Millionaire In The Mirror - even the rich need sound financial planning

Kiplinger's Personal Finance Magazine, March, 2000 by Kimberly Lankford, COURTNEY McGRATH

The next person to STRIKE IT RICH could be somebody you know--you.

WHO WANTS TO be a millionaire? Who doesn't? And to reach that goal you don't have to strike it rich on a game show, win the lottery or invest in a newly public dot-com. A growing number of Americans are entering the winner's circle the old-fashioned way: by working hard to develop, and possibly sell, a business, or by investing steadily and astutely.

Take Joe Kruse, who used to work in sales for a commercial carpeting business in Chicago. During the 1970s and '80s he concentrated on raising his family. But he still managed to dabble in real estate, oil wells, gold and bonds.

When his everyday expenses began to decline in the early 1990s, Kruse opened a Fidelity brokerage account and started investing in stocks and mutual funds. He bought Microsoft early on, held it, then bought some more. Hooked on technology, he began spending his free time researching potential investments. He asked friends who worked in finance and technology about companies they admired. His son, who had a job in the computer business, told him that everyone in the industry was using software made by a company called Oracle, so Kruse bought some shares. His research also pointed him to Sun Microsystems, America Online and Yahoo! when they were relatively cheap. Now he's 56 years old, retired from the carpeting business and sitting on a portfolio worth $ 5 million. "I would probably be even better off if I had bought an index fund rather than drilling for oil," he says.

Kruse has plenty of company. In 1998, 8.8 million U.S. households had more than $1 million in assets, compared with 7.3 million in 1997 and just 4.2 million in 1990, according to the Spectrem Group, a consulting firm that does research for financial-services companies. The trend is reflected in e-mails to Kiplinger's: "Advice from you, among others, has helped me to a net worth of almost $2 million. Not bad for a former migrant worker." "I am in the process of selling my business and will go from a total net worth of approximately $250,000 to approximately $20 million overnight. I am in desperate need of a top money manager." In fact, thanks to the bull market and the booming economy, it's increasingly likely that all you have to do to meet a millionaire is look in the mirror.

So now what? Sure, your fortune can help you live out your dreams--retire early, buy a house at the lake, send your kids to pricey private colleges or start a new business. But millionaires have worries, too--and not just about whether to buy a red Porsche or a hunter-green Jaguar. Now that you've earned it, how can you resist blowing all the money--especially if you expect to finance 30 years or more in retirement? How can you keep Uncle Sam from taking a huge bite in income and estate taxes? How do you make sure your fortune doesn't turn your kids into lazy slugs? And how do you learn to stop worrying about money after you've spent a lifetime husbanding it?

"The big problem my wife and I are having is that we don't picture this money as real," says Dennis Bayard of Milwaukee, who last year sold his metal-stamping and steel-fabricating business for several million dollars. Bayard can afford to stop working, but he has not decided whether he really wants to retire yet. "I'm sort of enjoying it," he says of his time off since selling his business. "But something says I'm only 52 years old and I should have gainful employment."

Even with millions in assets, he wonders whether he can afford to buy the Florida condo he has always wanted--and should he pay cash? How can he use the money to help his 12- and 16-year-old daughters without spoiling them? And how should he invest it all?

More of the same

INVESTING MAY BE one of the easiest tasks for newly minted millionaires because your strategy shouldn't change much from when you weren't so wealthy: You want to diversify your assets in line with your goals. That means putting your money in stocks and stock mutual funds for the long term, and buying bonds, CDs and money-market funds in the short run.

What's different, aside from the magnitude of your investments, is that taxes play a bigger role. But even with income-tax rates as high as 39.6%, you don't have to ferret out offbeat tax shelters with high fees and questionable returns. "The idea is to be very tax-smart in investing," says Karen Goodfriend, a financial planner in Palo Alto, Cal., whose clientele is packed with Silicon Valley millionaires. That means buying and holding growth stocks, which don't pay much in the way of dividends, and tax-efficient mutual funds, such as index funds, with low portfolio turnover to avoid tax-generating capital gains.

When D'Anne Schjerning's boss, Jim Clark, left Silicon Graphics in 1994 to start his own company, he asked her if she'd come along as his secretary and first employee. To lure her away, he offered her 10,000 shares in the company, for which she paid a total of $10. About a year later, Schjerning received 10,000 more shares as a gift from the company's board. When Clark's new company, Netscape Communications, went public, "it was the most exciting day for me and a whole lot of other folks in the company," says Schjerning, 59.