Millionaire Interview Update 65, Part 2

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 November.

It’s a long one (which I love!) so I’m breaking it into two separate posts. If you missed part one, you can catch up by reading Millionaire Interview Update 65.

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

SAVE

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

We spend $90K-$150K per year on ourselves, depending on how much time we make for travel. That’s been consistent over the last three years.

We continue to gift our daughter, son-in-law, and granddaughter (the annual exclusion amount) and we donate to charity (1% of our net worth per year). That’s in addition to our annual spending, and we’re intentionally depleting our investments.

Gifting our third house to our daughter & son-in-law boosted our 2024 spending by a value of $1.6M, but we don’t expect to do that again. We’re aggressively passing along our wealth as their inheritance while we’re all still alive to enjoy sharing it.

What happened along the way to make these changes?

As we say in Hawaii: it’s all good.

We intentionally bought our third house for our daughter & son-in-law just before I drafted my Millionaire Interview #248. (I finished writing it in that house’s kitchen.)

We all knew that the property (right up the street from our home) would be a great way to stay present in our granddaughter’s life. Our daughter & son-in-law visited for the first time in late 2020, and our baby granddaughter took her first steps there.

In 2022, as we discussed how to pass on our third house, we also developed a spend-down plan for the rest of this decade. I’ll outline that plan in the “Miscellaneous” section.

INVEST

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

In the 1980s-90s we made the classic investment mistakes: actively managed mutual funds, chasing the hot managers, paying sales charges of 2%, and expecting to beat the markets despite our high expense ratios.

Our high savings rate (and an aggressive asset allocation of 100% equities) made up for our blissfully ignorant mistakes.

In the months after the Internet Recession, we gradually switched to passively-managed stock-market index funds with lower expense ratios. This helped us stay with our asset allocation during the Great Recession.

In 2017 we realized that we could pay even lower expense ratios with a single total stock market index fund. We moved into Vanguard’s ETF version (ticker symbol VTI) and we appreciate its tax-efficient simplicity.

Between 2008-17 I was an active angel investor. Most of those startups have flamed out (which is typical) but there have been two exits (one of them successful).

I’m no longer making new investments, and I’m waiting on the final three to exit or shut down. Real estate has been a different challenge.

We’ve been landlords for 24 of the last 27 years, and the novelty has worn thin. However, my spouse feels a strong family attachment to our rental property and it has a very good age-in-place layout.

After much debate, we’ve agreed that she’ll do 99% of the management while I’ll just show up for casualty response or plumbing & electric repairs. Our daughter and son-in-law are helping, and in 15 years or so our preschooler granddaughter might want to step up.

While I personally no longer enjoy landlording, we all like the idea of having three houses for our three generations. If my aging spouse and I can no longer handle our current home during the next few decades, then we could move back into our rental property.

The worst case is that the rental’s equity will pay our long-term care expenses.

What happened along the way to make these changes?

Over our last four decades of investing, we’ve constantly learned more about optimizing our assets. The only factors truly under our control have been our savings rate, our asset allocation, and our expense ratios.

As we’ve improved our knowledge (and reduced our mistakes) we’ve also simplified our investments. Today my spouse and I have two military pensions, a little VA disability compensation, and (in a few years) Social Security.

Those are reliable inflation-adjusted incomes resembling the monthly dividend from a huge bond portfolio. This allows us to take much more equity risk with the rest of our investments.

A total stock market index fund is not at all diversified (especially thanks to a decade of hot tech stocks) and it’s certainly volatile, but it’s elegantly easy to manage. (We’re even automatically reinvesting its small dividends.)

We’ve converted our military Thrift Savings Plan accounts, our traditional IRAs, and our taxable investments into our two Roth IRAs and a joint taxable account. We’re still waiting on our last few small angel investments to exit or fail.

Our other income streams help us tolerate equity volatility during bear markets and recessions. It’s no fun to watch share values go down (or angel investments go out of business) but today it’s a relatively small part of our net worth.

Our rental property’s income is a low capitalization rate (3%) but reasonable by Oahu standards. Market rents and property values are appreciating faster than national inflation, but both will eventually flatten out as Hawaii’s housing shortage eases.

My spouse is still paying the bills in our household (almost all of them in autopay) and I’m still doing our tax returns. When we’re ready to be relieved, then we’ll let our daughter figure out who handles our bills, our excise-tax filings, and our income-tax returns.

In 2019 we overhauled our disability plan and our estate plan, and they’re still working well.

This planning has been very important to us: I was a financial caregiver for my father during his final six years with Alzheimer’s Disease. It was incredibly stressful figuring out everything without his help.

My conservator’s appointment (under the benevolent oversight of a probate court) was another layer of bureaucracy with chronic stress.

We want our eldercare to be less stressful for our family. We want to make it easy for our daughter to help us manage our money, and we don’t want to add gatekeepers or bureaucracy to our family’s caregiver stress.

Our estate plan is relatively simple. Most of our assets are Transfer On Death or Payable On Death.

Our daughter is a joint owner on our checking accounts which receive our monthly income and auto-pay our bills. Our home and our rental property are in a revocable living trust, and our daughter is a co-trustee alongside us grantor trustees.

