An Example of How to Become Rich

Here's a comment on my post tiled What's It Take to Be Rich? that gives a real-life example of how a couple went from poverty to prosperity:

There is no easy answer to this question. The answer varies widely based upon a number of parameters.

I can tell you about my own situation, but everything worked out very well for us.

• 1956 - Emigrated from Britain with $400 and the promise of a job in Toronto, Canada paying $83/week.

• 1958 - Moved to Denver, Colorado for a job paying $125/week.

• 1960 - Moved to Northern California for a job paying $173/week.

• 1992 - Retired after 32 years, last salary was $1,394/week - Total Market Portfolio worth $320,000, owned two homes - had zero debt. Pension was $30,234/annum. Wife still working as a teacher's aide.

• 1993 - Wife retired with a $9,036/annum pension - Total market now portfolio $562,000 after combining a few other small investments. We put the maximum possible into retirement plans our whole working life, and always lived frugally.

• 1994 - Total pension income - $39,360/annum - Total market portfolio $601,000 - no debt.

• 2009 - Now have Social Security so total pension income is $59,748/annum. Total market portfolio $5,668,000 - Tax deferred and tax exempt income $261,000/annum. Primary home value $1,100,000, second home value $800,000 - no debt. Two automobiles - 1991 Mercedes 560SEL - 1998 Mercedes C230.

Our major expenses are vacations, we like to travel the world and now fly Business class. Cost of HMO healthcare provided by a group plan at a great clinic is $163/month for both of us.

Bottom line - we overdid the saving and at 74 and 75 are still saving a lot, and never anticipated that I would become a stock market guru in retirement and do so well during the 90's in mutual funds.

You can do everything right but if you run into a disaster like the current economy and lose your home and/or lose your job, and/or lose your healthcare at a really bad time in your life and career, it isn't your fault, it's just the worst possible luck. We were incredibly fortunate, we didn't make any bad errors in judgment but somebody was watching over us (who, I have never figured out).

A few thoughts here:

1. Very interesting story. I love real-life stories of wealth creation because they take the theory of money management and show how it has delivered in a practical sense.

2. As they illustrate, getting rich is really simple. Even if they hadn't had the big jump from 1994 to 2009, they still would have done well. Earning 8% per year would have grown the $600k to almost $2 million (10% would have been $2.5 million.)

3. They made roughly 17% on their investments from 1994 to 2009. That's a pretty stellar record and not one that many can replicate.

4. Two good points made in the last sentence regarding luck in personal finances: you can do everything right and still be behind financially due to bad luck/timing and good luck can turn a nice nest egg into a fortune.

5. Note how he says they "didn't make any bad errors in judgment"? Kind of reminds me of Rule #1. :-)

Comments

[Jim]

They did good.

Other things that helped them:

* Good wages. The pay they had seemed at lest 'ok' all along. Not rich but not poor. The pay they had in 1992 was easily double median income so thats pretty good. Plus they had two incomes.
* Decent pensions. Most people don't have any form of pension nowadays. Average pension is $8k and they are getting over $39k.
* Benefited from 4 decades of good housing appreciation in California.

I'm curious how is their health insurance so low? They must be in their 60's. Is the plan in question through a retirement benefit from one of their previous employers or something?

[Jim]

OK I see they are actually in their 70's. Maybe the rate is low if its a supplemental insurance for medicare or something?

[FMF]

Jim --

To answer the pension and the healthcare questions, I wonder if they were both teachers...

[Zengirl]

Very interesting read. I am surprised at good pension on teacher's salary (at least on wife's part) and very low cost health care cost at $163 per month. We have private health care and we pay $550 a month and have $6000 deductible. Is there some secret rest of do not know? Curious. I am happy for them though, good for them. I have a long way to go in age and assets both.

Zengirl

[Jim]

Teachers do indeed have great pensions.

