The $5 Million Retirement Plan

Focusing On A Positive Net Worth Is Leading The Thomas Family To Early Retirement

a 401(k), contributing 10% of her income with a dollar-for-dollar match from the company. Three jobs later, she continues saving through her 401(k) account. Her account with JPMorgan Chase has $15,000 in it and 401(k) accounts from previous jobs have been rolled over into an IRA, which now stands at $65,000.

Since they both were on solid financial footing when they got married in 2002, Stephen says discussing their financial plans was an easy conversation. “I knew Rachel and I had the exact same values financially, which is one of the things that attracted me to her,” Stephen says. “She was not a big spender, but was serious and pretty adept at saving and investing. So we said, ‘This is what we have collectively, how can we build [on it] and [make it] grow?’”

First, Rachel sold a condo that she bought for $140,000 for $260,000. Stephen moved to Chicago, where the couple recently purchased a home, but maintains a rental property in Maryland. He refinanced the property in 2003, trimming the interest rate from 8% to 6.87% and saving even more on mortgage interest payments by shortening the life of the loan from a 30-year mortgage to a 15-year mortgage.

By pooling their financial resources, the couple has set the goal of saving $70,000 a year. “We both maximize our 401(k) for a total of $25,000 a year and we are dedicated to saving $2,000 a month of our after-tax income, which is $48,000 a year. That gives us a total of $73,000 annually,” says Rachel.

To measure my personal wealth bynet worth, not income
After years of concentrating on improving their net worth, the couple has several lessons to share with anyone who wants to adopt parts of their personal wealth strategy:

  • Be analytical about saving. Whoever manages the family’s finances should use a financial calculator, run the numbers, and keep track of your net worth by writing out your assets and liabilities and calculating the difference. “It takes more time to watch a movie or go shopping [than to calculate your net worth,]” Stephen says.
  • Know how much money you’ll need to retire. Figure out today what type of income you will need at the point of retirement, then design and execute an annual savings plan to get you there. Be sure to balance your wealth accumulation with current and future levels of consumption.
  • Only take risks that you can afford. For example, the couple recently took a $25,000 credit card cash advance at no interest for six months and invested the money for six months with a company that renovates houses for resale. The investment yielded a 20% return, earning the couple $5,000. Stephen cautions that their expertise in finance and their ability to absorb the loss made this investment less risky for them. Using a cash advance for investment purposes is not for everyone.
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