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David Crosetti
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I was born and raised in California. I worked in the family business for a number of years and then decided to spread my wings and try working for someone else. My first significant job was with Frito Lay. After a stint in the salty snack business, I transitioned to the beverage industry,... More
  • A Million Dollar Portfolio: Easier Than You Might Think 36 comments
    May 28, 2013 11:51 AM

    Introduction:

    In the movie, Office Space, there is a scene where three characters are standing around the copy machine and having a conversation. It goes something like this:

    Peter Gibbons: Our high school guidance counselor used to ask us what you'd do if you had a million dollars and you didn't have to work. And invariably what you'd say was supposed to be your career. So, if you wanted to fix old cars then you're supposed to be an auto mechanic.

    Samir: So what did you say?

    Peter Gibbons: I never had an answer. I guess that's why I'm working at Initech.

    Michael Bolton: No, you're working at Initech because that question is b.s to begin with. If everyone listened to her, there'd be no janitors, because no one would clean crap up if they had a million dollars.

    Samir: You know what I would do if I had a million dollars? I would invest half of it in low risk mutual funds and then take the other half over to my friend Asadulah who works in securities...

    Michael Bolton: Samir, you're missing the point. The point of the exercise is that you're supposed to figure out what you would want to do if...

    What I Know:

    Office Space came out in 1999. Back then, a million dollars was a lot of money. I remember when I was a kid, thinking that a million dollars would probably be more money than anyone could ever need.

    Now, make no mistake, a million dollars is a still a good deal of money today, but a million bucks just doesn't seem to go as far these days as it used to go.

    Regardless, the question today is this. "If you had a million dollars, what would you do?"

    Well, before you can do anything, you have to have a million dollars. Here's where things get tricky for most people. They look at a million dollars and they think that there is no way that they will ever reach that goal. But, they're wrong. It's actually not all that difficult. The hard part is actually getting started and putting aside all your rationalizations as to why you can't have a million dollars.

    How To Have A Million Dollars:

    Let's take a look at this project from the perspective of someone who is starting out at age 25. That individual would have a potential 40 years of investing before reaching what is today known as "retirement age."

    While the best vehicle for putting aside the most money is the 401k plan that many of us have at work, sometimes the investment options available in the 401k are not all that great. When you compare other tax deferral investment options, perhaps the Roth IRA lends itself well to our goals. Regardless, I am not endorsing any particular investment vehicle, but will use the Roth and Traditional IRA as points of discussion, relative to the amount of money that can be invested.

    This year, the Roth and Traditional IRA investment vehicles allow an individual who is younger than 50 to put aside $5500. The amount of earnings that can be put into the retirement plans has been growing over the years and should continue to grow as we move forward.

    By committing to investing $5500 a year in a Roth or Traditional IRA, with a rate of return in the 8% range, and investor can expect the following results:

    (click to enlarge)

    Investing $5500 a year, with an 8% growth rate, will earn you $1,658,280.42 at the end of 40 years and our example reaching age 65.

    Our example investor actually becomes a millionaire in 2047, which is 34 years from the starting point in 2013.

    What You Should Know:

    There are some people who would be unable to save $5500 a year in their initial work years. However, saving whatever you can is a key to having long term success. If you never save because you can't reach the $5500 number, today, you will fall farther behind when you decide to save nothing.

    In this example, we never increased the amount of money being put aside in the retirement account. As our income grows and as the government increases the amount of money that we can save in a Roth or Traditional IRA, it makes sense to try and reach those increased savings amounts.

    Starting early makes all the difference in the world. The longer you delay, the lower your end results are going to be. It's all about math.

    Summary and Conclusion:

    In our example, the individual is going to save $220,000 of his own money, ($5500 x 40 years), but he will have 1.6 million dollars put away.

    Having a spouse who can do the same thing makes the exercise even better, in my opinion.

    What I look for in investing this money is:

    1. Stocks that are priced at a value to their intrinsic worth

    2. Companies that have a long history of paying dividends

    3. Companies that increase dividends annually

    4. Companies that have DGR larger than inflation

    5. Reinvest dividends for capture of compounding

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Comments (36)
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  • raykrv6a
    , contributor
    Comments (2486) | Send Message
     
    Good example Dave.

     

    When 401k's first came out, I couldn't fully fund it, but put my raises into the contributions and was eventually able to fully fund the 401k annually.

