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Nonagenarian millionaires next door can only teach us so much about investing

Even self-made investing kings can’t hold back time.

Yet another story about a venerable old millionaire who people presumed was poor while he was still alive.

In The remarkable life and lessons of the $8 million janitor, the Washington Post tells us:

Despite his relatively modest wages, Read left an estate with “stock holdings and property” valued at nearly $8 million

One of my friends saw the piece and emailed me:

A glimpse of the future…

Are you worried that Ronald Read could be you in a few decades? 🙂

I quipped back that if I made it to 92 and I only had the equivalent of $8 million to my name then something must have dramatically changed along the road.

In fact, I’d say I’m on-track to have north of $300 million by my early 90s.

Many happy returns

That might seem an outrageous sum of money. Yet the maths behind my whimsical reply is pretty straightforward.

Despite rarely paying any higher-rate tax in my 20-odd years of working – and only modest amounts then, although recently I’ve been shielding more of my earnings behind a SIPP anti-tax wall – I have saved diligently all my life, and I’ve invested obsessively for nearly 15 years.

To cap it all, I’ve never bought the flat that this money was initially meant to go towards. Instead the snowball has just kept on rolling.

To-date it has me with a healthy six-figure sum – though that’s hardly sensational in the context of two-bedroom flats in my area of suburban West London, which cost well north of £500,000.

So how do I get from here to my mooted Scrooge McDuck-style fortune?

  • For the sake of argument, I assume I will continue to save and invest as now until 67.
  • At that point I assume no more fresh savings, but that I continue to invest at the same rate of return until I’m 92.
  • I am using a rate of return that is a few percent ahead of the return from UK shares over the past 100 years.
  • That’s controversial, but I believe it’s below the rate of return I’ve achieved so far. (I can’t be totally accurate because my early records are hazy as I don’t really believe in tracking returns. So it’s a conservative estimate, based on eyeballing those figures I did record and guesstimating. I have accurate records for recent years, as I decided I shouldn’t be opining about investing publicly without knowing where I stand.)
  • I assume today’s £/$ exchange rate prevails when I’m 92. This turns £200 million into $300 million.
  • Finally, I’m ignoring inflation (£200 million when I’m 92 will be worth far less than it is today).

I am deliberately being vague with my age, savings, and my investment returns for three reasons:

  • Privacy.
  • Because Monevator isn’t specifically about my achievements (or failures!)
  • Finally, because this is just a silly hypothetical example, not a realistic investing plan. Let’s not sweat the details on a thought experiment.

With those assumptions and caveats, I find a quick play with our compound interest calculator gets me to £200/$300 million at 92.

And by far the most important of those numbers is the last.

Golden oldies

It’s seeing my 90th birthday without drawing down my portfolio that’s really the secret of my hypothetical future self’s awesome investing success.

Pretty ironic – because I bet the journalists of 2060 will ask me all about my stock picking techniques and my ability to live frugally…

…but nobody will ask me about my diet or my fitness regime or how long my father lived, even though these will be as relevant to their story.

Old age is the extra leg up for most globally famous super-wealthy investors.

I’ve pondered before whether great investors live longer. I considered many of the attractive side-benefits of the lifestyle before concluding:

It could be that a long life is required to generate their truly incredible investment returns, rather than the latter causing the former.

And I think that is usually the case.

In the (totally theoretical) example we just ran through, I’d retire to live off a state pension at 67 (albeit doubtless topped-up by the thoughtful treats and home-cooked fare of kindly descendants who have one eye on my fortune).

At that stage, I’d have about £12 million. Nice, but it’s not going to get me onto any Rich List.

The other £188 million of the final £200 million comes from compounding that £12 million during my elderly years into an eventual nine-figure fortune.

It’s the same with most of those famous old investors like Warren Buffett  – and also the fabulously rich nonagenarian janitors and nurses we read about.

Sure they were already loaded by the time they became eligible for a bus pass.

But the crazy numbers that make our eyes pop?

Those came later.

Who wants to be a millionaire?

To me it’s almost more shocking that there aren’t more silver-haired and Zimmer Frame sporting Millionaires Next Door around, when you consider the maths.

Let’s turn again to Ronald Read’s stash. How much would you need to match his $8 million, in today’s money?

Remarkably little if you live until 92, with even just average stock market returns.

We’ll call $8 million equivalent to £5.3 million, as per today’s exchange rate.

Let’s say you reached 30 with savings of £20,000.

You invest it all in the stock market.

You fill your ISA every year for the rest of your life (so that’s £15,240 a year).

