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Rule number 2 is that the topic should be focused around capital compounding for millionaires, and, whether you are in the situation now or not, the unique challenges that start to hit investors at this stage in their goals. There are very few places to discuss it, which is why this board was formed.

I have a hard time focusing on money for the sake of making money, tending to be motivated more by non-monetary goals, or at least by expressing monetary goals in an alternate way. For me, family is a much bigger motivator than my bank balance.

Courtesy of my parents' experience, I learned at an early age that retiring early was a goal to be pursued and not just stumbled into. They retired at 58 when they realized all of a sudden they had the funds to do so and jobs they just could no longer tolerate. I was 18 at the time, and in the middle of a tough recession, but by 19 I was already putting aside funds for retirement. It had impressed me how my parents became much nicer people without the job stressors and I figured I could retire even earlier if I set my mind to it at a young age.

One of the main ways I improved my lot was to move out of the high cost of living Boston, to a much cheaper Philadelphia. Was great to be able to eat as well as put money aside and pay for college, something which the low cost of living allowed. I minimized student loans by starting up a cleaning company while going to school full time, quickly having a full plate and turning away customers, not to mention tripling the hourly rate available to my limited education and experience. I also switched my major in college from French to a more marketable Chemistry with a concentration in Biology, not wanting to get stuck in what was low pay teacher career at the time. Pared back my client list to what I could handle on weekends and did an 15 month well paid internship with a specialty chemical company, buying my first home during that time. This experience was critical to verifying I enjoyed research and product development, along with showing my future employer that I was not a risky kid to hire, but could function as an adult, already understanding how to succeed in a professional environment. Having a job offer in my hip pocket from my co-op experience was a fabulous boost for self-confidence in the interview process, and I wound up getting a job that paid 30% more than what the co-op offered me. Money saved for retirement, on top of an emergency cushion in savings, got shoved into Vanguard mutual funds. Sweat equity was poured into the house which I stuffed with emotional buttons to make people desire THAT house.

With a better paying job, I bought a 250 year old fixer upper that had been vacant for 3 years and was looking daunting. I convinced those inheriting to give me a fixed rate interest only mortgage with a 5 year balloon payment, and started fixing up this once in a lifetime property bit by bit. In truth I was again stretched very thin, having rented out my first house rather than sell, and I took on a couple of roommates as the home improvements allowed. Did quite a bit of 'This Old House' type mentorship with some really great craftsmen, wracking up sweat equity. The rent paid kept the lights on and food in the fridge, but in truth I was stretched too thin. That house was my first and last emotional buy, with each subsequent real estate purchase being subject to a 10 year profit projection spreadsheet. I skated too close to the edge on that one, but lesson learned.

Met a great guy at work, who further proved how fabulous he was when he showed up to help me do drywall when I told him that was my only time available to 'hang out.' 2 years later we were married and put his townhome on the rental market. We were 30/34 when we got married, with a decent amount of assets to our names, something that let us start a family with little risk financially. Nothing makes accumulation of assets harder than a family in tow, and our later start in the family way certainly was critical to our ability to build a nest egg, as was our choice of careers and living in a low COL. We both put in too many hours to raise our own kids, deciding last minute to forget about the nanny applications and deciding I would become a stay at home mom. DH would bring home the bacon and I would use my New England thrift to stretch those dollars as far as they could go, joining TMF to learn how to improve my investment skills and retirement knowledge to make it possible to retire early and get the money needed to send the eventual 2 kids through college without loans. No doubt had we invested that money we would have another million in the bank, easily, but I felt that having to put myself through college limited my options to work, and we wanted more for our kids. We left my dream home when eldest was 18 months old, heading to an overseas posting that provided housing. Was quite the 8 year adventure, returning to the mainland with 2 kids instead of 1. Housing had doubled in price in the 8 years we were without a home of our own, so possibly not the best financial move, though Mechanical Investing was very good to us in that time frame.

TMF taught me about stocks and ETFs, IRAs and eventually Roths, how to invest for college, though we were fortunate that DH's income was high enough by then to pay it out of pocket and we left the kids' contribution to those college funds intact for seed money for the kids when they graduated. The kids started working early, documented and declared for taxes if 'self-employed,' and we funded their Roths to the extent allowed by law, giving them a head start on their retirement, making sure they knew that we considered those funds untouchable until retirement. We still fund their Roths annually, allowing them to focus on fully funding their 401Ks. College and retirement funds may well be the extent of their inheritance, but as long as we are on track for a well funded retirement, we feel this is a great way for them to inherit, particularly now that inheriting our IRAs is only tax deferred for 10 years.

