Lessons from a Retirement Millionaire

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I really like it when major magazines do Q&A’s with regular people, like when Kiplinger talked with Dane Lacey, a 49 year old radiologist from San Diego. It’s somewhat deceptive though as a radiologist is hardly a job that any regular person can get into. It’s a specialty that involves using imaging to treat patients and something you need plenty of schooling to do properly. It’s, as you’d expect, a pretty high paying job since he was able to save $240,000 for retirement in a single year.

As I read the Q&A, I thought I’d write down some good takeaways as well as clarifications on what I found suspicious. In summary, I felt like there were some good lessons to learn from someone who earned a significantly above average income that anyone could use.

Diversify Your Investments

Lacey was heavily invested in tech stocks, like Cisco (CSCO), when the bubble burst and that hurt big time. A look at Cisco’s historical stock prices is still probably a scary sight for him, since Cisco nearly touched $80 at its peak and is still just a fraction of that, but it should be a lesson for everyone else. You don’t want a seemingly rare “black swan” catastrophic event to wipe you out and diversifying is akin to buying insurance.

Front Loading Retirement

Lacey front loaded his retirement savings because he wanted to retire while he could still enjoy it. I personally front loaded my retirement because I knew my expenses were lowest when I was young and because I had time on my side. This, coupled with frugality, means that you can super-charge your retirement contributions early so that they can grow as you age.

He had to work as a resident physician at $26,000 a year for four years before he could open a practice, where he started earning $220,000. It’s a lot like a college graduate getting their first job. You go from work study programs where you earn $15 an hour to an office job where you earn twice that. While it’s not multiplying your salary by 10, it’s the same idea. By being frugal and front loading your savings, you reduce your effective income to something only slightly higher than your former standard of living.

Pay Yourself Later

The quote of the story: “If you pay yourself first and then try to save, your standard of living will always adjust up to what you’re making, and you’re not going to have money left to put in savings.” Like a gas that expands to fill its container, your spending will almost always expand to meet your salary. Think of the friend who buys a new car after a promotion or raise because he or she can afford a larger monthly payment, that’s how your standard of living expands. There’s nothing necessarily wrong with that unless your goal is to retire early.

On Saving $240,000 in One Year

This answer perplexed me a little bit because I can’t figure out how he was able to save that sum of money into a retirement account until I started reading about defined benefit pension plans. Apparently, the employer’s contribution limit is near $200,000 and there are no contribution limits. Since he was self-employed, he was able to put such a large sum away into this pension account for himself.

It’s easy to dismiss a story like this, since they are talking to a radiologist, but there are still some good lessons you can take away. What did you take away from this Q&A?

{ 15 comments, please add your thoughts now! }

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15 Responses to “Lessons from a Retirement Millionaire”

  1. Interesting points Jim! Front loading your retirement accounts is key. I’m exactly in that situation. Just graduated college without debt and have been maxing out my roth and 401k accounts. With marriage looming and starting a family eventually, it’s so important to start saving NOW. It’s a must for anyone trying to retire at age 55.

  2. Justin says:

    Great advice, especially for someone fairly new to investing! However, I think that the “pay yourself first” concept is taken out of context here.

    The real meaning of it is to put your money into savings or investment accounts before you pay your bills- not getting yourself a gift before you pay your bills.

  3. Interesting.

    Couple of thoughts:

    a.) I am not sure the article actually says that he invested $240k in a year, instead I think it says he created a vehicle to invest up to $240k per year (potential vs. actual). Also these a pre-tax dollars right? So roughly $150k in post-tax dollars.

    b.)All the gold stars he gets from teacher for saving a lot and early, is more than negated by the boneheaded move of investing with double active management. To be clear, this means he is paying 1-2% of his investment per year for some guy to pick stocks or mutual funds. Worse, the mutual funds also charge a fee on top of that, so that effectively he is paying somewhere around 2-3% of his investment base in fees a year. So he has to earn at least 5-6% just to break even with inflation! Arrghh. That combined with the fact that money managers and mutual funds don’t sustainably outperform the broader market means that our friend Dale is not going to make the kind of money he is hoping for. He should instead be investing in a couple of broad indexes for both stock and bonds, weighted for his ability to handle risk.

    If this confuses anyone, they should read the Investors Manifesto by Bernstein or the Boglehead Guides.

    People spend so many life-years, blood, sweat and tears earning their money, why can’t they spend 2-3 hours reading up on what they need to do to invest it?