We’ll say you achieve a real1 return of 4.5% a year. (That is lower than the historical real return from UK equities over the past 100 years or so.)

At aged 92 you’ll have £5.3 million in today’s money.

Here’s a pretty graphic from the Monevator compound interest calculator that shows how your pot grows:

compound-interest-30-to-92

Ifs and buts

You can pick all sorts of holes in this example, obviously.

You might say an expected 4.5% real return is unrealistic, even though it’s lower than the historical average.

I disagree and think there’s plenty of reasons to be optimistic about the future (although I would concede that environmental collapse might make it all moot).

You might say it’s going to be hard to fill your ISA if you retire at 67, say, but remember I’m not up-rating that £15,240 contribution with inflation.

£15,240 will likely be quite a trivial sum in four decade’s time, let alone six.

You might also argue that ISAs won’t be around, or start muttering something about the Lifetime Allowance in a pension being capped at £1 million.

Clearly, sheltering your returns from the impact of tax – whether in such vehicles or by rolling up capital gains – will be vital to achieving a big final number.

I agree the landscape will change out of sight between now and then, but we can presume it won’t all be for the worst. Besides, this is just a thought experiment.

The point is it’s not impossible for an averagely high-earning 30-something to be fabulously wealthy when they die, provided they save and invest remorselessly and live until they’re 92.

What about someone who isn’t earning so much? Perhaps somebody living a healthy opt-out lifestyle whose frugality still enables them to salt a bit aside every year?

How much do they need to invest to make a million in today’s money by 92?

Not as much as you might think.

In fact, if they started with a £25,000 nest egg saved up from their previous life in the rat race and then managed to squirrel away £2,000 a year on top, with the same 4.5% real rate of return they could be a today’s money millionaire at 92.

And given their low stress living, you might also think they’d be more likely to make it into their 90s…

The wrinkle

Of course, that’s the rub.

In reality most of us choose to use most of our money to improve our quality of life while we’re alive – and nobody lives for ever.

That’s probably why most super-rich investing millionaires are either market professionals or else monomaniacally obsessed amateurs. They are investing for reasons other than simply to improve their lives in a decade or three.

Everyone else has kids, aspirations, spouses, and material itches to scratch.

Still, unlike some I don’t shake my head when I see somebody die with vast wealth that could have enriched their lives while they were alive (or the lives of others such as the person thinking the thought, which I believe is often the motivation for it!)

The author of the Washington Post op-ed makes some salient points in this regard, but generally people are dismissive of “miserly” old millionaires.

For instance the so-called Tin Can Millionaire – a Swedish tramp who died with over £1 million in the bank – attracted a lot of finger pointing.

On the face of it it’s obvious he should have spent more money along the way.

But who knows how amassing and investing his growing fortune motivated him, or what comfort he derived from knowing it was there?

Money is strange stuff. I’ve warned before about the dark side of compound interest – exemplified by Warren Buffett refusing to buy his wife a sofa in the 1950s because he was mentally extrapolating what it would cost him in investment gains foregone over 50 years.

Even Buffett talks explicitly in one of his early partnership letters about the futility of chasing money for an entire lifetime, and his desire to someday do something different.

Many would say he spectacularly failed to achieve that ambition, given he’s ended up as one of the richest people in the world.

But he’s lived to 84 and he got rich young and financially savvy.

After that he was always likely to die very wealthy.

Compounding the 1%

Folk tales of very old millionaires remind us of the awesome power of compound interest when allied with equity investing, but they don’t tell us a great deal we can put to practical use – except to start as young as you can.

Begin investing at 25 or 30 and you can hopefully get usefully rich by your 50s or 60s, rather than in your 80s or 90s. Kids whose parents are opening and funding pensions for them could be laughing in six decades time.

Incidentally I’d also caution that this dynastic dimension is why more of you should start agreeing with me that inheritance taxes need to be a bigger piece of the taxation picture.

The rich are getting ever richer. That is totally fine with me when they earned it, but I’m less comfortable with their wealth “cascading through the generations” than many of you are, partly because of this snowballing affect over a sufficiently large time frame.

In the old days you could rely on every second or third generation to blow the family fortune on fast cars, loose women, or trying to be a pioneer in aviation.

But the scions of wealthy families seem to be far more responsible nowadays. Risking a few years and a few grand trying to start up a business in Silicon Roundabout is more their style.

This matters because Ronald Read left his fortune to charity, not to Ronald Read Junior who could compound it for five decades before passing it on to Ronald Read III – a process that extends out the frankly impossible horizons of 60 years or so to trivial timescales for a typical old money family investing office.

