Millionaire Interview Update 34

Today I have an update for you from a previous millionaire interview.

I’m letting three years pass from the initial interviews to the updates, so if you’ve been interviewed, I’ll be in touch. 😉

This update was submitted in February.

As usual, my questions are in bold italics and their responses follow…

OVERVIEW

How old are you?

I am 65 years old and currently unattached.

I married in 1980 and have been divorced and living on my own since 1990.

Do you have kids?

I have one 39 years old daughter. She graduated from a highly ranked university and earned a law degree from a top law school and works as a Vice-President of legal affairs at a major studio. She is earning a higher salary than daddy ever dreamed of.

She is brilliant, hardworking, and fun-loving, but has little interest in managing her finances. This is where I step in, encouraging her to maximize IRA, 401k and ESOP contributions, and looking after her investments.

She became a millionaire at 35 — I should get her to do a Millionaire Interview.

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

I live in a large California city in a smallish house we bought in 1983, prior to divorcing.

What was your original Millionaire Interview on ESI Money?

I am Millionaire Interview 169. Go read that post — it’s guaranteed for a chuckle or two.

I wrote it in October 2019, published in January 2020, right before Covid hit, oy!

Is there anything else we should know about you?

I wrote ESI Retirement Interview 41.

My family immigrated to the United States in 1973 from USSR. Our family of 6 was allowed to leave the country with $600, a few pieces of jewelry, and some personal possessions.

I earned Master’s degrees in engineering and business, and started my professional carrier in 1980 as an engineer.

NET WORTH

What is your current net worth and how is that different than your original interview?

My current net worth is $7,727K. When I wrote the original interview my net worth was $6,076K.

If I had to liquidate everything at once today, I estimate I would end up with approximately $5.4M after taxes.

I have no mortgage (paid off last century) or other debt besides credit card balances, which I pay off every month, this has not changed from the original interview.

The above numbers include my investment portfolio and estimated value of my home. The numbers do not include car, household items, or the net present value of my pension nor Social Security.

If I include present values of pension and Social Security, total net worth would increase from $7.3M to $8.9M in the 3 years since the original interview, reaching a peak of $9.8M in November 2021 (so close to an eight-digit number!)

What happened along the way to make these changes?

The growth in my net worth is mostly in my equity holdings which benefited from the secular bull market we enjoyed since the Global Financial Crisis in 2009.

Along the way my investment portfolio saw two bear markets with paper losses of over $2M in each.

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

I am sticking with my aggressive asset allocation for now, but starting to consider moving some funds into real estate, specifically real estate syndications.

At this stage of my life, I am not focused on growing my net worth for myself, I have enough. I am interested in developing multi-generational wealth and look beyond my lifetime as an investment horizon.

EARN

What is your job?

I retired in 2018 from a supply chain program management position at a major aerospace company. I was a senior manager when I retired.

Overall, I have been working for the same company for over 34 years since graduating from graduate school, with a 4-year break spent pursuing an entrepreneurial opportunity in computer accessory area.

What is your annual income?

This year I will receive $32K from a pension and an estimated $150K in dividends and interest from my investments, $40K in after-tax accounts and $110K in tax deferred and tax free accounts.

The most I ever earned from employment was $235K in 2015.

How has this changed since your last interview?

Pension is slightly lower due to an expired Social Security offset provision at age 65.

This will be offset by reimbursement of up to $2K for medical insurance premiums, including Medicare IRMAA starting this year.

Dividends are about the same.

Have you added, grown, or lost any additional sources of income besides your career?

I stopped doing consulting work.

Redistribution of some investment assets (described below) should result in slightly higher dividends in the future.

I still have not started drawing my Social Security. If I filed today (February 2023), my monthly payments would be $3,286. If wait to file until age 70 the monthly payments will be $4,625 plus COLA.

I am inclined to wait to file as a form of longevity insurance, but truth be told, this decision will not have a significant effect on my finances.

SAVE

What is your annual spending and how has it changed since your interview?

At the time of my original interview my annual spending was $63K. Since then, my spending was as follows:

What happened along the way to make these changes?

My core spending remained fairly consistent at around $25K a year, remember no mortgage or car payments. The variations in annual spending are mostly due to timing of income tax payments on Roth IRA conversions.

Since I retired in 2018, I was covered by former employer’s retiree medical plan which was heavily subsidized and cost me on average $140 a month. Starting this year, I am covered by Medicare and paying Medicare premiums of $600 a month, including IRMAA.

I expect my spending this year will increase substantially due to Medicare, boosted gifting, planned home entertainment purchases, resumed travel and possibly a replacement of my 20-year-old car (somebody please make an electric sports car).

So far, I have not removed any funds from my retirement accounts and only raided my after-tax brokerage account to pay for Roth conversion income taxes.

INVEST

What are your current investments and how have they changed over the years?

My investments since the original interview are as follows:

My investment returns since the original interview have been as follows:

The compound annual growth rate (CAGR) since 1988, when I started tracking my investments, is 8.3%, internal rate of return (IRR) is 7.1%, and average return is 9.7%.

