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 [1]:
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 $300 million by my early 90s.
Many happy returns
That might seem an outrageous sum of money. Yet the maths behind my whimsical reply is pretty straightforward.
Despite rarely paying any higher-rate tax in my 20-odd years of working – and only modest amounts then, although recently I’ve been shielding more of my earnings behind a SIPP anti-tax wall – I have saved diligently all my life, and I’ve invested obsessively for nearly 15 years.
To cap it all, I’ve never bought the flat that this money was initially meant to go towards. Instead the snowball has just kept on rolling.
To-date it has me with a healthy six-figure sum – though that’s hardly sensational in the context of two-bedroom flats in my area of suburban West London, which cost well north of £500,000.
So how do I get from here to my mooted Scrooge McDuck-style fortune?
- For the sake of argument, I assume I will continue to save and invest as now until 67.
- At that point I assume no more fresh savings, but that I continue to invest at the same rate of return until I’m 92.
- I am using a rate of return that is a few percent ahead of the return from UK shares over the past 100 years.
- That’s controversial, but I believe it’s below the rate of return I’ve achieved so far. (I can’t be totally accurate because my early records are hazy as I don’t really believe in tracking returns [2]. So it’s a conservative estimate, based on eyeballing those figures I did record and guesstimating. I have accurate records [3] for recent years, as I decided I shouldn’t be opining about investing publicly without knowing where I stand.)
- I assume today’s £/$ exchange rate prevails when I’m 92. This turns £200 million into $300 million.
- Finally, I’m ignoring inflation [4] (£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 [5] 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 [6] 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 [7]. 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 [8]
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 [9] 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 [5] that shows how your pot grows:
[10]
Ifs and buts
You can pick all sorts of holes in this example, obviously.
You might say an expected [11] 4.5% real return is unrealistic, even though it’s lower than the historical average [12].
I disagree and think there’s plenty of reasons to be optimistic [13] about the future (although I would concede that environmental collapse [14] 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 [15] – whether in such vehicles or by rolling up capital gains [16] – 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 [17] 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 [18] 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 [19] 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 [20] – 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 [21] – 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 [22] 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 [23] 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 [24] family investing office.
Read up on Methuselah Trusts [25] if you haven’t ever considered this dimension.
I’m risking venturing into politics here and we had enough of that last month [26], 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… 😉
- That is after-inflation. [↩ [31]]