Millionaire Interview Update 52

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 December.

The update is long and detailed (which I LOVE!), so I’ll be posting it in two parts. Today, we’ll just get to the overview (believe it or not.)

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

OVERVIEW

How old are you?

It is now late December 2023, and I’ve been working on this update for over 3 months.

When you read this in early 2024, I will have turned 58 in January 2024, and my wife will be 57 in February 2024.

My goal is to retire in January of 2026 just before I turn 60 and be over 59 ½ to have penalty-free access to my 401k funds.

My 2 year countdown clock is starting!

Do you have kids?

My son turns 22 in January 2024 and my daughter turns 18 in May 2024.

It’s hard to believe they are now adults (or will be on her birthday next year), as both still live at home full-time. However, my daughter will be attending a 4-year college on campus, hopefully at a University of California school (which are all very hard to get into with most needing over a 4.0 GPA – as AP classes count on a 5.0 scale) in the Fall of 2024.

My son is still attending Community College and working part-time at a local movie theater for the last two years. He is on his way to savings as he has a Roth 401K of $10K and over $55K in savings from his part-time jobs over the last 4 years.

Hopefully I can teach them some personal finance wisdom. Probably not, but at least I’m trying.

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

We still live in Southern California. We paid off our home in July 2020 after 23 years of paying a mortgage that was refinanced at least 4 times. We have lived in the same house for 26 years.

People currently complain about interest rates of 7.5% to 8.0% on homes today, but our original mortgage rate was 8.75% for 80% of the loan and 10.5% for a second mortgage concurrent in 1997. However, I fully understand that housing prices are much higher today than inflation increased for the first time in over 20 years, which makes it very difficult for first time homeowners to get into a new home today in Southern California. We only had that original mortgage loan for a year and a half before we refinanced to a conventional 30-year loan, but our last loan was a 10-year loan at 3.25%.

It was a life-altering psychological benefit to have paid off the home, as it was a huge financial burden that lifted a large weight off of our shoulders and one of my goals before I retire. It was a lifelong goal, to have a home and asset fully paid off by paying $3,000 to 4,000 per month for 23 years (including taxes and insurance) which totals about $1M in monthly payments over 23 years, or about $42K per year. I am fortunate that my home is worth more than I paid for it, as well as more than the money we paid on the loans to own it.

However, with a family of four, there is always another expense, as we more or less continued to have a slightly smaller monthly payment for my daughter’s private tuition at her Catholic College Preparatory High School, but it has been really nice knowing we don’t have to worry about tuition plus a house mortgage costs (other than property taxes and utilities).

We are fortunate to have purchased a house in 1997, as there is no way we could afford to live 2 miles from the beach today or even purchased our home five years later.

One of the first things we did after we paid off the house, was we finally got central air conditioning (versus putting in window units each summer), as you only need AC for 3-4 weeks a year in Southern California close to the beach. I guess my “delayed gratification” of having AC lasted 23 years. There is some truth to purchasing a home in California, that you can check in at any time, but you can never leave as we could not afford to move to a comparable home or area.

Since we paid off the mortgage, we have been increasing our savings and maximizing and diversifying all of our investments the last two years.

What was your original Millionaire Interview on ESI Money?

We were Millionaire Interview 150 published pre-COVID on September 30, 2019, that I wrote in June of 2019 when we had a net worth of about $2.5M.

At the time I thought it was amazing, but I kept on watching my pennies and pinching myself. I was concerned at the time that I had too much of my net worth in the value of my home. Now I feel that $5.0M would be a nice round number that should be attainable in the 2 remaining working years along with conservative returns (nothing like the last 4 years and those returns are most likely unsustainable).

I was concerned that I had over 50% of my wealth tied up in my home value and my cash and investment were “only” a little over $1.1M plus as my home appreciation had about $1.4M. I have spent the last three years trying to build up my investments in my 401(k)s, Roth IRAs, I-Bonds, cash and to change my new money investment mix from pre-tax to post-tax Roth holdings as I had over 90% of my investment in pre-tax vehicles.

Writing the MI-150 interview got me over the theoretical investing hurdle of just saving 15% in my pre-tax 401(k), to actually do real wealth planning with a purpose and trying to determine when I could retire early. There is nothing like writing something down to make it happen. I always said I would get to investing goals in the future, but the future is now in finally getting around to what you should have been doing all along.

