PERHAPS YOU’VE HEARD the story of Ronald Read. A lifelong resident of Brattleboro, Vermont, Read was a quiet man. He preferred flannel shirts and spent much of his career as an attendant at a local gas station. Yet, when he died in 2014, even his closest friends were surprised to learn that Read had accumulated a fortune of more than $8 million.
Stories like this appear with some regularity. In 2010, Grace Groner, who was an administrative assistant in Lake Forest, Illinois, left behind $7 million. In 2013, Doris Schwartz, a former school teacher in Pennsylvania, bequeathed more than $3 million. In 2016, Sylvia Bloom, a legal secretary in Brooklyn, left nearly $9 million.
In each case, the story in the local paper was virtually the same, highlighting the individual’s unusual, and often extreme, thrift. Grace Groner lived in a one-bedroom house and bought her clothes at garage sales. Sylvia Bloom continued taking the subway to work every day until she retired at age 96. Doris Schwartz lived on peanut butter. And Ronald Read used clothes pins to hold his coat closed after the buttons fell off. Read’s appearance was so modest that one day a stranger paid his tab in the local coffee shop, believing it to be an act of charity.
When Read passed away, The Wall Street Journal’s headline read, “Route to an $8 Million Portfolio Started With Frugal Living.” Readers love stories like this. Who doesn’t enjoy the image of the humble retiree clipping coupons while quietly amassing a multi-million-dollar fortune? These are feel-good stories that appeal to the American spirit of hard work and self-reliance. That’s why, I think, we see them so often.
But I also believe these stories are misleading and convey the wrong lesson. To be sure, thrift played an important role in building wealth for Ronald Read, Grace Groner and others like them. But I don’t think it’s the only explanation. In my view, thrift is just the superficial explanation that seems to make the most sense. If we take a closer look, I believe there are at least two other factors that are equally important—and you should keep them in mind as you look to build your own nest egg:
First, there’s time. All of the multi-millionaires I’ve described here lived unusually long lives. Ronald Read died at 92, Doris Schwartz 93, Sylvia Bloom 96 and Grace Groner 100. That was a key factor for all of them.
If you have that many decades, you don’t need a high income to amass a seven-figure net worth. Consider someone like Ronald Read, who began working in 1941, when he was 18 years old. Let’s assume that in his first year he started out at minimum wage, which was then 30 cents an hour, and that his salary increased over time no faster than inflation.
Let’s also assume that he saved 15% of each paycheck, which was not too far out of the ordinary back then, and that he continued to save at that rate until he retired at age 65. Finally, let’s assume that his investment returns were in line with the overall stock market. Result? By the end of his life, his modest savings would have turned into more than $3 million. That’s the power of time.
Lesson: You can’t control how long you’ll live, but you should strive to turn time to your advantage. Begin saving as early as you can, even if you’re still in school. If you have children, get them started with their own retirement accounts. As I pointed out in an earlier article, children of any age can contribute to a Roth IRA if they have earned income, even if it’s from babysitting or mowing lawns.
Second, there’s luck. In the example above, I assumed that Ronald Read’s investment returns matched the overall stock market each year. But that overlooks the fact that, when it comes to the stock market, average is not typical. Thanks to investment costs, most investors underperform the market averages in any given year. But there’s always a fortunate minority who outperform.
If Read’s investment returns were one or two percentage points better than the overall stock market, he easily could have reached the $8 million that he ultimately amassed, rather than the $3 million I calculated using a 15% savings rate and average market returns. According to The Wall Street Journal’s analysis of Read’s impressive investment portfolio, it sounds like that’s exactly what happened.
Lesson: Don’t assume your future returns will match the stock market’s historical average returns, let alone do better. History may not repeat—and you may make investment mistakes. While Ronald Read was fortunate to do better than average, it’s always best to plan conservatively: Better to be pleasantly surprised than to come up short.
Adam M. Grossman’s previous articles include Slipping Away, Four Thumbs and Looking Sharpe. Adam is the founder of Mayport Wealth Management, a fixed-fee financial planning firm in Boston. He’s an advocate of evidence-based investing and is on a mission to lower the cost of investment advice for consumers. Follow Adam on Twitter @AdamMGrossman.