What happened along the way to make these changes?

Every year since I retired in 2018, I have been converting traditional IRA funds into Roth IRA to fill the 24% federal tax bracket. To date I converted just over $669K, which is reflected in the growth of my Roth IRAs balances and relative stagnation of traditional IRA balance. Since the conversions are taxable events, I paid $228K in federal and state taxes out of the after-tax brokerage account.

If I don’t do these conversions now, between dividends, pension, Social Security and Required Minimum Distributions (RMDs) from IRA, my federal tax bracket will be 38.8% (or higher if government increase tax rates) when I turn 73.

My net worth reached a peak value of $8,598K in November 2021 thanks to a raging bull market. Since then, my investments saw a decline of $2,140K through October 2022; my current balance reflects a recovery of 69% since that low point.

In 2020 during the Covid bear market, my balances were down $2,113K from peak to trough, but recovered quickly the same year, even managing a 10.4% return for that year. This level of volatility is due to the fact that vast majority of my investments are in equity index funds, which makes for quite a rollercoaster ride during turbulent times with multiple daily 6 figures swings and annual 7 figures swings in portfolio values.

The following compares my equity investments by asset class when I wrote the original interview in October 2019 to now (January 2023):

In 2019 equities were about 98% of total portfolio with remaining 2% in a Money Market Fund. At that time, I said: “This is a very aggressive portfolio, and I will have to do something more conservative when I grow up…maybe.” Today, equities are 99.9% of total portfolio; I guess I haven’t grown, even regressed a bit.

The main difference from 3 years ago is that I abandoned the Dual Momentum strategy I used for the lump sum pension distribution, which was invested in a S&P 500 index fund at the time of the original interview, and redistributed the funds among the other asset classes shown above. If I would have followed the momentum strategy during the Covid bear market in 2020, I would have gotten out of equities too late and got back in also late, costing me a few hundreds of thousand dollars. Besides, every first market day of the month when the strategy resets, caused me a great deal of stress, which I can do without.

My current investment approach closely follows Paul Merriman’s Aggressive Ultimate Buy and Hold Strategy. In hindsight, I probably would have been better off just holding a S&P 500 index fund or a total US market index fund, since factor investing has not worked very well the last decade or so, and US equities soundly beat internationals. Still, I am counting on reversion to the mean to correct for this underperformance, as often happened in the past.

MISCELLANEOUS

What other financial challenges or opportunities have you faced since your last interview?

I have not faced any other major financial challenges since the original interview, besides surviving two bear markets with drawdowns of over $2M in each.

Opportunities, on the other hand are around every corner: crypto coins, cannabis stocks, meme stocks, private equity, ARK, NFTs and countless other innovations can turn your FOMO level to “11”. Just watching gigantic fortunes being made overnight makes your head spin; staying the course is getting harder every year. Market volatility the last few years does not help either.

I managed to keep my portfolio mostly intact except for a few tweaks.

Overall, what’s better and what’s worse since your last interview?

My financial position is better, and so is my social life and my poker game.

My fitness level is about the same, however minor health issues keep creeping in, the “gifts” of growing older.

I am more worried about being on my own as I get older, studies show that single men don’t live as long as married men. They probably mean happily married men. I bet for unhappily married men life just seems to be longer. 🙂

What are your plans for the future?

Continue to enjoy retired life, travel more, date more (hopefully find a mate), keep an eye on my investments, possibly downsize to a condo closer to city center to be closer to family and to take better advantage of entertainment and cultural venues, and to reduce maintenance required in a house.

Now that Covid is subsiding, I will look into volunteering opportunities, including a local automotive museum and immigrant organizations.

Another area that could use improvement is transition from saver to spender; it is still hard for me to spend my savings after so many years of diligently growing my nest egg. I also find that the older I get the less happiness I derive from material possessions. I used to get excited getting the latest electronic gear, now I get annoyed that manufacturers stop upgrading operating systems on my devices by practicing forced obsolescence.

Given that you have a bit more wisdom and experience, what advice do you have these days for ESI Money readers?

ESI Money has conducted 350 and counting millionaire interviews. Each is unique in how to reach millionaire status and keep your net worth growing. In my case it took good education, a decent earnings history, prodigious savings and aggressive investment strategy to achieve my level of wealth. Others have done it through real estate investments, very high salaries, businesses, hedge funds, inheritances or a combination of these. So far nobody admitted to stealing, collecting ransoms or finding a buried treasure. 🙂

Find your niche that you enjoy doing while having potential for enrichment and dive into it with both feet. Set your goals high, never stop learning, network, value people, and give back in terms of your knowledge, time, and if you can afford funds.

If none of this works, find a wealthy spouse. 🙂

When planning for retirement, pay as much attention, if not more, to non-financial aspects, than finances. Retiring to something, rather than from something will make the transition go much smoother.

The earlier one learns how to invest and puts it to practice, the longer compounding will work its magic, and increase probability of building a successful financial life. Good investing is usually long term and boring, such as buying and holding index funds, or investing real estate.

For every highly publicized get rich quick story, there are countless untold get broke quick stories.