DH did refuse to retire at 55 and I finally got him to do so at 58. It doesn't take much for us to be content, with many of our activities actually being free or free after minimal investment of equipment. Our needs and wants are fully provided for, and I am less interested in our getting richer than in our boys getting firmly established. Our next 'investment' will likely be to fund a home purchase for Youngest, giving him an interest only 5 year balloon fixed rate loan that he can refi down the road, as he gets more advanced in his career.

Our kids are in their 20's, no debt, and even the bleeding heart liberal who wants to save the world has a decent brokerage fund. If our RMDs are as high as calculations tell me to expect when we reach the age of RMDs, we will plan as a family how to take advantage of the up to $100,000 we can donate annually via qualified charitable deductions. It important to accumulate it, but it's equally important to spread the wealth once your needs are met.

Long, I know. Believe it or not, that's the condensed version.

FWIW,
IP

Nice to see you here, IP. Looks like you found it about the same time I did.

<<InParadise
TMF taught me about stocks and ETFs, IRAs and eventually Roths>>

GREAT EXPLANATION!

I know that this is a really old post, over 12 months ago, but I just read it and have questions about the attractiveness to you of the Roth IRA.

My take: Having to give the Feds, up front, my fully taxed contribution into a Roth, when I'm at the highest incremental tax rate, didn't make sense to me. (We had several years of >30% incremental rate.) At that rate, conventional IRA contributions enjoyed an immediate 30% 'gain', since we didn't have to pay the tax.

Then, as retired, my much lowered retirement income puts us in the lowest tax increments.

I never "Roth'ed it". I wanted max dollars at work from day one, and 'suffer' the taxed results of our gains as we draw down the RMD's, but at the MUCH lower incremental rates. (They're still 'annoying', but...)

Comments?

(Your TMF comments: Same here. Gained lots of good nuggets, along with some forgettable stuff.)

I forgot to include comments about the 'silent' detriment of inflation. It is a non-trivial factor.

According to CPI Inflation Calculator, my $1 in 1997 (the first year Roth commenced) would now be worth $1.91 in 2024.
https://www.usinflationcalculator.com/

Like I say, very non-trivial.

I forgot to include comments about the 'silent' detriment of inflation. It is a non-trivial factor.

According to CPI Inflation Calculator, my $1 in 1997 (the first year Roth commenced) would now be worth $1.91 in 2024.
https://www.usinflationcalculator.com/

Like I say, very non-trivial. - BrerBaer

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This gives me a chance to expound on a problem I see with the tax code. There are a lot of things that are indexed for inflation, SS payments, tax brackets, and so on.

But one thing that is NOT indexed but should be is Cap Gain taxation.

Using the numbers in your example, in 1997, you buy 1,000 shares of bhm enterprises for $1,000. Then in 2024 you sell them for $1,910.

Sweet, a $910 gain that uncle sugar taxes you on. But is it a gain at all, given inflation over the holding period?

...have questions about the attractiveness to you of the Roth IRA. My take: Having to give the Feds, up front, my fully taxed contribution into a Roth, when I'm at the highest incremental tax rate, didn't make sense to me.

Hi BrerBear. I did a really interesting exercise to challenge my assumption that we would be in a lower tax bracket in retirement. Took all of our TIRAs and looked at what the value of those TIRAs would be when it came to be RMD time, plugging that number into an RMD calculator to see how much we would be forced to take out annually. Even with a super conservative return on equity, we would easily be in the 28% tax bracket, using the 2017 tax brackets as we hit the RMDs after the Trump tax breaks expire. Given the much higher amount of income one can have in the 24% bracket through 2025, we started doing Roth conversions up through the 24% tax bracket. Seemed to be a no brainer. In the very least this will be a better inheritance for our two kids, one of whom is already taxed at a super high level. When we first started maxing out the IRAs, we figured it would be a great way for our kids to inherit, but the changes to inherited IRAs, having to pull all the money out in 10 years, changed our desire for this type of account. Perhaps tax changes are on the way for the Roth as well, but you can only make plans based on what is, rather than what may be. In hindsight, focusing on appreciating assets that only would be taxed for LTCG would possibly have been better, but we've done well, so how can I complain?

HTH,

IP

<<IP: Given the much higher amount of income one can have in the 24% bracket through 2025, we started doing Roth conversions up through the 24% tax bracket. Seemed to be a no brainer.>>

Ah, got it. With those numbers, I can see it.