Thinking about finances, and finally acting on those thoughts are two very different things. Most people don’t get around to “the doing.”

Whenever I talk about finances with my wife, I can see her eye’s glaze over, and she says, you take care of it as that is your job. She doesn’t even want to discuss the pro’s and con’s of certain investment changes or future goals.

What I did after I wrote my MI-150 interview, was I consolidated all of our old accounts into one main account at Fidelity, with the exception of our current employers (as you can’t consolidate those). This, along with tracking our net worth on a monthly basis has been a game changer.

It has been fun seeing the numbers grow (as well as decrease in 2022) each month, but on a yearly basis, the accounts keep on growing rapidly. I will admit that 2022 was a difficult year, as we lost 20% along with the rest of the market. However, dollar cost averages, I increased my in savings to 30% with 401(k) for myself and my wife, 529 accounts, HSAs, company stock purchase at a 5% discount.

Main issue is to stay in the game and to stay fully invested.

Is there anything else we should know about you?

I have been employed as a Senior Vice President for a large insurance broker handling medical malpractice / professional liability claims advocacy for large hospital systems west of the Mississippi. I was promoted to a “Leader’ in 2020 and now I manage / supervise 9 other claim advocates. It was not worth the 5% raise by the way, but I am now a “middle manager” decision maker.

In the last three years, both of my parents died, as well as my father-in-law. I currently have an 83-year-old mother-in-law who will be 84 in early 2024. With both of my parents dying, it really had made me reassess and reinforced retiring early at the age 60. I am currently on my 2-year retirement countdown, and hopefully have 25 years of retirement.

As they say the 60’s are the go-go years, the 70s are the slow-go years, and the 80s are the no-go years. Having watched my parents’ health deteriorate made me value my future free time, as the last 7 years for my parents, they both had poor health and their quality of life kept worsening.

The other item that I have recently gone through is inheritance issues over the last two years. I guess it is like what they tell you before your first child, that you will not really be able to explain it to someone else until you experience it for yourself firsthand.

For the most part, it has gone smoothly, but as my mother died 3.5 years ago and my father died 2 years ago, the estate still is not yet fully closed as we recently found a $30K Roth account (to be divided $10K each) not with the other accounts or estate papers until a few months ago.

Not much happened when my Mom died as everything went to my Dad. After both parents died, there were a lot of moving parts in having to sell their house or get a step-up cost basis on their house; however it was my parents’ wishes that my single sister who lived close to them that she would get their house as it was larger and nicer than her current house a block away. My sister had to sell her house in order to move into my parent’s house.

In Minnesota where they lived, no taxes were owed on a house when the owners die, but you need to get an estimate on the market cost on the date the last person died. You only owe taxes on any future market gains after they die. For our situation, we took the $360K estimate and divided it by three so each of us would receive $120K. My one sister sold her home for $300K and then paid my other sister and me $120K each so each of us received $120K of the home’s value. She now has my parents’ house without a mortgage and is the owner of their house. We used the estate attorney for this transaction.

The other issue was the $420K in investments mostly in their IRA / 401(k)’s / annuities. There has been a new law recently passed that any inherited IRA or other retirement accounts need to be cashed out within 10 years of the last person’s death. However, there was a lot of ambiguity as my father was 79 when he died he was already doing the required minimum distributions (RMDs).

I had to set up an IRA Beneficiary Distribution Account (IRA BDA) that is often referred to as an “inherited IRA.” It’s one that you receive as a beneficiary from another person, and IRA rules dictate what you can do with an IRA BDA. For the last two years, I have taken $14K out each year and had to take 33% for taxes. However, given how the market has decreased and then increased for two years, the balance is still the same at $140K two years later.

I am going to maintain this small amount each year until after I retire when I will have more of a need for the cash flow and will fully distribute the funds in the next 8 years when my income and taxes are less.

Here is what Kiplinger explains regarding this issue:

Many IRAs inherited after 2019 are subject to the 10-year cleanout rule. The IRA funds must be distributed to beneficiaries within 10 years of the owner’s death. There are some exceptions for beneficiaries who are surviving spouses or minor children of the account owner, or beneficiaries who are chronically ill, disabled, or not more than 10 years younger than the deceased IRA owner. For minor children, the exception applies only until the child reaches age 21. The rule for spouses didn’t change. Unlike other beneficiaries, a surviving spouse still has the option to take an inherited IRA as his or her 99999333own. Also, the old rules still apply for people who inherited IRAs before 2020, so that they can continue to take advantage of the stretch IRA strategy.