Read up on Methuselah Trusts if you haven’t ever considered this dimension.

I’m risking venturing into politics here and we had enough of that last month, so let’s leave what to do about the societal downsides of compounding massive sums for another day.

Double or quits

For now I say we investing enthusiasts should salute the super rich janitors of the world, learn from their discipline, but also ask questions not of how they spent their money but what we’d do in their shoes.

How much is enough and how long have you got?

Impossible questions to answer, and supremely important.

For my part I don’t expect to see my 92nd year, given that 70-odd is an almost unheard of innings for men in my family.

(Get out the tiny violins!)

But if I do, it won’t be with £200 million to spare.

I’ll have turned on the spending spigots far too soon for that.

For starters I’ll have a London flat to buy… 😉

  1. That is after-inflation. []

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{ 22 comments… add one }
  • 1 Neverland May 5, 2015, 12:39 pm

    The other lesson from these examples (and from studies of the wealthy) is that they spend very little, drive modest cars, live in modest neighborhoods and their spare time is spent on really cheap activities

    The image of the Bentley driving, crystal sipping millionaire is very far from the reality

  • 2 Dividend Drive May 5, 2015, 12:50 pm

    Really nice and thorough article. Thanks for that.

    It is the first thing to jump out of stories like this. Age. All of these quiet millionaires lived to ripe old ages. That is the critical factor in their wealth.

    However, so is the frugality of their life which often these articles seem to quietly criticise. “Why did he/she not spend the cash when they had it?” True. But if they had not lived like that they would scarcely have been that wealthy. As you say, welath has different meanings for different people. For these individuals it seems to be security rather than wealth itself. Ok, it may be–for some–extreme financial security. But that security certainly could have played its part in their longevity. And who is to say their life was not more fulfilled than if they had blown it all? I’m certainly not. In the case of Read he may have been saving so he could leave this sum to charity his whole life. It is not inconceivable!

    I’ve managed to start investing in my mid-20s from a relatively low income but with equally low expenses. Hopefully that will serve me well. However, unlike you I have the peculiar family lottery of male members of my family either living to their 60s or to their mid-80s (and counting). Have to wait and see which one I have picked up the most genes from…!

    Keep up the great work. love reading your stuff.

  • 3 Mathmo May 5, 2015, 1:13 pm

    Super post and a great observations.

    You touch on it, but if living longer helps “death-wealth” then so does starting earlier. Getting a pension in your 30s is a head-start on many people, but doing it in your nappies is oodles better.

    I ran the numbers for Mathmo Jnr when he was born. If he can expect 5% real returns, then simply topping up his JISA and Pension to their maximum amounts for 18 years means he’s a retired-millionaire-in-waiting by the time he’s nudged out of the nest. If topping up to the maximum (currently £6,880 a year) sounds a bit expensive then consider that each £1 given to a child at birth is worth £1 a year for the rest of his life at age 65. (Assume 5% real returns, 4% real safe withdrawal rate): 1.05^66/25 = 1

    Of course the responsible thing to do is to fit ones own oxygen mask before helping others — so topping up my ISA and Pension takes priority (particularly since he can now get them when I don’t need them any more). Grandpa, on the other hand, has to answer questions about why he didn’t already do this for me so is a willing contributor…

  • 4 Martin - Getting Fired May 5, 2015, 1:15 pm

    I started investing at 30 and realistically I’ll contribute substantially for 10 years and let it taper off into early retirement. I hope to not have to use my principal sum as my earnings though they’ll drastically reduce at 40 will still be enough to sustain most of our lifestyle if not all. That should leave more than enough for Jnr to be comfortable for life. Does anyone really deserve to be left £2+ million? Can they handle it well if they didn’t earn it?

    You briefly hit on it, but tax is really the one element that worries me in all this. I have fully funded all I want to in both my wife and I’s pension as by the time I am of normal retirement age, it should be a nicely sum. ISA’s are filled by default so I need to really focus time on taxable investments and how best to filter them across after I stop piling into the ISAs.

    I’ve probably decided VCTs aren for me, but realistically I know little about them

    great article btw

  • 5 Rob May 5, 2015, 1:36 pm

    This is important
    Read typically bought shares of companies that paid out regular dividends. He owned railroads, utility companies, banks, health care, telecom and consumer products. Those dividend checks were then reinvested back into more shares of the same companies.

