Diligent Saving Pays Off: Couple Can Retire Early--as Millionaires


Leopoldo and Adelaida Tolentino are millionaires who don’t have cable TV.

He drives a 1980 Mercedes-Benz that has only seen a mechanic once in 17 years--everything else it’s needed, he’s done himself.

She works two jobs as a medical technologist.

Leo laid the hardwood floors in the couple’s 3,600-square-foot Walnut home, and he is just as hands-on with their West Covina rental property--neither a plumber nor an electrician has set foot in that house. A civil engineer, his favorite hobby is fixing up old stereos; he adores classical music, but buys only about six compact discs a year.

He has a philosophy: It’s much nicer to want something knowing that you could buy it--even though you don’t--than it is to want something and know you can’t afford it. “We are more happy to see our wallet have something than always empty,” he said.


Now that their two children are grown, the couple wrote to Money Make-Over wondering if they could afford to retire in 10 years.

Manhattan Beach fee-only financial planner Preston Caves spent two weeks reviewing their finances and punching numbers into his computer. His response: “How about five?”

“Y’all are doing great,” Caves told Leo, 55, and Aida, 48. “You have a lot of investments that are diversified. You’ve been saving rather impressively, rather diligently. If you continue these habits and get good rates of return, you’re going to be able to retire earlier than most people.”

The good news for the rest of us is that the Tolentinos did not arrive at this sunny situation through huge salaries or some unusual windfall of cash.

They’re fairly typical hard workers who play by the rules: He has worked his way up to a $57,000-a-year salary as an engineer in local government. Her two part-time jobs bring in $48,000. They parlayed an interest in real estate into a modest business of two rental properties, one in Azusa and one in West Covina. They accumulated sizable trust funds for their children’s college educations. They have made regular contributions to their retirement accounts.

Today, their net worth is more than $1.1 million--and poised to balloon, according to Caves.



Solid income. Careful spending. Prudent investment. A simple formula that should allow Leo and Aida a long time with their feet up.

Caves’ projections are based on Leo living to age 85, Aida until age 90, and her keeping one part-time job for five years after her husband retires. According to Caves’ computerized analysis, the couple can retire with a monthly allowance, after taxes and mortgages are paid, of $3,500--far more than they say they need.

And if all goes according to the computer plan and Aida does indeed die a widow at age 90 in 2039, Caves’ projections show that she would leave about $3.4 million in assets, plus two houses that are likely to be worth well more than $1 million by then. Not a bad potential inheritance for daughter Joy, now 22, and son Ryan, now 20.

Even if the average annual return should be as low as 7.75%, rather than the 9% Caves expects during the Tolentinos’ retirement years, or if their effective tax rate should rise from its current 25% to as much as 37%, the couple will still have enough money to live comfortably, the analysis shows.

“It’s nice to know that we have the ability to retire at an early age. It’s nice to have that feeling--even though we’re still working, we know we can stop working,” said Leo. Shrinking local-government budgets have Leo worried that his bosses could decide to give him “the handshake”--that is, encourage him to retire before his 65th birthday.

To determine when the couple could feasibly retire, Caves started with a software program by Leonard Systems/Mobius Group now used by about 1,400 planners nationwide. The software costs $1,000 plus $100 a month for maintenance and upgrades. It also has systems for estate planning, education funding, cash-flow analysis and net-worth figuring, income-tax projections, capital needs, life insurance analysis and asset allocation. Comparable programs are available from Lumen Systems, ExecPlan and Sterling Wentworth, among other companies.

Caves said he only uses the software for clients interested in retirement planning. One of the weaknesses in the program, he said, is that it presumes that people will pay off all their debts at the time of retirement--which is not always the best idea.

The Tolentinos, for example, have a $384,735 mortgage on their home in Walnut. Dipping into their retirement accounts to pay off that huge balance would have significant tax consequences, and the money in the house may not increase in value as fast as money invested in the stock market.

There are other drawbacks to such software, Caves said, but it can consider more variables in making a quick assessment of someone’s retirement plans.

