“Theodore Johnson worked for UPS and never made more than $14,000 a year and yet, in his old age, was worth more than $70 million. When he said he had no money to save, a friend told him that if he were taxed, the money would be taken out of his account and he’d never see it. So he created a tax for himself to make him wealthy. Even though he made little money, he took 20 percent of his money and it went straight into an investment account. Over more than five decades, that compounded to make him $70 million.”
When I first read this story in Tony Robbin’s new book “Money – Master the Game,” I was baffled. I had to know how someone with such a low income could accumulate such enormous wealth. Could this really just be an incredible example of compound interest? Is this an illustration of what happens when you switch from over-priced mutual funds to low-cost index funds? How could someone that continually lived below the poverty line amass a fortune that catapulted them beyond the 1%? I just don’t get it.
Well, like any good boy, I
let it go and didn’t let it bother me relentlessly Googled everything I could until my brain hurt and eyes went cross-eyed. And what did I gain?
The Full Story of Theodore Johnson
It turns out that the story of Theodore Johnson is an old one. Here’s the original New York Times article written in 1991 that highlights Mr. Johnson’s incredible generosity.
According to the story, “Mr. Johnson, who was reared in a middle-class family, worked his way up at U.P.S. to vice president for industrial relations by the time he retired in 1952. His annual salary was $14,000 then, but he had bought as much of the company’s stock as he could and had about $700,000 when he retired.”
At the time the article was written, Mr. Johnson was 90-years-old.
The Glory of Compound Interest
Albert Einstein called compound interest the “greatest mathematical discovery of all time.” It’s the best chance for you and me to become wealthy and – eventually (*sigh*) – retire. The fact that someone can save $3000 a year of their $14,000 income, invest it wisely, and watch it grow into $70 million should be inspiring.
BUT (oh, there’s always a BUT!) , in my opinion, Tony Robbins leaves out some important details. So, in addition to the glory of compound interest…
…Here’s What You Can Learn from the Story of Theodore Johnson
1. Inflation is a b*tch
The way that Tony presents Mr. Johnson’s income is as if it’s nothing – table scraps – because it’s a meager $14,000 a year. This is nothing compared to the median household income of $53,046. If he is able to save 20%, then by-golly we should all be able to. Right? Well, yes, but it’s important to keep in mind that Mr. Johnson retired in 1952. $14,000 in 1952 is not equal to $14,000 in 2015. In fact, after accounting for inflation, Mr. Johnson’s $14,000 equals roughly $123,000. Hmmm…$123,000 a year doesn’t exactly portray the image of poverty that I presume Tony was looking for, does it?
Even though the people that are responsible for
fudging reporting government statistics tell us that there is little inflation, there likely will be in the future. So, be sure to protect your wealth by investing in assets that hedge against this deterioration.
2. Diversification is *usually* recommended
When most of us join a new employer, we automatically enroll in their 401(k) program and instantly diversify our investments among several expensive mutual funds that include stocks from large companies, small companies, international companies, bonds, etc.
Mr. Johnson didn’t have a 401(k). These savings vehicles are relatively new concepts – introduced in 1978. So, Mr. Johnson, realizing how important it was to invest, put ALL OF HIS MONEY in his company’s stock. This thankfully worked out very well for Mr. Johnson; but, it could’ve gone horribly wrong. His company just as easily could’ve gone belly-up and his stock could’ve been worth nothing. But, it didn’t, and he looks like a genius.
This is all good information, but what good is information without action?
Hmm..good point. Here’s how I would apply this knowledge:
- If you own company stock, I would probably sell it. If it’s not vested yet, sell it as soon as you can. Use this money to either payoff non-mortgage debt or put into a different (better diversified) investment.
- If you don’t really know what you’re invested in – I would get setup on something like Personal Capital.. (1- It’s what I use, 2- It’s free, 3- It syncs all of your accounts and analyzes your portfolio to show your overall diversification and how much you’re paying in fees, and 4- It also tracks your net worth and allows you to manage your cash flow.) If you like something else, tell me about it. But, I haven’t found anything better yet.
After reading this article, you may assume that I didn’t enjoy Tony Robbin’s new book “Money – Master the Game,” but that couldn’t be further from the truth. I enjoyed it so much that I finished the lengthy book in a weekend. It’s full of a lot of great information that I’ll likely share on Funancials in the near future.