2008-08-21

Success Stories: Couple Hits $515K Net Worth by Age 27 — and Seeks to Retire by Age 40

The September 2008 issue of Money magazine brings us the story of Gina and John Rodrigues. At age 27, their net worth is $515,635. Some of their main assets include: $483K in investment properties (rentals); $146K in mutual funds and 401(k) savings; $137,000 in regular savings; $125,000 in a business (a retail gift shop); and $88K in individual stocks. Their current goal is "to become millionaires and retire by the time they turn 40, just 13 years from now."

How did they do it (or how have they done it so far)?

  • They have been quite frugal. As a few examples: they moved back to John's childhood home, which they are renting from his parents; they eat out rarely and when they do, they sometimes order just an appetizer and tap water; they cut their clothes budget to $300 a year; and they do little traveling (for instance, John declined when his friends invited him to fly to Las Vegas for the weekend).
  • They have historically saved well, on the order of 15-20% of their income. And they are currently saving quite a bit more than that, about $91K a year—more than half of their combined salaries. About $54K of that goes into investments.
  • Their incomes from their jobs have mostly been quite strong. Their current combined salaries total $174K.
  • They have invested in real estate, including: they made $110K from the sale of their first home (a condo in Dublin, California); they bought an investment property in Phoenix, Arizona; and taking money out of the Phoenix house, they bought two investment properties near San Antonio, Texas.

The article observes that the Rodrigues couple did not start off making all the right moves. They were not at first on the same page on spending habits; and early on, they followed the advice of a financial adviser to buy a pair of variable life insurance policies—and later found that the policies were a bad deal because of their fees and cancellation penalties (which they went ahead and swallowed in order to get rid of them). Over time, they have learned to make compromises regarding their different spending proclivities—including allowing certain planned splurges.

Interestingly, the Rodrigueses' strategy is quite conventional in its concentration on spending less and saving more; but past that, they have been entrepreneurial and aggressive, by many people's standards. Gina quit her job in the mortgage underwriting business because of dissatisfaction with the long hours and lack of creativity involved in the work—and quit without having anything else lined up. She was out of work for about a year. Of course, their savings were down quite a bit during that year. Gina found her calling in the form of running a boutique that sells imported soaps and hand bags—and they took out a $75K loan to buy the store. And of course, owning three investment properties means additional debt load. The business loan and the mortgages comprise all of their debt though (no car loans or anything else), at a total of $516,365.

And though they did well with the sale of their first home, their real-estate strategy is suffering from the current market. They project that they might barely break even if they were to sell the three properties; and the cash flow on them is negative by about $9K a year. From my read of the article on the Rodrigueses, that negative cash flow is their current situation going forward, with all three properties rented—and does not account for a 9-month period during which the Phoenix property was vacant because of a dispute with a former tenant. The Rodrigues seem to acknowledge difficulties in owning investment properties far away, although it sounds like they try to deal with this by hiring local property managers. Reading about this was quite interesting for me, because we have our one modest investment property far away as well. I would guess that their reasons for buying far away were similar to ours—at the time, houses in remote areas were much more affordable than houses nearby.

Money magazine brought in two financial advisors to consult with the Rodrigueses, and I thought their advice was interesting to note. They advised that the Rodrigueses stock portfolio was too concentrated in company stock (37% in Microsoft) and recommended getting that down to 5%. They advised adding bonds to their 401(k) portfolio, moving from their current 99% in stocks to a 90% stocks/10% bonds split. And they advised selling one or two of the investment properties, to reduce the negative cash flow. The Rodrigueses stated disagreements with at least two of the recommendations. John stated that he wanted to keep the Microsoft stock, saying "it's dumb to sell low" and expressing confidence in the safety of the stock; and he strongly disagreed with selling any of the properties:

I think those properties are going to come back eventually. Even if they don't, our retirement plan is not based on any return from those properties anyway.

I think the Rodrigueses are doing great. At their ages, my net worth was negative—debt as far as the eye could see—and I definitely knew less than they do about investments; and I would have been too shy to plunge into real estate. I would have loved to have had as strong a start as the Rodrigueses have accomplished. As for their personal-finance strategy and approach, I agree that it is quite aggressive—and not recommended for many. But it seems to work for them. Their high income and liquid savings give them at least some significant ability to absorb the negative cash flow on the investment properties to try to wait out the market, as well as to absorb problems such as vacancies. I'd be curious to know more about the retail business, such as how much income it's spinning off, whether it's growing or has much more upside, and whether it has much risk (for instance, if it includes a long-term lease and generally what its level of fixed expenses are). But I also tend to get excited to hear about someone quitting their safe job to find one that they love. On their investments, I'd be interested to know how John's company stock purchase plan works, because if he gets any kind of benefit or discount, that does not seem to have been factored into the advice. And otherwise, my leanings tend somewhat more toward the Rodrigueses. My wife's and my 401(k) mix is closer to 99% stocks (including stock funds), and we are quite a bit longer in the tooth than the Rodrigueses. But our approach has some aggressive leanings too and also is not recommended for all.

What do you think of the Rodrigueses' strategy, particularly in the places where they disagreed with the advice of the financial planners?

[Editor's Note: At the time of this post, the profile of the Rodrigueses was not yet available online. For further reading, the Prime Time Money blog has several articles on magazine profiles of "Millionaires in the Making," including links to profiles and aggregate analysis of the group of "Millionaires in the Making." It's totally worth checking out! See: Millionaires (at Prime Time Money).]


Related Posts:

Success Stories: Retired At Age 43 With Nearly $2,000,000

Success Stories: Single Parent Saves Over $310,000 By Age 38

Success Stories: Couple Retires at Age 44 With 3 Young Kids

Success Stories: 6th-Grade Teacher Worth $500,000

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