Millionaires in the making: The Rodrigueses

Only 27 years old, prodigious savers Gina and John Rodrigues are determined to retire with a million-dollar nest egg by the time they turn 40. Here's the odd part: They just might make it.

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By Paul Keegan, Money Magazine contributing writer

In the hills near their home in the Oakland area's East Bay, Gina and John Rodrigues (here with Terminator, their shetland sheepdog) map out their financial future. Top priority: an early retirement.
In their spartan lifestyle, the Rodrigueses' only splurge: this $30,000 Subaru that John uses for rallycross racing.
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(Money Magazine) -- John and Gina Rodrigues have always been good with numbers. John is a software engineer who manages a team at Microsoft, and Gina spent years processing mortgages at Wells Fargo and Countrywide Home Loans. But the numbers they are especially good at are the kind with dollar signs in front of them.

At age 27, John and Gina already earn a combined $174,000 a year, save half of what they make and have built a formidable portfolio of $380,000 in stocks, mutual funds and cash. Their goal: to become millionaires and retire by the time they turn 40, just 13 years from now.

To make that dream a reality, they have become black-belt practitioners of an art rarely practiced in America these days: While others with their earning power might indulge in fancy dinners, luxury vacations and designer wardrobes, the Rodrigueses live like young couples did before the era of easy credit. They rent the house where John grew up in the San Francisco Bay Area for a mere $650 a month; rarely travel; split an entrée on the rare occasions they eat out; and spend almost nothing on clothes (John wears free Microsoft T-shirts, while Gina gets hand-me-downs from her sister).

They are driven by a fierce determination to control their own fate. John yearns to quit his job to indulge his passion for the outdoors, and Gina plans to cut back her hours at the boutique they own to work with animals and, possibly, raise a family.

Can the couple do it? The outcome depends on the answers to three key questions: Will they be able to keep up their spartan lifestyle? (Anxious for a home of their own, they are now shopping for a house in one of the priciest areas of the country.) Will they invest wisely? (Among their goofs so far: They snatched up three properties near the height of the real estate bubble.) And even if they do, is 13 years really enough time to amass the huge sums required to retire at 40 - enough money to last them for the ensuing 50 to 60 years?

A great start

John learned the importance of saving early. When his father quit his job as a retail store manager to follow his dream of becoming a high school special-ed teacher, the family's income took a big hit. They squeaked by thanks to their rainy-day funds, but there wasn't much left for extras. When John, then 12, wanted the latest video-game system, his parents told him to earn it. So he raked leaves and mowed lawns for nine months until he'd scraped together the $150 he needed.

Later, when John saw his high school classmates tooling around in expensive cars, he worked long hours at a computer store so he could buy a used Honda Prelude. "I don't need my mom or dad to buy me a $60,000 Mercedes," he recalls thinking. "I can do it on my own."

John and Gina met at that computer store, where she was a cashier. They began dating and spent money like typical teenagers, going out to dinner and the movies, shopping at the mall. But starting in his sophomore year as an information systems major at the University of California at Santa Cruz, John had to pay his own tuition (his grandfather had paid for the first year). He saw a stark choice: take out loans like his friends or get a job and live frugally. He chose the latter, working 30 hours a week while packing his schedule with extra classes. "People said it was too hard; I wanted to prove them wrong," says John, who graduated with highest honors in just three years, free of debt.

Gina was slower to embrace John's money-saving ethic. Midway through college, as their relationship got serious, she revealed that she had $5,000 in credit-card debt. "I loved shopping," she remembers. "If I had a tough day, I'd go to the mall to make myself feel better." John was not pleased, but Gina devised a plan to dig out. Shortly after graduating, she got her real estate license and paid off the debt with the $9,000 commission she made selling her first home.

About a year after they began their careers - John at Microsoft, Gina at Wells Fargo - John proposed. But first he drove to Oregon (12 hours each way) to buy Gina's engagement ring, thereby avoiding $1,500 in California sales tax. They married in 2004 and moved into a two-bedroom condo in Dublin, Calif. that they bought for $377,000, putting down 5% of the price and financing the rest.