     

    We lived on less, but it still was good because of the comfort level of knowing retirement was covered.
    28 May 2013, 12:04 PM Reply Like
  • PendragonY
    , contributor
    Comments (5517) | Send Message
     
    Ray,

     

    I did much the same with my company 401(k). I started with enough in to get the max company match. And then each year I bumped my percentage up enough to take half my yearly raise. And now my wife and I are maxing out our contributions. Which between us is more than we were making when we first started putting money into a retirement account!
    29 May 2013, 07:05 AM Reply Like
  • David Crosetti
    , contributor
    Comments (10228) | Send Message
     
    Author’s reply » Ray:

     

    The 401k vehicle offers some advantages to the Traditional IRA. First, the amount of money you can defer is much larger in the 401k. You also, in many cases have employer matching funds that can accelerate your return. When you leave that employer you can roll that money into an IRA without tax consequences and then begin to invest in individual stocks if you so choose.

     

    Either way, getting started is the key and not getting started is a very bad plan.

     

    Dave
    28 May 2013, 12:10 PM Reply Like
  • raykrv6a
    , contributor
    Comments (2486) | Send Message
     
    The payroll tax advantage with the 401k along with the match is pretty good over time. We did IRA's on the side too.

     

    I've already rolled one 401k into an IRA and setting up to roll the last 401k.

     

    I think I'll just stay retired as I'm finding plenty to do.
    28 May 2013, 02:47 PM Reply Like
  • David Crosetti
    , contributor
    Comments (10228) | Send Message
     
    Author’s reply » Ray:

     

    It sure is!

     

    Dave
    28 May 2013, 04:01 PM Reply Like
  • David Fish
    , contributor
    Comments (7462) | Send Message
     
    Dave,
    This should be very encouraging to those starting out, especially since you didn't even include the extra $1,000 that could be invested each year once a person turns 50 OR the potential for the 401k contributions...which can be about three times as much as the IRA amount each year.
    Of course, the sticking point is putting the money aside, and too few people give priority to the "pay yourself first" principle.
    28 May 2013, 12:11 PM Reply Like
  • David Crosetti
    , contributor
    Comments (10228) | Send Message
     
    Author’s reply » DF:

     

    I didn't want to have a piece that went on all that long. The nuances are many! I am in the "bonus round" and my wife turned 50 this year, so she is in the "bonus" round as well!

     

    What that does is give her and me the stepped up savings to close in on that million dollar target.

     

    I am a big fan of 401k's for the dollar amounts that they allow you to put aside from current taxation. When you can afford to do it, the 401k gives you a triple on savings vs. Roth or IRA. That's hard to beat even with a "poor" plan.

     

    Having had a number of jobs after leaving KO, one of the things I found is that the "poor" 401k plans worked out very well for me. My return, relative to the amount of money that I personally put aside, were always positive and it was a set it and forget it plan.

     

    With the Roth and the IRA, you actually have to schedule your monthly deposits or your annual one. With the 401k, it's just fill out a form and the company takes care of it for you.

     

    Not paying yourself first is the biggest mistake that people seem to make. It's unfortunate, but so true. Even if you do not have a great paying job, but do have access to the 401k put something into it and increase the amount as your salary grows or you change jobs and perhaps get a better paying one.

     

    Dave
    28 May 2013, 12:20 PM Reply Like
  • billinsd
    , contributor
    Comments (1423) | Send Message
     
    Great article,
    May I add a few footnotes ?
    Back in my 20's and 30's IRAs were limited to $2000 per year.
    Since I did not have great knowledge, I used mutual funds to build my core.
    There are still many good mutual funds out there for young people or people who dont have the time or savvy to manage their own money.
    I am forever grateful to Mr. Michael Price for helping me get launched in the investment world.
    Every investor should research Michael Price.
    Sometimes life's events can derail your locomotive.
    Divorce,illness, job loss can all cut into your plans and dreams.
    The main thing is "stick with the plan" and never waiver.
    While my circumstances <divorce> have prevented me from personally reaching that magic number of 1 million,I would have been long past it,had life not thrown some curveballs.
    Start young,stay the course....
    28 May 2013, 12:27 PM Reply Like
  • David Crosetti
    , contributor
    Comments (10228) | Send Message
     
    Author’s reply » Bill:

     

    I can appreciate the way that life throws curve balls at you. Been there, done that, for sure. You have to get up and keep going, however, and while that's not always easy, it's necessary.

     

    I know that you are one person that I really admire for your "can do attitude." Good to know you, my friend.

     

    Dave
    28 May 2013, 12:54 PM Reply Like
  • David Fish
    , contributor
    Comments (7462) | Send Message
     
    "Not paying yourself first is the biggest mistake that people seem to make."