How does the 10-year cleanout rule work? Must amounts be paid out each year or can the beneficiary wait until year 10 to take out all the money? This question is sowing lots of confusion. The IRS’s original interpretation of the rule led many tax and retirement professionals to believe that it doesn’t mean that annual payouts to beneficiaries are required. It was thought that beneficiaries could wait until year 10 to take out all the money, get annual payouts or skip years, provided that the IRA is fully depleted within 10 years after the original owner’s death.

The IRS issued proposed regulations in March 2022 that muddied the waters. Under the regulations, the 10-year cleanout rule differs based on whether the original IRA owner dies before or after his or her first beginning date for taking RMDs. If he or she died before, then the beneficiaries needn’t take distributions from the IRA each year. Instead, these beneficiaries can take annual distributions, they can wait until year 10 to take out all the money, or they can skip years, provided the IRA is fully depleted within 10 years. Tax and retirement professionals are fine with this provision. It’s the following that surprised them. If the deceased IRA owner died after the RMD start date, then annual RMDs must be paid to the beneficiary in years 1 through 9, with the rest of the account fully depleted by year 10. In this situation, the beneficiary would figure annual RMDs based on his or her life. So the younger the beneficiary, the smaller the RMD amounts. Of course, the beneficiary can take more than the RMD amount each year and can clean out the account before year 10 if he or she desires.

The IRS’s proposal on the 10-year cleanout rule, which has not yet been finalized, has received lots of criticism. Practitioners want the 10-year rule to apply on a consistent basis, without regard to whether the IRA owner dies before or after the RMD beginning date.

Meanwhile, the IRS is giving relief. Last October the IRS said that beneficiaries of IRAs inherited after 2019, for which the deceased owner was already subject to RMDs, won’t be penalized for not taking distributions in 2021 or 2022. The IRS just extended that relief for such beneficiaries for 2023.

The two takeaways I took from living through this, is that a Roth investment, cash and step-up cost basis on a house are worth one-third more than an inherited IRA/401(k). Also getting money out of an annuity after they die is also a difficult task with many hurdles and obstacles to get the money out of the old accounts as these institutions do not seem to want to give up the money easily with lots of hoops to jump through.

In all, I inherited about $260K from my folks who never had any money when I was growing up and made me pay for my own college. They ended up with an estate value of about $780K. Making me pay for college was the start of my personal finance journey / education. No better education than living it.

I guess I learned from them to pay myself first, live within my means, and save with my employer-matched 401(k), and to own a home to build wealth. I got rich slowly over the last 34 years since I graduated from college. It is pretty boring, by getting a college degree and an MBA while working full time, steadily building our retirement accounts and purchasing a home at the right time in the right market.

I know some people think the American dream is dead but that is also what I thought when I graduated college in 1988 and earned $14K in 1989. Get an education. Get a good job. Buy a home. Save in a workplace retirement plan. Get promoted. Build wealth over time. Hard to believe that the Investopedia’s top term of 2023 is “American Dream.” 

Here is what Investopedia states:

“The term “American Dream” originated in the depths of the Great Depression in 1931, and was coined by writer James Truslow Adams in his book Epic of America. He described it as “that dream of a land in which life should be better and richer and fuller for everyone, with opportunity for each according to ability or achievement.” It’s typically used to refer to a collection of milestones like buying a home and car, getting married, having kids, and economically prospering. Yet the economic dynamics of the past year made most of those accomplishments too expensive to achieve for many. Saving, owning a home, raising a child, and building wealth were severely impacted in 2023 by persistent inflation, a spike in mortgage rates, and ever-rising home prices, putting the modern day American Dream out of reach for millions of Americans.

The American Dream now costs $3,455,305—that’s the estimated lifetime cost of common milestones including marriage, two children, homes, healthcare, cars, and education.”

I thought the $3.4M in earnings, home appreciation, 529 college funds, and retirement savings to be somewhat high. Then again, I must have been successful, as when I add up all of my gross wages over the last 40 years since high school, this totals $3.7M, and does not include my wife’s wages which I’m sure are another $1.5M (she took off 10 year to raise the kids during her higher earning years).