The wife however was actually a teachers aid rather than an actual teacher. Her portion of the pension was only $9,036 a year which isn't that high, but still isn't bad really. Its not clear what the husband's occupation was but given his $72k pay in 1992 I really doubt he was a teacher.

I assume their great insurance rate is because they're covered by Medicare and what they are paying for is actually supplemental insurance to cover whatever Medicare doesn't rather than full insurance coverage.

[Old Limey]

I would like to clear up the questions about our healthcare. After working for 32 years as a senior staff engineer for a very large aerospace corporation I am entitled, as a retiree, to be a member of any of the company's group healthcare plans with my wife as a dependent. Our options were a choice of three Senior Advantage HMO plans, Kaiser, Healthnet, and Secure Horizons (part of Pacifcare and United Healthcare). The clinic that we have used for almost 50 years accepts the latter two HMOs and we have used them both over the years.

The plan is excellent, the copays are $20 to see your primary care physician (PCP) and $40 to see a specialist. The drug plan uses a mail order provider that gives us three tiers of drugs. For a 90 day supply the costs are $20 or less (generic), $50 (brand), and $100 (non-formulary). The TROOP (True Out Of Pocket) drug expenses are capped at $4,350/year which we never come anywhere close to exceeding. There are no caps on anything else but there is a $250/day charge for the first 4 days of an inpatient hospital stay. These HMOs are also limited to people living in zip codes where they have service providers. If you live out in the wilds HMOs are generally not available. This clinic is part of the Palo Alto Medical Foundation and is a huge, very new and beautifully landscaped and appointed facility, with lovely waterfalls and expensive artwork, and offering all labs and outpatient services under one roof. The clinic is more like a Hilton or Sheraton hotel inside. The hospital is nearby.

We have never encountered any attempt whatsoever to ration care and make us wait but we hear numerous stories about Kaiser where patients have to wait months for artificial joint replacements. My wife has had two hip replacements and I have had two lens implants because of cataracts. Typically if the PCP requests an MRI or X-ray, it is provided the same day, the radiologist then posts the results on their website, under our account, and either calls us or e-mails us the next morning. We are just hoping that the Universal Healthcare plan being discussed in congress doesn't adversely affect the excellent care we are receiving but I expect the premiums to keep increasing every year.

[Kirk Kinder]

This is an inspirational story. These folks need to continue to let others know about their story as they didn't make exceptional salaries, but they achieved exceptional results.

I also think it is time for them to enjoy the money now. It doesn't mean they have to frivolously spend it, but they could craft a vision of how the money can be used to help others, the family, or the vacation of a lifetime.

[Robert]

I agree, this is a good story. I would take a good pension any day, but those are getting harder to come by - just ask an autoworker in Detriot.

Also, the incredible jump in their portfolio was amazing. I am curious how they paid off their houses. The first I can understand, maybe they owned it for 30 years and it appreciated nicely. The second had to come later and at a higher price. I would like to understand if they just pulled money out of their retirement account. If they did, it makes the growth in that account that much more amazing.

[cb]

They sound boring and nearly dead ;-)

Seriously though, good dedication. I was just yelling at someone on facebook about getting a near car with 'zero down'...

[CDM]

It's ironic when some people are so frugal while they're young and vital and can take advantage of youth to do more with money. Then, when they retire, they have more money than they know what to do with. At least the people in this story don't have to worry about a thing financially speaking, but younger people have to live a little while saving some as well. Any one of us could die tomorrow, you can't take it with you, and what you leave behind is difficult for your loved ones to spend anyway. My mom certainly doesn't feel like spending the life insurance money from my dad's passing without him being there to enjoy it with her. In mer mid 60's, she also doesn't need or want as much although she could definitely help with her grandkids' college expenses if she so chooses. As for me, I would rather spend an extra $5,000 a year to enjoy myself during the rest of my 30's and live a little more frugally when I get older. I'm fortunate enough that I can afford to nearly max out my 401K every year so I am saving, but I am enjoying the fruits of my labor as well, not worrying about where every penny goes.