My IRA/401k's were well into the conservative side, where the gains were not as robust. Safe and good, but not as robust. So the impacts of the RMD's are now less.

I bifurcated my overall planning into the 'safe and secure' IRA side, and the outside, where I intentionally took a roll of the dice and a lot more risk, and was 'lucky' with the outcomes.

It's worked here, so far!

Thanks for taking time to comment; looking forward to more from your corner of the globe.

In the very least this will be a better inheritance for our two kids, one of whom is already taxed at a super high level.

The rules for inherited IRAs are not friendly. You’re required to take a rmd each year, and the entire IRA must be exhausted after ten. The tax hit on your heirs could be substantial.

In the very least this will be a better inheritance for our two kids, one of whom is already taxed at a super high level. - IP

The rules for inherited IRAs are not friendly. You’re required to take a rmd each year, and the entire IRA must be exhausted after ten. The tax hit on your heirs could be substantial. - Philip

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I have been doing Roth conversions myself for a number of years for just the reason IP said, inheriting a Roth is a better inheritance for her kids.

In the case of the Roth, the beneficiary has ten years to drain the account. That can be a little at a time or all at once in year ten. Bequeathing ten years of tax free growth is a substantial additional benefit.

The rules for an inherited IRA are different and RMD's are required under certain circumstances.

I just found this board today (5/12/24)so I've only scanned some posts. The comments below may thus be old news to this group.

Re compounding for long periods and minimizing taxes, I'm surprised to not see discussion about Berkshire Hathaway stock. It is a company that retains and reinvests all earnings and pays no dividend. So the money one invests compounds at a rate now approximating the S&P 500 over long periods with no tax consequences until it is sold. Then you pay capital gains taxes, lower than ordinary taxes, and are able to choose how much and when. An added bonus is the step-up on death for spouse and heirs. That can permit compounding without tax consequences.

Due to size, we can't expect growth rates anywhere comparable to the past. But it's not unreasonable to expect high single digit returns. And, with dry powder, there are occasionally chances to invest at attractive prices. Maybe not a thrilling return outlook to those with animal spirits. OTOH it's a widely diversified company and about as low risk for permanent loss of capital as exists in the equity markets.

The concern about Warren Buffett's passing is far overblown. If the market overreacts there could be some really attractive entry points.

Just curious what others might think on this subject.

@texirish, I should really say..."nothing to add" to your observation that Berkshire cannot be left out of this discussion thread.

Over the past 50 years, there's likely no other "single pool" of millionaires and some billionaires. The future is not the past by instead of 10's and 100's of millions, there's a good possibility that there is a large pool of millionaires in the fold now and in the coming decade or two.

The concern about Warren Buffett's passing is far overblown

Indeed. While I miss Charlie, his demise didn't tank or derail a thing.

I'm reasonably sure that Todd and Ted have been making most of the investment decisions (or suggestions, when a higher dollar outlay is sought, and Warren is saying yes often), for many years. Warren certainly would not have bought Apple which is by far responsible four outsize gains well beyond Warren's Coke purchase or such.

I founded a personal finance forum at work, on our intranet, that had over 3000 participants before I retired. That was pretty cool. Seeing young people talk about compounding and such was even more so, especially those born after I entered the workforce. Seeing some folks achieve TSP millionaire status was at the top of the cool mountain. And yes, I seeded a lot of Warren wisdom in there...

The concern about Warren Buffett's passing is far overblown

Indeed. While I miss Charlie, his demise didn't tank or derail a thing.

For a company which measures its success in years, not quarters, I’d have to reply “Too soon to tell.” It’s been what, 15 months? And in that time we have seen Berkshire stack up piles of Benjamins that would reach to the moon, perhaps more. (It’s not a criticism, just an observation. It may be the exactly right thing to do, dunno.)

It’s *possible* that the death of Charlie will make no difference, but I doubt it. I think it unlikely that the death of BOTH of them won’t change things, no matter how hard someone tries to replicate their thinking.

(Steve Jobs famously told Tim Cook: don’t do what you think I’d do. Do what you think you should do.)

I'll take a mildly controversial position here, and postulate Charlie's demise (and, maybe Warren's one day) will actually facilitate or unlock some options that haven't been afforded to Greg Abel/Ajit/TeamToddAndTed.

When I retired, I left a role I was really invested in, but though I was good at it (my boss's boss begged me to stay) and am writing a book on it, I was also culminating some. Peaking a bit. Eventually it is time for some new and fresh ideas to be given the opportunity to be pursued.