  4. billsnider says:

    I had very different experiences.

    I didn’t start to really save until I was in my early 50’s. At that time I had no more debt and finished educating my kids.

    I started to save every penney and followed all the rules of investing. One of those rules was to diversify. I also did not chase prior winners, but did not hesitate to move money if I saw a better opportunity.

    I am in my late 60’s and am happy to say it worked! I live a very comfortable retirement life. I wish the same for all of you as well.

    Bill snider

  5. skylog says:

    these are all things i am trying to accomplish, even though i am not earning the income i want at this time. i know i will need to increase my efforts as time goes on, but getting myself used to cutting back while funding my IRA and 401(k) will only get easier as my income increases.

  6. freeby50 says:

    Setting up your own defined benefit pension is a neat trick to save a lot of money for retirement. But thats a very complex thing to do and would generally come with some steep fees. It is certainly not a DIY item. You would need to get an annual actuarial report and file paperwork with the IRS. I would assume that minimum costs would be in the $1000 to $2000 per year level. Thats only feasible for someone saving >$100k a year or the fees eat up too much money.

  7. daenyll says:

    just became eligible for 401k at work and have had a Roth IRA, I think between the 2 I’ll be putting away 12-13% right now, which I will be adjusting after I kill off my student loans, I plan at least 6k extra in addition to the monthly payments this year and we’ll see about next. I figure “investing” in killing the loans is a guaranteed move then bump up actual investments and savings toward a house or property since I have roughly 6-10mo. in EF floating about in CDs

  8. zapeta says:

    I think the important thing to remember is to start saving as much as you can and as early as you can. I’m not currently able to save as much as I’d like but I save what I can and let the returns compound over time.

    • tbork84 says:

      Thats exactly what my approach is. The key thing is to do what you can while you can. I think the quote is to “not let perfect be the enemy of good”.

  9. Shirley says:

    Automatic deposits to my 401k from my paycheck saved the day for me. I signed up for the max (15% at that time) and never missed it because I had never seen and gotten used to it.

    It worked beautifully for us.

    • Strebkr says:

      Yea, you can’t spend what you don’t have (for most people)

      Maxing out the 401k is a surefire way to getting your retirement savings on the right path.

  10. Jeffrey says:

    This article speaks to a small slice of an even smaller slice of the world in which we live in. How many make $240K a year? 1%. How many have their own personal DBP or the ability/money to open one? .0001%.

    If you are deferring $240K into a pension plan in one year, I would like to know how much he actually lives on.

    Making that kind of money, it isn’t hard to save and accumulate wealth or meet up with a financial advisor chomping at the bit to get you with his fees. Which leads me to my first point, this guy things diversifying is having 50% of his money with one broker and 50% with another? He doesn’t have a CLUE about his finances and is more than likely (I would guarantee it) that he is getting creamed with fees. He is paying a financial advisor 1% a year, plus 1.5% in mutual fund fees, plus the hidden costs associated with turnover and brokerage costs inside the portfolio.

    What mutual funds is he in is a good question. He is likely in an active portfolio strategy because he thinks he can destroy the market. He is everything (aside from a good earner) that I would never want to be.

    This guy is a bonehead.

    I love this one.

    We went on vacation and his $300K portfolio became $10K? Who is he kidding with this statement? He is full o’ crap with this.

  11. IcantThinkofAcleverName says:

    This is a perfect example of how the tax code is geared towards high-income (not rich!) people. I am able to contribute pre-tax dollars into a 403(b) and 457(b) both of which allow $16,500/year, not including a match ($17,450). The 457(b) is limited to “high income” employees. People with lower incomces are not eligible!!!! In addition, I can contribute another $5,000/year into a traditional IRA and then convert it to a Roth for a total of $55,450. Then there is the defined benefit pension plans that allows you to contribute even more (I’m not eligible)! Don’t get me wrong, I love the fact that I can “shelter” $55,450/year. I wish I could save more. However, I have a problem that the opportunities are not the same for all employees in this country. There’s a lack of equality.

  12. Evan says:

    These types of stories don’t really inspire me (but don’t get me annoyed some of the other commenters)…at the current time I don’t have the income this guy does so a lot of his savings/investing abilities is in applicable right now

    • Strebkr says:

      All of us are at different stages of this journey. There will be times when we read something that isnt at the same level as us. All we can do is look up and use that as motivation to improve ourselves and our situation.

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