When we someday wake up dead, our daughter will open our In Case of Emergency binder to its checklist and start the notifications. Our will would be filed with the probate court and our revocable living trust continues with her as the surviving trustee.

TOD/POD assets are inherited with an affidavit, and she’ll already have the authority to manage her real estate. She knows where to find the logins & passwords for everything else. I also have a plan in place for my social-media accounts.

We can’t predict what estate law will look like decades from now, but our pour-over will might not even need probate. Our cars, longboards, furniture, and other personal property would all add up to less than $20K.

Disability is slightly more complicated.

If we wake up in a coma (or with dementia), our daughter has a durable power of attorney over our investments. (Regular POAs become invalid when the grantor is no longer considered mentally competent.)

As a co-trustee of our revocable living trust, each of us has the specific authority to act unilaterally. She still has to be a fiduciary for us grantors (by law), but there are no gatekeepers or committees or doctor’s evaluations or other bureaucracy.

Title companies, lenders, and title insurers like having real estate in revocable living trusts. Since the properties are owned by the trust (not in our personal names) the titles remain clear during transactions even if the owners are not competent at the moment.

As co-trustee of our revocable living trust, she can continue to manage our rental property. If necessary she could even mortgage or sell both properties to pay for our care.

This simplicity of our DPOAs and our trust means that our daughter can immediately step up to manage our assets when we can’t. She won’t have to deal with the chaos (let alone the courts) that I encountered over a decade ago with my father’s investments.

She (and the rest of our family) will have lower caregiver stress.

Alert readers might wonder about my remaining angel investments. I expect them to exit or fail within the next five years.

In the meantime, we’re asking our estate-planning attorney to draft a Durable POA for my spouse and our daughter to handle them. We’ll also figure out a TOD beneficiary designation.

Side note: our lawyer hates the simplicity of our disability & estate plans. She argued hard against giving one person the power of a sole DPOA & co-trustee.

We recognize that our daughter could be subject to all the classic issues of addiction, mental illness, domestic coercion, cults, or even malfeasance & incompetence. We think it’s unlikely (because we’re biased) but we appreciate that there is a risk.

If a trustee pillages our assets, then next month we’d still receive our pension deposits and Social Security. Our lives would suck for a while, but we’d rebuild our wealth.

In the meantime the very real benefits of the DPOA and the trust far outweigh the potential drawbacks. Our daughter is much happier knowing that she has the authority to step up if the time comes.

We parents are relieved that she’ll have less caregiver stress, too, and she won’t have to go through all the issues that I had to figure out with my father’s finances.

Our disability and estate plans are not locked in stone, but we’re all happy with the status quo. For the rest of our lives (or at least as long as we’re competent), we’ll keep having these family discussions and we’ll update our plans.

Our pursuit of financial simplicity led to our next epiphany: our spend-down plan.

MISCELLANEOUS

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

A few of you might have read about this in Retirement Interview 49.

Recent studies have noted that most beneficiaries inherit in their 50s and 60s. (I inherited from my father at age 57, while my spouse’s parents are still hale & hearty in their 90s.) We think that a large inheritance is a financial failure if the money could be used earlier in all of our lives.

In early 2022, as the stock market and the real-estate markets did their compounding, our net worth approached $5M.

That $5M represented over 300% of the net worth we’d need for our sustainable financial independence (at the 4% Safe Withdrawal Rate) for the rest of our lives. In addition, the 4% SWR does not include the Social Security deposits that we’d start receiving in the 2030s.

Clearly we weren’t spending it fast enough.

The “problem” with this compounding is that Hawaii has not raised their estate tax to match the higher federal estate tax of the 2017 Tax Cuts and Jobs Act. My compounding spreadsheet predicted that we’d double our net worth in another 15 years and would be vulnerable to paying state estate tax.

These days my spouse and I are deliberately focused on spending down our wealth. Right now we’ve dialed in our expenses to our ideal lifestyle, and we’re enjoying all of the fun that we’re physically capable of.

Our secure inflation-fighting income streams mean that we can spend more through gifting & philanthropy, while we’re all alive to enjoy it together.

The only rational solution to this challenge is… more math and spreadsheets.

We decided to pursue a dedicated spend-down plan until 2031, when we’re both in our 70s. (It’s tab #58 on my spreadsheet that I built in 1997.)

Our assumptions are so conservative that they’re economically apocalyptic, but the math still works. In this scenario, “failure” means that our heirs might have to pay estate taxes from the assets that my spouse and I leave behind.

We assume that each year through 2030 we’ll:

• gift our progeny,
• donate 1% of our net worth to charity,
• grow our personal discretionary (travel!) spending at 5%,
• delay Social Security until age 70,
• never raise the rent on our tenants,
• never gain more equity on our Oahu real estate,
• only receive the 1.6% dividend rate of the U.S. total stock market, and
• never get another dollar back from my angel investments.

As we carry out this plan, by 2026 we’ll donate most of our taxable account to charity. By the end of the decade my Roth IRA will bottom out.