  • 6 Jim McG May 5, 2015, 1:56 pm

    This article covers one of the big questions for me on investing. Yes, save, save, save but at which point are you actually going to step back and spend some of the pot? I was made redundant in January which put big brakes on my investing and will soon mean I will have to start dipping my investment pot. But the other day I was speaking to my mate, who’s 54 and could retire with a reduced pension at 60. However, he can’t see further than the cash he’ll miss out on versus retiring at 65 so he’s prepared for another eleven years of the lash. But why? My old dad said the difference in age you feel at 65 versus 60 was really considerable. Spending those five years at the office might be the worst investment he will ever make. I used to think that choosing when to buy and sell was difficult, but choosing when to spend is just as hard!

  • 7 Martin - Getting Fired May 5, 2015, 2:07 pm

    I guess you have to really decide when “One More Year” is enough. When my withdrawal rate is around 3% I’ll pull the trigger and wind down work over 24 months or so, building a buffer and selling my side of the business perhaps, or work much less than I do now.

    For most people the consideration is all or nothing. But few even think about life after their current main employment. It’s not going to be pina coladas for lunch everyday and life on the beach, but you can have this some of the time, if you want.

    Your skills don’t disappear overnight, work opportunities can always be capitalised on. Work when you have to and if you must.

  • 8 ermine May 5, 2015, 5:44 pm

    > Everyone else has kids, aspirations, spouses, and material itches to scratch.

    the tribulations of the human condition getting in the way, eh 😉 Maybe the rarity of the rich are because living frugally when you have money is only easy after you have done it for a few years, because you have to untrain the spend all you earn theme of most living.

  • 9 pinkney May 5, 2015, 9:59 pm

    Have you considered setting up your own investment trust perhaps something along the lines of the ti trust you could employ people only born in the same street as you to run the trust with some percentual going to a charity of your choice or your family to run it like a mini Rothschild. Great article

  • 10 Minikins May 5, 2015, 11:01 pm

    I really enjoyed reading this post, thanks TI.
    The compounding thing seems to go exponential after a certain point. The folding table cloth is a good example (from Dennis Meadows), albeit impossible to physically do, it does explain the point. So if you fold it 21 times it will be a mile deep. But just doubling it another 5 or 6 times more will get it to the edge of space. From this point just another 12 folds will take it past the moon!
    So a healthy bank balance compounding beyond the retirement years well into the eighties and nineties could seriously swell your stash by virtue of those last few years of compounding which many of us think we will miss. Maybe that’s why we spend it in retirement and sabotage our earning and life potential.

  • 11 Lee May 6, 2015, 5:05 am

    I didn’t finish school till 29, but in my thirties managed to build up a base of a reasonable amount. Now I only pay in 1k a month fresh cash not inc. divi reinvestment, but according to the forecasts I’ve played around with it should be a few million over the next 30 years.
    I frankly can’t believe it and expect something to chip it – divorce, broker failure, some black swan event. I guess we shouldn’t be too complacent.

  • 12 Richard May 6, 2015, 10:56 am

    Excellent article.

    I take the view that I don’t want any massive financial changes when I retire. Thus while I’ve always been a saver, and not especially materialistic, I don’t force myself not to spend.

    I don’t assume that once I retire I’m going to spend, spend, spend. But neither do I want to assume that in retirement I’ll be living on materially less than now.

    So nice and steady it is. I’m assuming I’ll work for 30 years and then be retired for 30 years (although my financial models map out further than that).

    So it’s a simple question of “how do I make 30 years of earnings last 60 years?” I really don’t see financial planning as being anything other than maximising my chances of achieving this.

    All the usual – save as much as possible without “going without”. Use all the tax breaks available (ISAs but especially SIPPs). Assume I’ll obtain reasonable/prudent stock market returns (broad-based passive investments, nothing esoteric). Keep a cash buffer of a few years in case of bad times (in my personal life, or in the stock market).

    Then knock up an Excel model to see if it all pans out. It does, but is hugely dependent on two things – real stock market returns and how long I live. (The latter is only an issue if the model shows that I’m lowering my asset base as I get older; the preferred solution is that I’m increasing my asset base in old age.)

    I use 2.5% real for equities and 0.5% real for cash. I think the article uses something like 10% – 12% nominal to achieve the figures quoted.

    Then add in refinements – when will I need care, and how much? When will I sell my house (and what will it be worth in 40 years?), etc.

    But basically ensure that I have enough assets to cover me for 30 years’ spending at my current rate, when factoring in investment growth and state/company pensions in my mid-60s.

  • 13 guymo May 6, 2015, 2:53 pm

    @mathmo
    I think if you max out a child’s pension (£3600 gross per year) for 18 years, then make no further contributions, and achieve 5% real returns, the child will hit the £1M lifetime allowance at age 64. This of course reinforces the article’s excellent point about investment-lifetime.

