They say that Warren Buffet made 80% of his money after turning 65. That fact shocks the senses. It seems outrageous. You’re supposed to make your money while you are working, not after you reach retirement age.
Here is another startling fact. If you travel due south from Chicago, you will eventually run into the Galapagos Islands off the west coast of South America. That doesn’t seem right either. But it is.
Let’s get back to Warren Buffett. His late-life wealth accumulation is not all that surprising either. It is the natural result of compounding. Compounding is a powerful force. Stock market compounding can sometimes seem like magic.
Let’s say that a schoolteacher named Judy invests $500 per month into the stock market over the course of 30 years and reaches age 65 with an investment portfolio of $1 million. Judy is determined not to spend the money, but rather to allow it to accumulate and donate it all to Wolfson’s Children’s Hospital in her will.
It took 30 years to accumulate that first million. The second million will come much faster. Assuming an 8% rate of return on her investments, Judy will double her money every nine years.
The trick to figuring out how quickly money doubles is called the “Rule of 72.” You divide 72 by the interest rate to determine the number of years needed to double. In this case, 72 divided by 8% equals nine years.
So, if Judy, the retired schoolteacher, lives off her pension and her social security and allows the investment portfolio to grow, she will have two million at age 74, four million at 83, and eight million at 92. In this example, Judy accumulates 88% of her estate after age 65.
The idea of living to 92 may seem far-fetched, but not as far-fetched as Chicago being due north of the Galapagos Islands. After all, life expectancy in the United States is only 77-years. (It recently went down for the first time in decades due to Covid.). But, as you age, your life expectancy increases. At age 65, a woman has a life expectancy of 87.
A lot gets written about life expectancy these days. Youth culture exaggerates the shortness of life to justify a wide variety of hedonistic behavior. This is nothing new. Every 20-30 years we become obsessed with the hubris of youth.
The reality is that people are living longer. The longer you live, the more opportunities you have to double the value of your assets. That is why Dracula is always rich. He lives forever. Many seniors accumulate significant wealth in their golden years.
That wealth typically comes from compounding the value of stock and real estate holdings. For many suddenly faced with the responsibility of maintaining and growing the largest pool of assets they have seen in their lifetime, managing these investments can seem daunting. If you seek help, be wary of the help you seek.
Scott A. Grant is a local author and columnist. By day he is a Fiduciary with Standfast Asset Management.