     

    And that's largely related to the psychology you mention: Giving up before you even start because you're convinced that you have no chance of "amassing a fortune."
    28 May 2013, 12:27 PM Reply Like
  • David Crosetti
    , contributor
    Comments (10228) | Send Message
     
    Author’s reply » DF:

     

    That is a behavior that is all to common these days. I remember when I went to work for KO. I wasn't the brightest bulb on the tree, but I showed up every day with a desire to get the job done.

     

    Had my share of ups and downs, but I've been known to be a very stubborn person who doesn't like coming in second place.

     

    Dave
    28 May 2013, 12:56 PM Reply Like
  • curreyr
    , contributor
    Comments (689) | Send Message
     
    One thing I would add is that the "second mistake" would be the "home run strategy". For some, buying lottery tickets is "the plan"!

     

    In my opinion, retirement planning is more like farming than it is gambling.
    28 May 2013, 01:05 PM Reply Like
  • David Crosetti
    , contributor
    Comments (10228) | Send Message
     
    Author’s reply » C:

     

    I like to hit for on base percentages, personally. That's why I'm a DG investor.

     

    Dave
    28 May 2013, 01:19 PM Reply Like
  • Cheesecake7
    , contributor
    Comments (131) | Send Message
     
    Inch by inch a cinch, yard by yard hard.....I like the farming image. I tried the home run strategy and struck out.
    28 May 2013, 01:53 PM Reply Like
  • David Crosetti
    , contributor
    Comments (10228) | Send Message
     
    Author’s reply » Cheese:

     

    We put in a garden every year. We have peas, beans, squash, tomatoes, potatoes, corn, and this year watermellons!

     

    Dave
    28 May 2013, 04:01 PM Reply Like
  • 6grizzly
    , contributor
    Comments (10) | Send Message
     
    Thank you. It was a great read.

     

    ``Having a spouse who can do the same thing makes the exercise even better, in my opinion.''

     

    This reminds me of ``The Millionaire Next Door.'' The authors stated that it would be very difficult to accumulate wealth if one in a couple is a spendthrift. And in their survey, many millionaires claimed that they couldn't get their wife to spend.
    28 May 2013, 01:54 PM Reply Like
  • David Crosetti
    , contributor
    Comments (10228) | Send Message
     
    Author’s reply » Grizzly:

     

    Having those conversations with the spouse is very important. The rule we use in our household is that 10% gets saved first. Everyone else that we might owe money to can just wait.

     

    Pay yourself first. I've been funding a Roth for my wife and she is really getting interested in managing her investments. When she looks at her dividend income, she gets very happy.

     

    Dave
    28 May 2013, 03:54 PM Reply Like
  • David Crosetti
    , contributor
    Comments (10228) | Send Message
     
    Author’s reply » Cheese:

     

    We farm for dividends. We plant money into stocks, the stocks produce income in the form of dividends. We can harvest the dividends and the crops just keep producing more abundant crops.

     

    Plus with farming, you get to work outside instead of some stuffy office. My Deere has airconditioning and Sirius radio!

     

    Nothing runs like a Deere.

     

    Dave
    28 May 2013, 01:55 PM Reply Like
  • Mike Nadel
    , contributor
    Comments (7973) | Send Message
     
    <<Well, before you can do anything, you have to have a million dollars.>>

     

    Hey Dave ... that reminds me of an old Steve Martin joke (back when he used to be funny): "I'm here to tell you how to turn a million dollars into 10 million dollars. OK, first, get a million dollars. Then ... "

     

    As for your article, good advice for every investor. A million bucks is still a lot of money and still worth striving for. Look at stats today; lots of retirees and near-retirees don't even have six figures saved.

     

    One other thing about IRAs: The limit is $5500 this year (and, as Dave Fish said, $1000 more for those at least 50 years old). The limit will go up, just as it has every few years since it started at $2000 in 1998.

     

    As you know, I am especially a big fan of Roth IRAs, as I wrote last October in one of my most-read articles (http://bit.ly/11vxI3h)

     

    Be good.
    Mike
    28 May 2013, 02:28 PM Reply Like
  • David Crosetti
    , contributor
    Comments (10228) | Send Message
     
    Author’s reply » Mike:

     

    Like you, I am a real fan of the Roth IRA. We have been in 401k's for a while with our work and have rolled those into IRA's. While I am still funding my 401k at work, I'm putting money to the maximum allowed in my wife's and my Roth accounts.

