Luck Run Amok—Part 6

How Much is Too Much?

How much is too much? If you have $1 billion in wealth and you earn a modest 5 percent return after taxes during a period of 2 percent inflation, you can spend $30 million a year (3 percent of $1 billion) and maintain the real, inflation-adjusted value of your wealth. Thirty-million dollars a year is $2.5 million a month, which, as far as I can tell, is more than enough for an extravagant lifestyle. If you can get by on less, the real value of your wealth will grow year after year without you doing anything more than living it up.

Not only that, but your heirs can live it up too without doing anything more strenuous than deciding which of their many homes to go to next. Most nations have estate taxes, but most wealthy people pay smart lawyers to reduce or avoid these taxes.

A very different question is whether people need millions of dollars in income to persuade them to be productive members of society. Would Lionel Messi have worked so hard to become a tremendous footballer and continued playing this demanding sport year after year if he were paid only, say, $8 million each year, instead of $80 million? Would Bill Gates have dropped out of Harvard and worked his tail off building the Microsoft empire if he had known it would only give him $1 billion in wealth, instead of $200 billion? Would Warren Buffett have devoted his life to making profitable investments if he ended up with $1 billion instead of nearly $150 billion? My answer is yes, surely, especially since both Gates and Buffett have pledged to give away 99% of their fortunes.

Warren Buffett still lives in the modest house he bought in Omaha in 1958, drives an ordinary car, and regularly eats food from McDonald’s and Dairy Queen. He famously explained: “I enjoy the game and that’s where the fun is... The money is just a way of keeping score.”