However, any financial plan, no matter who or what calculates it, involves some guesswork. So while Caves is confident in his conclusion that the Tolentinos could easily quit work in five years, he expressed caution about some of the specifics.

For example, the rates of return are projected based on the historical performance of the stock market since World War II. It is impossible, of course, to be sure of any future investment returns, and things such as family emergencies or changes in tax legislation can’t be predicted either.

Caves therefore used conservative assumptions in making the calculations: He used a 3.5% annual inflation rate and counted on the Tolentinos’ getting only 50% of the Social Security benefits they’re entitled to, in case the system goes bankrupt.

“We don’t know the future,” the planner warned. “We’re going to be projecting about 40 years of time. That’s a lot of time in today’s fast-changing world. . . . But you do have to give your best shot at it.”


To that end, Caves offered several suggestions, including adjustments in the couple’s asset allocation, to help them solidify their position.

First, he urged that they immediately purchase disability insurance. Medical and related disability expenses can drain savings, he explained, and much of the Tolentinos’ retirement security depends on what they earn and save in the next five years.

Since both Leo and Aida earn significant incomes, Caves said both should buy coverage with benefits equivalent to about 60% of their annual salaries.

One option would be to buy five years of coverage that would pay $2,700 a month for Aida and $2,900 a month for Leo, for premiums of about $3,800 a year, Caves said. Another would be to buy coverage that would last until each reaches 65, costing about $4,500 a year for both.

“Disability is actually a more dire situation” than death, Caves pointed out. “If someone dies, you don’t have to feed them. With disability, there’s no savings, and probably additional costs, and yet there’s no income.

“You’ve got to have a good defense,” he noted, “before you can plan a good offense.”

Second, Caves and the Tolentinos agreed that they should plan to sell the duplex they own in Azusa in the next five years or so. The property, now worth about $190,000, brings in $1,625 a month in rent and the mortgage payment is only about $600 a month. But Leo said he is tired of worrying about the maintenance.

Caves said real estate is not an ideal asset for retired people because it is illiquid. If and when the Tolentinos need a bit of capital from their nest egg, it would be far easier to sell a few stocks or bonds or interest in a mutual fund than to sell a piece of real property.

Still, the Tolentinos said they do want to keep the house in West Covina, which they rent out for $1,000 a month. The property, worth about $190,000, was paid off a few years ago, but Aida recently borrowed about $40,000 to make a loan to a family member. The couple figures that Joy or Ryan might want to live in the house after they finish school.


But the couple are determined to impress upon their children the importance of being responsible for one’s decisions. Recently, the kids persuaded their parents to switch the trust fund accounts over to their control. Leo and Aida said they do not plan to give Joy and Ryan any additional money beyond the $12,000 remaining in each fund.

“I said, ‘I’m not going to catch you if you fall back, because you made a choice,’ ” Aida said she told the children.

Next, Caves turned to their retirement investments. The couple have a total of about $500,000 invested in tax-deferred workplace retirement-savings plans and individual retirement accounts. Caves praised the Tolentinos for the diversity in their portfolio, but he did suggest that they rejigger some of the fund selections within their various retirement accounts to create a more varied spectrum of investments. Overall, Caves suggested an aggressive investment mix of 90% stocks and 10% bonds for the next 10 years, then that they move closer to a 50-50 split about five years after Leo retires.

Caves was particularly concerned about the amount of money--$310,511, or 56% of their portfolio--the Tolentinos have in four tax-deferred annuities in tax-deferred retirement accounts.

An annuity is a life insurance product combined with investments, and that, after a set period of time, provides the owner with an income based on premiums paid and investment earnings accrued in the annuity. The tax-deferral benefit of an annuity is wasted inside a tax-deferred retirement account. Such accounts are most beneficial when the investments in them earn high returns that would otherwise be taxable.

Caves advised the Tolentinos to move what they can out of the annuities without incurring early-withdrawal penalties and put most of that money into stock funds.