     

    Dave
    28 May 2013, 03:57 PM Reply Like
  • Mike Nadel
    , contributor
    Comments (7973) | Send Message
     
    Dave:

     

    I actually have started using a Roth 401k, knowing full well that I'll be rolling it over to a Roth IRA. That's what I do in my current part-time job. My wife still does the regular 401k for the instant tax savings but we might do a Roth 401k with some of hers in 2014. Not all companies offer them, but they are a legitimate option. It's always good to diversify investment vehicles, as well as investments themselves.

     

    Mike
    28 May 2013, 09:25 PM Reply Like
  • David Crosetti
    , contributor
    Comments (10228) | Send Message
     
    Author’s reply » Mike:

     

    I started to get into all of the different investment vehicles, but my head started to hurt. There are all kinds of plans out there for private sector people, public sector folks, self employed, etc. etc!

     

    I think everyone has to keep in mind the value of deferred taxes that many of these programs offer and then on top of that, the Roth with no taxation and no RMD.

     

    I love the Roth as a tag advantaged savings/investment plan. The more the merrier!

     

    Dave
    28 May 2013, 10:17 PM Reply Like
  • curreyr
    , contributor
    Comments (689) | Send Message
     
    In 2006, I planted a pair of cherry trees (bare root saplings).
    In 2007, I had 2-3 cherries.
    In 2008, I had a couple handfuls.
    In 2009, I had enough to make the best cherry pie ever.
    In 2010, I sold the property, but I expect their "dividend" is being enjoyed by the new owners!

     

    Farming/gardening involves many of the aspects of successful investing. That is:
    Planning (choose your 'crop' wisely)
    Patience (it doesn't produce overnight)
    Nutrition (it requires additions .. water/fertilizer or $)
    Maintenance (weed, thin and adjust for conditions)
    28 May 2013, 02:29 PM Reply Like
  • David Crosetti
    , contributor
    Comments (10228) | Send Message
     
    Author’s reply » C:

     

    I love blueberries. I put two plants in my back yard when we bought the house 10 years ago. Needless to say, we eat a lot of blueberries and love them!

     

    We make preserves, pies, syrup, freeze them..........it's all good.

     

    Dave
    28 May 2013, 03:59 PM Reply Like
  • curreyr
    , contributor
    Comments (689) | Send Message
     
    Yes, there are many ways to enjoy the "fruit" of your investment 10 years ago. I'll also guess that the two plants didn't produce the amount after year one that they do now.

     

    "From seeds grow mighty oaks"
    28 May 2013, 04:11 PM Reply Like
  • David Crosetti
    , contributor
    Comments (10228) | Send Message
     
    Author’s reply » C:

     

    No, it took them a while to throw off more blueberries that we can eat. Now we bring blueberries to all the old folks in our neighborhood. We pick, they eat. Blessing every muffin and pancake!

     

    I think that's how Knott's Berry Farm got started!

     

    Dave
    28 May 2013, 04:22 PM Reply Like
  • Guitar Man
    , contributor
    Comments (228) | Send Message
     
    Dave -

     

    First and foremost: I, too, am a major-league blueberry fan (blueberry pancakes, blueberry pie, blueberry waffles, or just plain old blueberries - you name it!).

     

    Secondly: your statement re "Pay Yourself First" is the wisest advice that one can take. It's a discipline, but one which many, sadly, do not adopt. I don't care how much or how little you pay yourself; pay yourself FIRST!

     

    When I was younger, my dad urged me to begin contributions to my company's TDSP (Tax Deferred Savings Plan, now commonly known as a 401k). I did, and the results have been staggering. However...I was only able to begin with about $50-100 per month. That did not deter me! It was a start - and that's all you can do. Just start. Anything is better than nothing (as you so aptly stated in this article).

     

    Finally, any contributions going to other places than a 401(k) - wherein most choices are usually, but not always, mutual funds - should seek out the best Dividend Growth Stocks on the planet. Water your plants...and watch them grow....

     

    Thanks for all of your contributions on SA.....

     

    -GM
    28 May 2013, 05:30 PM Reply Like
  • David Crosetti
    , contributor
    Comments (10228) | Send Message
     
    Author’s reply » GM:

     

    I had a kid who worked for me at Coca-Cola. He came into my office one day and asked me if he could have some advice. I said, "sure." What he wanted to know was if he should pay cash for a house or finance it. I asked him how much the house cost and he told me $384,000.