[FMF]

CDM --

What makes you think they didn't spend some to enjoy themselves?

[Old Limey]

One event that I used to pay off our mortgages when I retired was a "Golden Handshake". The Cold War had ended and defense contracts had slowed down a lot so the company wanted to reduce the workforce. They offered an early retirement incentive of 1 weeks pay for every year of service. Since I was already planning to retire in the Spring of 1993 to get the annual increase in my future pension I took the incentive of $44,608 and retired in the Fall of 1992 instead.

The incredible jump in our portfolio was due in large part to the once in a lifetime dot.com bubble.
1998 - Portfolio increase 42.31% - NASDAQ +39.63%
1999 - Portfolio increase 62.17% - NASDAQ +85.59%
2000 - Portfolio increase 29.35% - NASDAQ -39.29% - I sold everything in the 4 days ending 3/15/2000.

As to our lifestyle I should first mention that Brits, coming from a tiny island and being from one of the great colonial powers of old and a nation that produced great seafarers and explorers are raised with a great desire to see the world. We have been on safaris in Africa and met Bushmen in the Kalahari desert, to China with the Smithsonian soon after it opened up where we hiked the Sacred Peaks, to Peru and Ecuador (twice), Java, Bali (5 times), Nepal (3 times), Turkey, Morocco, Thailand (3 times) with day visits to Laos and Burma, France and the Normandy beaches, Italy, Germany, Austria, Switzerland, Belgium, Holland, Yugoslavia, Hungary, Russia, Scotland, Ireland, Wales, Costa Rica, and Mexico (twice). In between I found time to do a solo hike of the John Muir trail (230 miles) and climb Mt. Whitney (3 times), Mt. Baker, Mt. Rainier, Glacier Peak, Mt. Shasta, Mt. Mera (22,000ft.), trekked to Everest Base Camp and trekked completely around the Annapurna range in Nepal. This weekend we leave for Nice on the Cote D'Azur and join a river trip through Provence and Burgundy to Paris.

We are far from being boring and a long way from being dead, as the last post insinuated.
Next year we have trips already reserved to Novia Scotia, Bulgaria, Serbia, Croatia, Bosnia and Hungary.

[CDM]

FMF,

I came to that conclusion after reading this line...

"Bottom line - we overdid the saving and at 74 and 75 are still saving a lot"

But, I'm sure they had some fun; maybe he felt like they could have had more.

CDM

[Old Limey]

Today's "Tech Ticker" at Yahoo Finance has an enlightening discussion about the retail business, it's called "In the Tank Forever". The guest is Howard Davodowitz, CEO of a consulting firm that compiles statistics on retailers.

This is a must read if you want to be prepared for the realities of the next few years and to not let this year's gains slip away.

[Pop]

Hello Old Limey,
Thank you for your insightful posts on this topic, and your posts on previous topics. I could tell from the first one that you knew what you were talking about, and the numbers you've displayed prove it. Congrats on your accomplishments, and enjoy the fruits of your labor!

[Jim]

Limey, thanks for elaborating on your healthcare. Its great that you get such good insurance via your former employer as a retiree. Thats a benefit that few people get nowadays. As far as the current health care reform legislation, I haven't seen anything in it that would change your situation negatively.

[Old Limey]

Kirk:
You suggested that we craft a vision for what to do with our money when we're both gone.
It so happens that tomorrow we meet with an attorney to sign a revision to our wills and living trust documents. We wanted to have the revision completed before we fly to Europe this weekend just in case we both go together in a plane crash.

Before this "Great Recession" started, the bulk of our money was going to be left to a charitable foundation that purchases scenic land, saves it from real estate speculators, and donates it to organizations that run recreational parks in our surrounding counties for hikers, campers, equestrians, and mountain bikers.
The changes we have made will split it up between our children and grandchildren (excluding spouses), and will only default to the charitable foundation as a last resort. Even though our three children are in good financial shape there is now so much uncertainty about the future that we felt a responsibility to put our family first.