The biggest single change Caves suggested was for Aida to liquidate more than $240,000 in a Lincoln Life annuity in a 403 (b) account from a previous job, pay off a $40,000 loan against the account, and roll the remaining proceeds into an IRA account to be invested in stocks that will add diversity to the couple’s portfolio.

He suggested she buy $97,000 of T. Rowe Price International Stock Fund (five-year average annual return: 14.9%; [800] 638-5660), which is invested about 80% in international large-capitalization stocks and 20% emerging-markets issues; $39,000 of Vanguard Index 500 (five-year average annual return: 20.2%; [800] 662-7447), a large-cap U.S. stock fund whose holdings are based on the Standard & Poor’s 500-stock index; $40,000 of Managers Special Equity (five-year average annual return: 21.1%; [800] 835-3879), a U.S. small-cap fund; and $28,000 of Acorn International, ([800] 922-6769), an international small-cap fund that is less than 5 years old.

For the rest of their portfolio, Caves suggested an overall re-balancing to maximize diversification. He told the Tolentinos to keep 10% of their retirement savings in fixed-income instruments, including U.S. government-guaranteed bonds, international bonds, quality corporate bonds and high-yield bonds.

Right now, the Tolentinos’ entire balance of about $500,000 in retirement-fund investments is in U.S. equities, about $375,000 of it in large-cap stock funds and $58,000 in medium-cap funds. Leo also has $44,000 in shares of Parsons, a previous employer.

Caves recommended that the couple reduce the proportion of their portfolio in U.S. large-cap-stock funds, and add holdings in funds investing in foreign stocks.

Thus 25% of their current assets and future savings would be in large-cap stock funds, split between an actively managed fund and an index fund; 18% in a small U.S.-stock fund; 18% in large international-stock fund; 5% in small international stocks; and 4% in international emerging markets stocks. Their U.S. medium-cap and individual stock holdings would be maintained in their current proportions, about 18% of their total portfolio.


Once the portfolio is reconfigured, Caves said, the Tolentinos simply have to contribute about $16,000 a year to their workplace-sponsored retirement plans. He also recommended that for the next five years they put an additional $7,200 a year into their savings accounts, to build up a cash cushion for emergencies. That plan, which is close to their current savings pattern, will give them a surplus of about $15,000 over what they would need at retirement to ensure four decades of financial security.

The Tolentinos, who were both born in the Philippines but met in California, said the spending and saving outline seems suitable. The couple, married since 1971 and U.S. citizens since the mid-’70s, said it’s likely their only indulgence after retirement will be an annual vacation.

“I keep telling Aida, ‘If I retire and we have the ability, I want both of us to retire at the same time,’ ” Leo explained. “Right now, Aida works in the nighttime, I work in the daytime--we’re not together. I said, ‘If I retire, you retire.’ ”

That day isn’t far off.


This Week’s Make-Over:

Investors: Leopoldo and Adelaida Tolentino

Ages: 55 and 48

Occupations: Leo, engineer; Aida, medical technologist

Combined annual income: $102,000

Financial goals: Be able to retire in 10 years

Total net worth: About $1.1 million


Real estate

* Home: Worth about $595,000, with $384,735 remaining on mortgage

* Rental properties: Duplex worth $200,000 on which they owe $77,620, house worth $190,000

Other investments

* Assets Include retirement accounts worth about $500,000 invested in annuities, large-capitalization company stocks and medium-cap stocks, and Parsons and Union Pacific stock.


$52,000 in savings accounts


* Buy disability insurance.

* Sell duplex in five years.

* To retire in five years, even earlier than their goal, put $16,000 a year into retirement accounts. Sell annuities that can be sold now without an early-withdrawal penalty. Diversify portfolio by reducing percentage of investments in large-stock funds and adding investments in international-stock and emerging-company funds.

* Save an additional $7,200 a year for five years to build up emergency fund.

Meet the Planner

Preston Caves is a fee-only investment management consultant, financial planner and Chartered Financial Analyst in Manhattan Beach. He works with companies on compensation, fringe benefit, pension and financial planning, and with individuals.