My spouse’s Roth IRA will survive, even though we’ll donate some of it to charity for the final years of the decade.

(We’ll keep the minimum balance in those accounts in order to preserve their account numbers. Our durable POA with Fidelity cites those specific numbers, so we don’t want to inadvertently create new account numbers.)

In 2031 my spouse and I will start drawing a total of $60K/year from Social Security. When that happens, our Medicare premiums will also rise to the next IRMAA tier.

The good news is that our Roth IRAs won’t be subject to Required Minimum Distributions, but (under current legislation) we’ll be in the 24% income-tax bracket for the rest of our lives.

The other news is that if either of us needs assisted living or long-term care, we’ll have enough pension and Social Security income to pay most of our monthly fees for a care facility. (Personally I’m thinking of Ilima At Leihano in Kapolei, with its shuttle service to White Plains Beach.)

Long-term care expenses will cut into our gifting and philanthropy, but we’ll revisit that part of the spreadsheet in 2032.

Ideally next year we’ll reduce our net worth to $3M in our home and our investments. We’ll live within our military pensions and our Social Security while continuing most of our gifting and philanthropy.

This feels like a lifetime away from our first experience with a $3M net worth. It’s still more than enough for the rest of our lives, and we can help our progeny decide what they want to do with the assets that we pass to them.

Gifting our family now helps them get much more comfortable at managing larger sums of money while we’re all still around to talk about it. It’s in our parental best interests, too: they might end up managing our money for us during our final years, especially if we’re disabled with dementia.

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

It’s mostly better!

This year we’ve adapted to our three generations of family living within a 10-minute walk. Our granddaughter drops by for an hour every weekday after preschool (accompanied by at least one of her parents).

She’s probably here for the snacks or the crafts, but she’s young enough that we’re still worth her valuable time.

We also babysit once a week. I’m pretty sure her parents appreciate the evening off, but we grandparents are even more fulfilled for being able to pay it forward.

We wish we’d had the same convenient babysitting service when we were parenting a preschooler.

These days we’re also taking her for an occasional walk over to the local elementary school, where next summer she’ll start kindergarten. Of course, we’re marketing the heck out of the huge milestone of being Five. Years. Old!

My son-in-law and I enjoy Sunday dawn patrol at our favorite breaks. (He’s still on active duty so it’s about the only time he has for a couple hours of adult surf.)

He’s working on our granddaughter’s swimming skills, too, and I have a stand-up paddleboard ready for us to ride tandem someday. That might happen in the next 6-12 months.

We’re also usually invited up to their home for a weekend family dinner, too. My favorite food is when anyone else cooks it, and they’re both good at it.

Our daughter is still working from home part-time as a financial paraplanner, and we continue to nerd out on the numbers. Her financial knowledge has grown faster than mine, which gives us elders great comfort in knowing that someday– hopefully decades from now– she’ll be able to step right up to manage our finances.

If there’s any downside to the last few years it’s the aging challenges of creeping osteoarthritis, my chronic sinusitis, and… my hearing aids. None of this is life-threatening but the daily bodywork is a potent reminder of tempus fugit & carpe diem.

If I’m going to update my first book and then crank out a third book, I should probably stop writing so many retirement updates and focus on drafting more chapters.

What are your plans for the future?

We’re traveling as much as we can. We prefer slow-travel itineraries of 2-3 months where we live local in an area and explore the sights & neighborhoods.

Maybe we’ll cut back in 20-30 years if we’re too creaky or in declining health. Maybe we’ll want to spend more time with our granddaughter… and someday great-grandkids?

Ironically our extended travel hasn’t dramatically expanded our expenses. The things we love doing in different neighborhoods don’t cost much, and we’re much better at travel hacking.

We’ll continue our gifting and philanthropy. Our progeny’s net worth will eventually exceed ours, but that’s their estate-planning problem.

My spouse and I could live into our 90s, and it’s no help for our daughter and son-in-law to inherit in their 60s.

I hate to sound like a broken recording or a one-note piano, but the Millionaire Money Mentors forum has brought me great pleasure over the last four years while improving our financial acumen (and our spending) by tens of thousands of dollars. I’m really looking forward to our next annual meetup.

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

You’ve already seen it, but here’s the short version:

• If you’re in the military, you don’t need to gut it out to 20 for your financial independence. Stay on active duty as long as it’s challenging & fulfilling– but when that stops then it’s time to move to the Reserves or National Guard.
• A high savings rate can overcome a lot of ignorant investing mistakes.
• The 4% Safe Withdrawal Rate works. Use that as a tripwire (assets of 25x net annual expenses) and feel free to keep working as long as it’s challenging & fulfilling.
• The 4% SWR has enough safety margin, and so will you. Do not continue trading life energy (which you might not have) only for more money (that you will not need.)
• Travel while you still can!  As we’ve noted on the forum, you never know your last day of anything.

I should point out that if Older Me traveled back in time to drop in on Younger Me in my 20s, YM would have laughed off that advice– and maybe called for security to escort me off the premises.

Back then I wasn’t ready to listen, but by my 30s I was (finally) paying attention.