Back to Charlie - at the 2004 Wesco meeting, he said something very close to "it is a wasted year in which one does not destroy one of your most sacred notions." I think he was getting at you can't keep doing everything you were doing before, in the pursuit of something with a reasonable likelihood of being better. Creative destruction.

I think he was getting at you can't keep doing everything you were doing before, in the pursuit of something with a reasonable likelihood of being better

While I think “a year” is far too short a time frame, I’d note that Warren has been through quite a few different phases in his career, some driven by Charlie, a few by the macroeconomic situation, some by the sheer size of what Berkshire has become.

He’s gone from a cigar-butt puffer to an investment guru (discovering the wonders of float), there was a phase of whole-business acquisition (still going on except for “size to move the needle”) to, well, saver of the economy (2008, although I exaggerate.) And with the addition of Ted & Todd a search for value in fields Warren wouldn’t have touched in years prior (notably Apple, but also BYD [Charlie pick, I think]) and so on.

When Warren “moves on” it cannot help but change the company. The number of corporations that have managed to “continue the culture” after the death of the legendary CEO is vanishingly small, although yes, it has happened a few times. I don’t know if it will be for good or bad, but I am quite sure that Berkshire will change, just as it has had to change in the past depending on the market, the opportunities, and economy, and the philosophy of the guys in charge.

I’m not scared about it, on the other hand I’m not so sanguine to think it remains a “set and forget” for all time.

The rules for inherited IRAs are not friendly.

Currently. The rules were switched after we had accumulated a good amount in Traditional IRAs and 401Ks. Originally we had planned to set the boys up with the idea of take RMDs and let the rest ride. That now has been reduce to a 10 year time frame, instead of their lifetime, which is how I get to draw on the IRA I inherited from my dad. Because of that, we find ourselves needing to realize taxes in our lifetime via Roth Conversions, as forcing the kids to take it out over 10 years will be a killer tax wise. IN HINDSIGHT, realizing that we did not even originally have Roth IRAs available to us, I would have just stuck the funds in something like BRK.B, but for us that's not an option, as the funds are where they are and there will be tax consequences. If you are still making contributions, for you it may be one. In the meantime, if you are dealing with owning Traditional IRAs and 401Ks, you should be considering conversions. The financial planner we had at the time, having fired a ways back, tried to tell us that it didn't matter....you get taxed now or you get taxed later. I had to show him the numbers I had run and he had to agree with me that it did indeed matter.

Sorry to say that it gets harder and harder to maintain trust in the US Government. Feel a bit like having been given a bait and switch where they get to change the rules and our funds are held captive, but trying to focus more on how to minimize the damage they have done rather than dwell on it.

IP

it gets harder and harder to maintain trust in the US Government. Feel a bit like having been given a bait and switch where they get to change the rules

I took out a ginormous amount of student loans in the 1980s, almost all for med school. Their obligation resulted in lost opportunity costs for literally decades. (Goodbye, Professor! Goodbye, bench research! Goodbye, Department Chair! Hello, private practice! (1))

I partially consoled myself at the time that at least the interest on those loans was tax-deductible.

...until, oops, a year or so into my residency, right at the time when the first payments became due (Hello moonlighting! (2)), the tax deduction abruptly vanished (3), effectively making my loans, what, suddenly 30+% bigger? There was no grandfathering, which I thought was the least our selfless public servants should have had the judicious wisdom and foresight to do.

So, a decade or so later when the 529 plans came out (and I had rugrats crawling around, who -- unlikely as it seemed in the moment -- would probably want to go off to college someday), I never got further than printing out the enrollment forms a time or two. Just couldn't pull the pin. Fool me once, etc

So, 15-20 years after that, I mostly paid list price for DS's undergraduate degrees. And did that cost me a bunch? Yes, it did.

I don't trust the bahstids. Not for the last 40 years or so. And while I'm happy to be on Medicare and am looking forward to SS at age 70 or so, we could get by without the latter at lease. (And the former, if the ACA isn't gutted. Not holding my breath on that one either)

-- sutton

(1) not that that's not the decision I might have made anyway, but there's a difference between optional and not-optional

(2) including thirty-hour weekend shifts as the only medical officer on duty for the entire state prison system. Yes, inside the fence. (Free advice to readers: try not to go to prison. It's bad in there)

(3) https://en.wikipedia.org/wiki/Tax_Reform_Act_of_19...

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Berkshire Hathaway FAQ

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