Within a year the condo had appreciated to $535,000. Tempted by their success, John and Gina decided to buy an investment property, settling on a $141,000 three-bedroom house in Phoenix, where friends had invested. They put down 10% and hired a property manager. Within 18 months the home's value had shot up to $240,000. They refinanced, taking out a $190,000 mortgage to free up cash for more properties. In late 2005 they bought two $150,000 homes near San Antonio with a 20% down payment.

Not that the Rodrigueses were relying on real estate alone to build their fortune. They were also saving furiously, putting 15% to 20% of their income in a mix of stock and cash investments. By the time they turned 24, when many of their peers were struggling with student loans and crushing credit-card bills, Gina and John already had nearly $70,000 set aside for retirement, plus their real estate equity.

Buckling down

Then came a stumble, followed by an epiphany. John decided he could use tips from a financial adviser. After picking one he deemed astute and trustworthy, he bought a pair of variable life insurance policies at the planner's suggestion, only afterward looking at the fine print to find that the policies were loaded with fees and cancellation penalties. John stormed into the adviser's office demanding an explanation, then realized it was his own fault for not being more careful. "I was so angry that I didn't catch it," he says.

It wasn't just the $5,000 it cost to cancel the policies that had John steaming. His very identity - the financial whiz kid with a chip on his shoulder who could shut up those who doubted him in high school and college - was shaken. So he gave himself a crash course in finance, spending weekends with Gina poring over investment magazines and books. One day, he says, they hit upon a stunning realization about the power of compounding: "If we just push as hard as we can for another 10 years or so, there could be an explosion of financial growth at the end for us."

The Rodrigueses vowed to yank their belts even tighter. Like Tiger Woods restructuring his swing after winning the Masters a decade ago, they took their already phenomenal savings game to a new level. They sold their condo in late 2006, netting $110,000, and moved to John's childhood home, which they rented from his parents (his mom and dad had moved to a house nearby). They cut back on eating out to once a month, going to cheap chain restaurants and sharing a meal. They vowed to drive their cars until they died. Their clothes budget dropped to $300 a year.

Their new minimalist approach caused a few problems socially. Gina recalls awkward moments going out to eat with her family or friends when she would order only an appetizer and tap water and didn't think it was fair to split the check equally. John had to "respectfully decline" when buddies invited him to fly to Las Vegas for the weekend. "We're kind of boring," says Gina.

Their restricted lifestyle sometimes chafes, both admit. Living in John's boyhood home, furnished with his parents' stuff, is tough. "It's hard to see other couples living in their own houses the way they want," says Gina. And yes, she sometimes resents John's constant admonitions to save, save, save: "I'd say, 'We could die in a car crash tomorrow, so let's enjoy ourselves now!' " John, though, revels in his thriftiness: "I'm okay with people calling me cheap."

Over time they've learned to compromise. They eat out two or three times a month now and recently splurged on tickets to the show Jersey Boys (it was their anniversary). Gina convinced John to buy something he'd been craving for years - a $30,000 Subaru WRX STI to indulge his hobby of rallycross racing. And John has promised Gina they'll buy a home of their own as soon as they find a suitable one (they're looking in the $350,000-to-$450,000 range).

The Rodrigueses still manage to save more than half of their income, which is spread among different investments. John aggressively buys discounted Microsoft shares through an employee stock-purchase plan and contributes nearly the max to his 401(k). Additional savings go into a diversified mix of stock funds and cash accounts.

Bumps in the road

But they have a long way to go before they're millionaires. And the Rodrigueses have run into a few snags that underscore how hard the path to wealth can be even for the most dedicated savers.

For one thing, owning real estate so far away has turned into a headache. Make that a migraine: One house stood empty for nine months because of a dispute with a former tenant, and their Phoenix property has dropped so sharply in value that they now owe nearly as much as the house is worth. Carrying costs for the properties exceed the rental income they generate by $9,000 a year. Given the downturn in real estate prices, if they sold all three homes today, they'd barely break even.