     

    I sat there for a moment and said, "Mark, do you have 384K?" He told me that he did. You see, his dad was a stock broker and from the day he was born, his dad invested money in the stock market for his son. His dad it turned out had put $25k away for his son over the years and when he was 18, dad asked Mark to "pay him back."

     

    So while Mark was working at Coke, he would give his dad money every week to pay down what he owed. His dad meantime took that money and invested it for Mark and at that time he had 400k in stocks.

     

    That's when the lightbulb went off and I started to invest in stocks. It was 1984--can you imagine what 400k was worth back in those days? A bunch.

     

    Ever since, I've allocated money to my 401k every paycheck and have done that since 1984.

     

    Dave
    28 May 2013, 05:48 PM Reply Like
  • buildingyield4years
    , contributor
    Comments (303) | Send Message
     
    I personally preferred the answer "two chicks at the same time" from Pete's neighbor but I doubt that would have gotten your point across as well!!

     

    really enjoy the farming analogy above by currey.

     

    I'm fortunate to work at a place that has matched my 401k contributions up to 5% the very minute I started working at what is/was my first full time job. Decided initially that 10% was what I was putting in and I'd have to work around what was left when all the other hands got ahold of the pieces of my paycheck. It ain't effortless at times, but I'll be thanking myself in the long run, and gets a little more manageable with raises and bonuses.

     

    I started a little ahead of many of my peers by having no student loans coming out of school and I'm not about to ignore the head start it gives me in my efforts to compound and farm as much as I can as early as I can. This article is a nice reminder of the powers that one can have if they understand the options they have with their money. It's nice to be able to walk backwards from a predetermined goal and know that it's achievable with fairly conservative assumptions.
    28 May 2013, 09:56 PM Reply Like
  • David Crosetti
    , contributor
    Comments (10228) | Send Message
     
    Author’s reply » Years:

     

    Yeah, I like the second quote better, but I just couldn't make it fit--but Pete's neighbor has a pretty good plan there!

     

    Dave
    28 May 2013, 10:19 PM Reply Like
  • Smarty_Pants
    , contributor
    Comments (2781) | Send Message
     
    You can lower your annual contributions to $3,325.00 and still make it to a cool $1 million under the conditions given in the article.

     

    That's about $277.00 per month of savings.

     

    Dave's exercise is a good way to set up a predicted set of goals to compare your actual results against along the way. Year by year you can see if you are on schedule, or even ahead if you're lucky.

     

    It's a great planning tool.
    29 May 2013, 08:14 PM Reply Like
  • Sum02006
    , contributor
    Comments (347) | Send Message
     
    This is a great article. Thanks, Dave. And an excellent comment stream. Using a Roth IRA is a great way to slowly but surely develop wealth over time.
    11 Jun 2013, 09:58 PM Reply Like
  • David Crosetti
    , contributor
    Comments (10228) | Send Message
     
    Author’s reply » 2006:

     

    Thanks!

     

    I would agree that the Roth is a fantastic tool for younger folks and a pretty good tool for people like me (older).

     

    When you take the time to sit down and do the math, the potential is staggering.

     

    I hope that people would take advantage of the retirement savings programs that are available to them, but most people will find a reason why they can't afford to invest, instead of finding a reason why they can't afford NOT to invest.

     

    Dave
    12 Jun 2013, 07:52 AM Reply Like
  • Robert Allan Schwartz
    , contributor
    Comments (12924) | Send Message
     
    "most people will find a reason why they can't afford to invest, instead of finding a reason why they can't afford NOT to invest."

     

    That's a great way to phrase it! :-)
    12 Jun 2013, 09:45 AM Reply Like
  • SDS (Seductive Dividend Sto...
    , contributor
    Comments (3190) | Send Message
     
    David,
    Our friend Robert Allan Schwartz did show that DGR=8% is probably not sustainable in 40 years span.
    SDS
    12 Jun 2013, 09:52 AM Reply Like
  • David Crosetti
    , contributor
    Comments (10228) | Send Message
     
    Author’s reply » SDS:

     

    It's not the dividend growth rate that you need to be concerned about. It's investing in quality stocks that are priced at a value--first and foremost.

     

    When you buy a stock and the price of the stock at the time of purchase makes all the difference in the world.

     

    Having purchased different stocks in my portfolio, the gains of 15-30% over 12-18 months ACCELERATES the portfolio growth rate.

     

    I am not looking for a DGR of 8%. I am looking at a total return of 8%. That not only includes DGR, but capital appreciation as well.

     

    Dave
    12 Jun 2013, 10:07 AM Reply Like
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