January 2020. It was a very profitable 9-year run.

Both were single-family houses; one was where we used to live. If one was occupied, it almost paid the mortgage for both units, so I didn’t have to be a real estate genius to make that business work.

It’s hard to make a good comparison on the one we lived in, but the other we purchased specifically for rental in 2012. If you consider how much money we brought to closing in 2012 and how much we came away with when we sold in 2019, that alone was on par with a historic bull market in the S&P 500. And along the way we had the tax benefits of depreciation and regularly pulled money out of the LLC.

We managed it ourselves since we lived nearby, and I didn’t want to pay a management company 12% off the top to make a few phone calls for us. The business was 90% on autopilot until it wasn’t, at which time it required immediate focus (garage door, air conditioner, garbage disposal, etc.). I’m glad we did it, and I’m glad we got out when we did.

One benefit of the endeavor is that it kept our money tied up in a good investment. One can never know for sure, but I worry that if we had just sold the house when we moved to another, the accumulated principal on the first would have just evaporated. That rental adventure was key to early retirement since I was investing the proceeds of the sales into the market as it was in the COVID freefall. We were about a month early with most of it, but managed to avoid second-guessing ourselves as everything was going down. In 2020, we invested about $275K from the sales.

SAVE

What is your annual spending?

We started really tracking our spending in 2021 to answer the obvious question: “How much will we need if we want to retire early?” And for such a simple question, it’s not a very straightforward answer.

Excluding income taxes, I’d say about $120K per year. I read ESI millionaire interviews and wonder how we can spend so much when others seem to live a rather comfortable and comparable lifestyle on ~$80K per year. So, what can we eliminate? We pay an extra $4K a year for concierge medical services and my general aviation habit cost $8K last year. When we pay off the house and eliminate that line item (and our two noted luxuries), we’re down to $92K. Which still seems a bit rich but at least in the same ballpark.

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

• Mortgage principal & interest: $16K
• Utilities: $7K
• Home improvement: $20K
• Home maintenance: $3K
• Insurance: $5K
• Groceries: $10K
• Eating out: $7K
• Gas / Auto maintenance: $7K
• Medical (excluding premiums): $9K
• Misc (housewares, clothing, etc.): $21K
• Fitness: $3K
• Travel: $3K
• Charity: $4K
• Flying: $8K

Home improvement is included here because there will always be something. The big item in 2023 was a new deck. But eventually it will be a roof. Or a master bathroom remodel. We can’t hand-wave these away as one-off expenses if they come regularly.

Another major expense is taxes, which are excluded from the above list because we are planning for it separately when we exit the W-2 world. We had $104K withheld from our paychecks in 2023 for federal, Social Security, Medicare, and state … plus paid $11K in quarterly estimated tax payments (and came pretty close to being even on the 1040s). We’re electing to take some tax hits now while the capital gains rates are low as we consolidate our investments with Vanguard, but had to spread it out over a few years to keep it manageable.

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

No. Any large expenditures are discussed in advance, and having an early retirement goal in mind helps keep things under control. The dynamic usually involves my wife lovingly reminding me that I don’t have to be such a tightwad.

Maybe I have a strange view of spending, but I don’t chafe at all at spending extra for quality things we will use and have for a long time. For instance, we paid almost double the cost of a basic dishwasher to install a premium one when our old one died, but it doesn’t sound like there’s a dump truck in our kitchen. And many years later, that couple hundred dollars extra is forgotten. On the other hand, the drip-drip-drip of small expenditures where you have nothing to show for it at the end of the day offends my tightwad sensibilities.

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

I started saving 8% of my salary into a traditional 401(k) when I started working out of college. That was enough to get the maximum employer match and about as much as I could spare at the time. After getting divorced and during a long stretch of bountiful overtime, I pushed the throttle forward to hit the IRS maximum and haven’t looked back.

Now we both max out the Roth 401(k) plans and health savings accounts at work and regularly put surplus cash into our “retire early” investment fund. All in, it’s about 25% of our W-2 income. In contrast, the tax man got over 30% (IRS, Social Security, Medicare, dividends & capital gains, etc.)

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

The same thing every other ESI interviewee says: Pay yourself first. If it never shows up in your checking account, you can’t spend it. And if you get a bit fat in that account, transfer it to an investment before it starts burning a hole in your pocket. Before I had a separate investment or money market account, I took money off the main page of my checkbook and had a separate ledger on the back page (an account within the account) to avoid seeing large numbers and feeling too rich.

Get that 401(k) started on day 1. If you understand the math of exponential curves, you want to get that flat, boring, low-growth tail on the left side of the curve behind you as soon as possible. It’s going to take ~20 years before you really start to see it really take off. You don’t have to max it out from day 1 of employment. At least get the whole company match. Then every year at raise time, increase your contribution a percent or two.

If you make excuses, all you’ll have in 20 years is excuses.

What’s your best tip for spending less money?

Keep your eyes on the prize (early retirement, in our case).

Balancing this against enjoying life every now and then is the perennial dilemma. I look at some of the younger folks on my team at work and wonder if they know what road they’re choosing (without knowing the details of their circumstances, of course). Some seem to have chosen to enjoy life while they’re young.

In some ways, I can’t say they’re wrong; every day is a gift, and you don’t know when it will be your last. But I have friends in their 60s and 70s that can drop me like a bad habit when we’re mountain biking, so it’s clear that youth doesn’t end in your 30s.

My goal is to remain active enough to enjoy all the delayed gratification.

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

I’ve been mesmerized by anything with wings since before I went to kindergarten. My dad took me up in a little Cherokee 140 and I fell for it hook, line, and sinker, and then jumped into the boat. I got my glider rating in college, then my powered plane rating after getting divorced (the flying may or may not have been cheaper than therapy).

The typical story is: a (non-professional) pilot gets a new rating, takes his friends up for rides until he runs out of money, then some years later after saving the money takes more lessons to get a new rating and repeats the process. I went 15 years without flying as I prioritized family life, but with the kids off the payroll my wife finally convinced me to get back in the game. Now I’m working on my commercial rating.

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Pretty interesting so far, huh?

To read the rest of the story, see Millionaire Interview 412, Part 2.