I have to admit, reading a lot of these millionaire interviews, and seeing some very, very high salaries of people in their 30’s earning over $500K plus per year does make me a little envious. I was 40 before I made over $100k.

As Charlie Munger stated, “the world is not driven by greed, it’s driven by envy,” and “avoiding envy is one of the ‘simple’ secrets to living a long and happy life.” Everyone has their path to building wealth, and mine was to get there slowly by being consistent, and growing my salary slowly over 30 plus years.

That was the benefit of only having essentially 4 employers in 34 years. I learned that through many years of striving that happiness is not having what you want, but it is wanting what you have. If only my wife would let me get a small 20 foot motor boat. I still have to strive for something in retirement.

My father never earned over $50K per year when he retired in 2002, at age 60, and died at age 79. My mom worked as a Nurse part-time until age 69, and she died at age 77 after overcoming stage IV cancer at age 57. I guess I got my frugality from them, as they saved and gave away more than they spent on themselves.

My dad taught me how to save, be frugal, along with the compounding principle to save steady, safe often and stick with the boring index funds course. I recall remembering my Dad and my Uncle taught me the magic of compound interest and “the rule of 72” and how many years it will take to double an investment.

Again from Investopedia The Rule of 72: Definition, Usefulness, and How to Use It:

The Rule of 72 is a simple financial concept that helps estimate the time it takes for an investment to double based on a fixed annual rate of return. Here’s how it works: 1) Divide 72 by the annual interest rate (expressed as a percentage). 2) The result is the approximate number of years it will take for your investment to double.

For example: If you have an investment with an annual interest rate of 8%, using the Rule of 72: 72 ÷ 8 = 9, or it would take approximately 9 years for your investment to double.

The Rule of 72 applies to compounded interest rates and is reasonably accurate for interest rates that fall in the range of 6% and 10%.

Keep in mind that this rule provides an approximation and assumes compound interest. It’s a handy mental shortcut for assessing the growth potential of an investment over time. I always wanted to be like Warren Buffet and experience the snowball of compound interest. I guess in the last 3.5 years I have experienced the snowball of compound interest. If you just want to accept the 5% interest the banks are paying now, it will take you 14.4 years to double your money.

My wife had another surprise as we came across “found money” from when she worked for UC Regents for 15 years. It was not really found money, but money she did not know was coming her way. We always received her 403(b) statements in the mail quarterly of the money she contributed while she worked there. She never paid much attention and she thought she would only get her 403(b) get as she quit working for them full-time 17 years ago when my daughter was born. She never received any pension documentation in the mail when she left (which I find hard to believe, but I never saw any and she always gave me those documents).

One day this summer we received an email from UC Regents that if we did not sign into this one account, the account would be deactivated. Long story short, now that my wife is over age 55, she is now eligible for a UC Regents Pension. This was a surprise to her as she heard about it, but was not sure if she would qualify for one as she left 17 years ago and it was never fully explained to her.

After a lot of phone calls and review of the UC pension web pages, she qualifies for a lump sum payout of $255K UCRP + 20K in another fund that must be liquidated with a pension payout for a total of $275K. We have already made the decision to take the lump sum instead of the $1,300/month monthly pension payment. The break even is 17 years for the monthly cost to equal $269K (now worth $275K) and I believe the income can continue to grow and we can easily receive profits above $15K per year given our prior investment return history.

Between the pension and the inheritance, we had had two unexpected windfalls in the last two years with $530K in additional retirement funds that were not included in the June 2019 M150 report. The other future issue is that when my mother-in-law passes, most likely in the next ten years, my wife and her two siblings will most likely have an inheritance that is much larger than my parents as she resides in California with higher housing prices and her folks had a higher income than my folks.

I was not looking for any inheritance from my folks and did not put this into my calculations 3 years ago. Nor do I expect a sizable inheritance from my in-law’s estate, but it most likely will be a one-time windfall that is expected to add to our net worth in the future.

As I keep on reading in the press, in the next ten years will have the greatest generational wealth transfer in history, as the greatest generation/baby boomers are set to pass more than $68 trillion onto their children.

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That’s it for today! Great start, huh?

To read the rest of the post, see Millionaire Interview Update 52, Part 2.