[FMF]

Old Limey --

You may also want to write your favorite personal finance blogger into your will. ;-)

[CentsInTheCity]

Interesting to see how other people spend their retirement money. Since I'm in my late 20's, odds are I will not have a pension or Social Security to depend on. Right now I'm banking on fully funding my retirement on my own, which is a very scary thought!

[kiki]

17% average return for over decade - that would be inspirational if it was not such an unlikely scenario. No reasonable person should ever bet on it. I am happy for them but going from $600k to $5 mm is not something that happens to an average folk.

[Old Limey]

Kiki:
How about those wonderful eight years when Bill Clinton was our President.

1/1/1993 - 12/31/2000
NASDAQ COMPOSITE Annual Rate of return = 17.53% Total Gain = 264.95%
NASDAQ 100 ................ Annual Rate of return = 26.31% Total Gain = 550.15%

That's for Buy and Hold on a market index.
If you are practicing both good fund selection and market timing as I was you can often beat a market index, especially if you got out in March 2000 when the market had been on an unsustainable rocketship ride that took the Nasdaq Composite to 5048.62 on March 10th. 2000.

I am, as you say, "A pretty average person", it's just that my market skills coincided with one of the greatest bubbles in a very long time, and one the likes of which I will never see again. The Internet in my opinion was by far the greatest invention of the last 100 years, even greater than the Wright Brothers aeroplane or the Model T, and it was largely the catalyst for the bubble. Do you remember the scorn directed at old fashioned "Brick and Mortar" stores that many thought were facing extinction at the hands of Internet marketers?

[Mike Hunt]

Old Limey,

If you ever come out to Thailand again look me up- I live in Bangkok.

I also love climbing mountains- also did Mt. Shasta (my first 14er), Whitney 3 times, Mt. Muir, Whites Mountain peak, Mt. Langley, Split Mountain (all 14ers within CA), Pikes Peak, Longs Peak, Wheeler peak, Mt Baldy (10 times or so), Agung mountain (tallest peak in Bali), Mount Kinabalu (tallest peak in Borneo), Kilimanjaro. Tried to do Rainier in a 24hour push but didn't make it to the top- my friend pulled a tendon.

My question to you is how on in the world did you decide to sell everything on March 15, 2000? That move along likely is responsible for 30% of your net worth or more! Well done mate!

-Mike

[Moneymonk]

Seems like they had no kids, Him and his wife did well.

Investing and Real Estate are a good way to wealth

[Nicole]

I would like to ask a question of Old Limey or anyone else who would like to answer. I mean no disrespect, I am simply curious, but it could be a loaded question. It seems clear that you and your wife planned well for taking care of yourselves, and seem to have enough assets and available income to maintain the kind of lifestyle that you want. Do you believe you are entitled to Social Security benefits? If there were a bill in Congress that would eliminate your benefits because you are able to provide for yourself, would you oppose it? Should Social Security benefits be reduced or eliminated for people who can support themselves in order to extend the amount of time the fund will last in general?

(To make sense of my perspective, if it matters, I am 27 years old. I have been paying in to Social Security since I was 16, and have only become aware in the last few years that the current system is not sustainable, and that I am completely on my own for retirement. I would like to hear the answer of someone who does receive benefits, but doesn't depend on them as the sole source of income, as to whether benefits should be reduced or eliminated for some people. I personally have not reached any sort of conclusion).

Thank you for any response that you give me, and I honestly am not trying to offend or say that you do not deserve benefits because you saved for your own retirement.

[J in FL]

Old Limey,

I also want to hear more about how you came to realize you should sell everything on 3/15/00. I think it's an amazing feat you pulled off right there...and as Mike mentioned, responsible for a very significant portion of your wealth.

Congrats on doing so well!

[FMF]

Nicole --

I'm going to post your question later on. Stay tuned.