Feb 14, 2021 | 08:00 am
This is the first of what I hope will be several personal stories shared by real Pillars of Wealth readers. The objective is to show that each of us travels our own unique path. Along the way we all make decisions we regret. But in all cases there is light at the end of the tunnel and a propserous, successful path forward.
My thanks to Anne and Frank (pseudonyms to protect their privacy) for sharing so many important details to support everyone else's education.
Anne graduated from medical school with very little in student loan debt, having gone to a state school and having been a very high academic performer with various scholarships. She matched into a prestigious residency and brought along her husband, who had dropped out of college. Anne’s marriage was never good, but she thought things may improve if her husband could pursue an education in a field he enjoyed. She cosigned for his student loans and paid for him to earn a bachelor’s degree in graphic design.
Turning down an opportunity to be a chief resident to focus on her first child, she completed a one-year fellowship in her husband’s hometown. When it became apparent that he would not be good at being a stay-at-home dad or able to obtain reliable employment, Anne moved back to her hometown with her husband so that her parents could help with the children. (By this time, Anne had a second daughter.) The move required moving out of the just-purchased townhome in a major city right before the 2008 real estate crash. (She still owns this townhome. It is under property management.)
When her husband became physically abusive to their toddler, Anne contacted an attorney and obtained an Order For Protection (restraining order). She went into credit card debt hiring an excellent attorney and was able to retain sole physical custody. Still, she had to cash out her six-figure retirement to pay her ex-husband a lump sum in alimony and would not receive child support---which required wage garnishment—for several more years. Her daughters still see their biological father every other weekend.
Anne started dating Frank a year after her divorce. Frank graduated from medical school with $165,000 in student loans. He took out another $40,000 loan from SunTrust during residency. During his training, he contributed the maximum amount to his 403b. He moonlighted extensively during his fellowship, grossing over $90,000. His first job as an attending, he paid off consumer credit card debt in the tens of thousands of dollars within several months, although it would take him another year and a half to pay off SunTrust.
While waiting for an out-of-state medical license to be approved he worked a contractor, which paid on a 1099 basis.
His salaried job contract was reviewed by an employment attorney, who pointed out that there was not really much to do with a state contract. The state offered a relocation allowance of $25,000. The moving company gave an inaccurate estimate and charged $8,000 more than that to complete the move. (Teaching point: Get rid of your stuff before you move, even if the moving allowance is substantial.)
The W2 salaried job paid only 2/3 of what the 1099 job did, and instead of living at a paid-for hotel he now sublet a condo that was a third of his monthly take-home pay. He also bought an $18,000 used vehicle. He made slow but steady progress toward his SunTrust loan.
After 23 months at his salaried job, it was clear that there were problem physicians on staff and that management was incompetent. (The CEO from the facility ultimately moved out of state to a similar job, where he promptly received a no-confidence vote from hospital staff and was removed from his position by the state governor.) The state job had a pension, with vesting that began at 24 months (40 percent) and went to fully vested at 5 years.
Frank moved out of his condo and put his items into storage at a personal cost of $5,000. He went back to contracting work and seldom took much time off. His accountant told him to fully fund a SEP IRA if possible, and he did once at $54,000. Not really knowing anything, he picked the “aggressive” pie chart at Charles Schwab on the advice of the attractive rep who worked there saying, “It’s just nice to know someone is thinking about your investments,” when justifying their fees.
Becoming tired of contract work he moved again to another salaried job, this time without a relocation package. He began to carry balances on his credit cards again. He kept the job for less than a year, since a long-distance romance developed into a marriage.
At his third job, again with a state employer, Frank ensured that he was at the top of the state’s pay scale and did the best he could through the alumni network to vet the organization’s culture. His relocation was paid for and under budget. He did have to buy a larger vehicle and larger house, and his wedding, which he and his wife paid for themselves, was $16,000. (150 people. Open bar. Father-in-law paid for the band.) He was starting married life in credit card debt again. When his wife became pregnant he bought term life insurance.
This state job came with $50,000 in loan forgiveness, which came in $10,000 increments. Frank used this to pay off his credit cards, save for the last two installments, which he actually put toward his student loans. Cashflow was tightened by a large house payment and car payments but was still positive.
A full four years after settling into his marriage and new home, Frank was able to send several monthly checks for five figures to pay his student loans down to $100,000 at 2.875% interest. Refinancing the house with a small, local bank proved wise but came with constant offers to meet with their financial planners to buy insurance products.
All along, Frank had maintained some 1099 income that allowed him to itemize and deduct about $25,000 per year in business expenses. His 1099 job converted to a W2, making those deductions more difficult.
Anne moved from a county hospital to a state job and has been making $225,000 to $270,000 per year consistently.
In their early 40s, with no credit card balances, manageable student debt, $19,500/year per physician going to two state 457 deferred compensation plans (helped to the tune of $6—8,000/year by converting vacation time), Frank and Anne are now finally saving $107,000 per year toward retirement while the household is grossing $650,000. With two children in daycare, a car to pay off, and the mortgage on a $750,000 house, Frank’s still paying off student loans, and Anne's still paying off her ex-husband’s student loans, plus groceries for four kids, they are still paycheck to paycheck. Their present nest egg of $728,000 is not nearly what it would be had Frank lived below his means or had Anne avoided her first marriage, but they still ought to retire on time and comfortably, barring unforeseen events.
Some immediate observations:
Here is a projection of the family's net worth, assuming retirement in 20 years, under two growth assumptions (6% and 8%)
Assuming investments grow at 8%:
Assuming investments grow at 6%:
In either scenario, if home value grows for 20 years at 2% annually then after 20 years it will be worth $1,114,461.* By convention, the value of a primary home is not included in net worth calculations.
I'm assuming the family's main debts (student loans, mortgage loan) are mostly paid off within the span of 20 years. Even if some costs have not been incorporated in this rough analysis (e.g., children's college costs, weddings, and some other unexpected expenses), the family is on a favorable path.
* You can confirm the numbers using the Hypothetical Wealth Accumulation spreadsheet available for download at this link.
** These totals ignore the future value of Anne's rental property. I didn't have enough information to incorporate a specific number, but I expect it will add handsomely to the family's nest egg.