Melvin and Jennifer Smith have been savers as long as they can remember. At the age of 8, Jennifer was putting her $5 monthly allowance into a passbook savings account, which listed deposits and balances. Melvin, too, had a savings account at age 8; when he turned 13, his mother encouraged him to purchase his first stock. “I chose Mattel, the toy company. That was my first exposure to the world of stocks and the whole notion of risk and return,” says Melvin.
This Cleveland couple has embraced their save-and-invest strategy throughout their adult years as well. The Smiths are proponents of Declaration of Financial Empowerment principle No. 2: to save and invest 10% to 15% of my after-tax income. As a result, they have built a formidable nest egg that will secure their planned retirement at age 55. They’ll have the financial freedom to nurture second careers or pursue personal interests rather than work because of financial need.
Together the couple has amassed more than $888,000 by saving a portion of their substantial salaries (Jennifer and Melvin earn a combined salary of about $270,000 annually), by maximizing their contributions to corporate pension plans and by taking advantage of stock options. The Smiths have always set aside money from their paychecks, regardless of size. As their salaries increased over the years, so too did their contributions to their retirement and savings accounts.
“We began by contributing approximately 6% of our salaries to our 401(k) programs,” says Melvin, 45, an assistant professor of organizational behavior and faculty director of executive education at Case Western Reserve University. “When we first got married 19 years ago, we put away $150 to $175 per month for each of us, or $300 to $350 a month combined.”
The Smiths chose to withdraw 6% from each paycheck for several reasons. For starters, their employers matched the contributions. “Up to that amount contributions essentially doubled instantly even before considering investment gains,” says Jennifer, 44. Also, the low percentage didn’t significantly affect their monthly budget but gave them the crucial benefit of deferring taxes on at least a portion of their incomes.
Today, the Smiths contribute more than 10% of their base salaries — more than $2,000 per month combined. So far, the couple’s investment strategy has yielded bountiful financial fruit. Jennifer still has a 401(k) plan with her first employer, IBM, where she worked eight years as an account systems engineer. When she left Big Blue in 1993, Jennifer kept the employer-sponsored retirement account instead of rolling it over to an IRA. “IBM is a good company, and the money is still growing,” Jennifer says. The current balance is $95,000.
With PPG Industries since 1994, Jennifer has moved up the ladder to her present position as IT director for the company’s car paint division. In addition to her salary, she collects a bonus each year of $20,000 to $30,000. After 12 years of participating in PPG’S 401(k) plan, Jennifer’s account now stands at $146,000. She also owns shares of company stock worth $38,000.
Jennifer