    Hitting the LTA is not a bad problem to have, of course, but at least at the moment it is good to have the flexibility to make pension contributions, e.g. to recover some child benefit or to take advantage of employer-matched contributions; so maybe there’s a better way to invest the money? I don’t know what that would be, given that you’re already filling the JISA each year. Maybe someone can tell us?

  • 14 Mr Zombie May 7, 2015, 4:58 pm

    Most seem content with Pay as you Earn and Spend as you Earn. For those that ignore this and save as they earn, and save a lot, they can end up with a nice fat sum at the end of it all.

    Like you point out, if this is past onto the next generation who have similar habits…and again…and again I wonder how long it would take that family to own 99% of the worlds wealth, never mind the 1% owning it. I guess it gets to the point when your £1 billion fortune is growing at £50million a year at 5% and you feel a bit stupid continuing to contribute £750 a month to it 🙂

    What a legend for passing it all to charity.

    Mr Z

  • 15 The Investor May 7, 2015, 9:02 pm

    Cheers for the thoughts and positive words all. (Not sure this post went out via the email to subscribers due to some SNAFU, so it may be an exclusive club who’ve actually read it!) Lots of value added! 🙂

  • 16 The Roamer May 9, 2015, 5:34 am

    I really enjoyed this read… Mostly because of your speech style, but I wouldn’t want taxes to be higher for inherited money I just would want to make it a trend to leave a big chunk to non family.

  • 17 LadsDad May 9, 2015, 9:06 am

    Great article, always enjoyable to read a thought provoking article that is also highly entertaining.

    My first thoughts were, I wonder at what portfolio value the average DIY, self-made investor would get nervous about maintaining a multi-million pound portfolio…?

    I have every confidence that TI will manage the £200m portfolio just fine!

  • 18 droidvoice May 11, 2015, 12:58 pm

    A great read, a lot of people (students especially) come out of university and start to earn, thinking can spend a bulk of their earnings. What they are missing out on is compound interest that they can get on that additional ‘just £10’ they spend more on items or ‘stuff’.

    I am 25 myself, I have just stumbled upon Monevator, been saving since I came out of university to invest for the long haul. It has been tough, but we will see the outcome in a decade.

  • 19 Richard May 11, 2015, 1:21 pm

    @droidvoice

    One psychological way to stop yourself spending is to think how much £1 now will be worth to your future self.

    You’ve probably got 40 years before you retire. If we assume your pension/portfolio returns 5% real then £1 today is the same a £7 in 40 years’ time – IN REAL TERMS.

    That coffee on your way home tonight is robbing your future self of a week’s worth of coffee when you’re retired.

    If you think that everything you buy today is costing your future self 7 times that, then you may not stop spending all together but you may stop and think before you do spend…

  • 20 Minikins May 11, 2015, 11:25 pm

    @droidvoice
    That’s a great attitude, just keep up with the disciplined attitude and keep a dream or two in sight. I know it was a different environment when I graduated but I was quite determined to save up for a house and managed to buy one at 27. I had about 5 jobs ranging from my main job as a clinical researcher at UCL to working evenings at an estate agent in Pimlico. I also worked at HMV on the graveyard shift and with troubled teens in Clapton. I’m still in that house many years on, two marriages, two kids and two divorces (clean breaks) on. So not all my dreams came true but that’s life!

  • 21 Rob May 20, 2015, 11:17 am

    A follow up to the story about Mr Read has just been given to me.

    Readers of a certain vintage will recall an airline called Pan Am run by a chap called Juan Tripp from an office on Park Avenue in New York. At its peak he threw a dinner for employees and was persuaded to extend the invitation to the man who ran the boiler in the basement.
    At the dinner the boiler operator asked lots of detailed questions and ended by asking Mr Tripp to dinner at his house. He accepted, with some hesitation, and on the designated date turned up at an address on Long Island.
    The house was a mansion and Tripp was given a sumptuous dinner. Eventually, curiorisity got the better of him and he asked the host how he afforded such luxury on the modest salary of boilerman.

    He said that when the airline had been created before the war he had been given one of the 100 founding shares in the company in lieu of wages. Thoughout all the subsequent corporate events, restructurings and share splits he still owned 100th of the company which then was one of the leading shares on the NYSE.
    Buy and hold eh! Mind you the story ends before Pan Am’s subsequent demise.

  • 22 The Investor May 20, 2015, 12:07 pm

    @Rob — Wow, amazing! Thanks for sharing.

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