The Rodrigueses have also seen how a blip in their careers can undermine their saving efforts, even temporarily. Last year Gina quit the mortgage underwriting business - the hours were too long, she says, and the work wasn't creative enough. During the year she was out of work, the amount the couple were saving dropped by 20%. Then, earlier this year, Gina found a boutique called La Lavande, which sells imported soaps and handbags, for sale in nearby Walnut Creek. The Rodrigueses took out a $75,000 loan to buy the store - and Gina had found her calling.

Eventually, though, the Rodrigueses both hope to stop working altogether. Their plan is to move away from the Bay Area to a less expensive locale like Arizona by age 40. They want to buy a ranch where outdoorsman John can go hiking and camping while Gina starts a small farm, raising sheep and chickens and maybe a family. "I'd like a really simple life where John and I can just spend more time together," says Gina.

The advice

Money asked California financial planners Eric Toya of Redondo Beach and Mike Chamberlain of Santa Cruz to assess the Rodrigueses' chances of retiring by 40 and recommend steps to help them reach that goal. Their suggestions:

Rethink that exit date. If John and Gina maintain their current rate of saving, they'll build an impressive nest egg over the next 13 years. Assuming they get raises of 4% annually and their portfolio averages gains of 6% a year, Toya estimates they'll have $2.9 million at age 40. Combined with the income they might earn from any ventures they pursue in retirement (John's thinking about buying more investment properties or starting a small business), that might be enough to last them the following 50 to 60 years.

Toya, however, stresses that making projections for such a long period is inherently risky because the unknowns are so great: What path will their careers take? Will either one develop a health problem? Might the financial markets go through a protracted downturn? To compensate for those risks, Toya says, "the younger you retire, the more conservative your withdrawal rate should be." But even if the Rodrigueses draw down their portfolio at a 3% rate vs. the 4% typically recommended for retirees, they'll run out of money before age 80.

What to do? Delaying retirement by just five years will greatly increase the chances that their money will last their lifetime, Toya says. When they're 45, their portfolio will be worth $4.75 million, according to his calculations. They could tap their savings at an even lower 2.5% annual rate - giving them an extra cushion for bad market years and big expenses like raising kids and paying for college - and they'll still likely have enough to live comfortably to age 100.

Dump the company stock. The Rodrigueses have 37% of their portfolio in Microsoft. That's far too much in a single stock, especially since they're also dependent on the company for most of their income. Chamberlain advises selling the shares in increments every two weeks or so to get the stock down to 5% of their portfolio.

John strongly disagrees. "Frankly, I think it's dumb to sell low," he says. "I think it's a safe investment to hold until the market comes up." Replies Chamberlain: "I don't care what the stock is: To diminish risk, you need more diversification in your portfolio."

Add a few bonds. Gina and John scored off the charts for risk tolerance in a questionnaire Chamberlain gave them. But even for fearless investors, having 99% of a 401(k) in stocks and just 1% in fixed-income assets is too aggressive, warns Chamberlain, who suggests a 90/10 split. Best bet: intermediate-term bonds, which historically have returned about 5% a year.

Consider a real estate sale. The Rodrigueses are losing about $750 a month on their three investment properties. If they sell one or two of the homes now, they can stop the bleeding and probably break even on their purchase. If they're forced to sell later on and the market is still in a free fall, they stand to lose a lot more money.

But John is adamantly against a sale, an odd position for a man who splits entrées at a restaurant to save a few bucks. Chamberlain believes John has developed an emotional attachment to the properties - or he may simply be unwilling to admit that they made a mistake. John counters: "I think those properties are going to come back eventually. Even if they don't, our retirement plan is not based on any return from those properties anyway."

After meeting with Chamberlain, John and Gina are relieved to know they're on the right track. They do understand that life is uncertain - that John could lose his job and that investment returns could keep shrinking. If that happens, they say, they're prepared to work past 40 and retire later.

But John remains optimistic about their chances of reaching their goal. "I get tired of the naysayers around me," he says. "Sure, it gets lonely sometimes, but look, I have a beautiful wife, I'm happy, I've got good friends...." He pauses, as though hearing a cash register ringing. "Well, I don't need a hundred friends. That usually means a hundred gifts a year."

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