Rethinking “F@#$ You Money”

Now that I’ve stepped down from RescueTime, I’m pondering my next thing (whether it’s a product role at a very early stage startup or spinning up my own for the 3rd time). I figure it’s a good time to be introspective and consider my motivations. Why do startups? For me, it’s more about having the choice to work on the stuff I want to work on, work with cool people on small low-friction teams, and wear a lot of hats. I definitely see the lure of the financial reward, but it’s never been a primary motivator for me. I’ve said in the past that stock options for startup employees are generally a sucker’s bet, but the argument extends to founders, too (especially when you’ve got 3+ founders and/or need multiple rounds of investment).

On a recent trip to Alaska, my ideas around “F@#$ You Money” changed pretty radically because of two conversations (which I’ll relate below). First, let’s start with a definition:

F@#$ You Money: any amount of money allowing infinite perpetuation of wealth necessary to maintain a desired lifestyle without needing employment or assistance from anyone. (via Urban Dictionary)

Retirement Plans

The first conversation I had on my Alaskan trip was with an older retired couple who was traveling around Alaska. We’d had a few drinks at a local bar and got to talking about retirement, risk-taking, and (eventually) f@#$ you money. He started talking to me about his finances and told me that he was really anxious about money despite having a “couple million bucks”. “It used to be absolutely true when people said ‘money makes more money’,” he told me. “Be relatively sharp about flipping real estate, have a solid and diverse stock portfolio, and you’re making 6-10% per year or more.” 8% of $2 million is 160,000. Add some Social Security money to that and the fact that older couples generally have a paid off house or a cheap mortgage, and that feels pretty close to permanent retirement. If you want to live more lavishly, you can chip away at the principal.

But this couple was shaken by the new reality. What, exactly, are they supposed to invest their money in that throws off 6-10%? Real estate in major metro areas are looking at a 5-20% drop in the next two years. The stock market is volatile but stagnant (more on that in a minute). Money markets are throwing off less than the rate of inflation. Top all that off with the potential that inflation accelerates, turning their couple of million bucks into dramatically less… Which means that even if they leave it in cash, there is a lot of downside risk.

The formula for a 2 million dollar retirement changes from:

$2,000,000 * 8% = $160k/yr + Social Security

to

$2,000,000 / # of years you expect to live after retirement (say 30) = $66k/yr + Social Security

If that all works out, you die nearly penniless on your 30th year.

The idea of a millionaire couple (surely the top 5% of retirees?) living on a combined wage that is dramatically less that what they were likely earning before they retired was pretty damn shocking to me.

The second conversation that I had on my Alaska trip was with a money manager at the Seattle airport. He was one of the top wealth managers at one of the big Wall Street firms. His belief was that it was likelier to get worse before it got better and that it could be 10 years or more before the economy bounced back. “I think we’ll see Dow 4,000 before we see Dow 12,000,” he told me. With the ratio of workers to retirees changing for the worse and with birth rates flattening, he wasn’t sure how much it COULD bounce back. Obviously, his opinion isn’t shared by everyone. But there’s a chance he’s right. Given that, where exactly do you put your f@#$ you money? A balanced portfolio isn’t enough protection against that kind of drop.

(Want to worry some more? Consider how much you have to save to retire if your savings don’t throw off interest.)

Want to be Mercenary? Time to give up on F@#$ You Money and Focus on Other “F@#$ You” Things

Pretend that you sold a startup tomorrow and walked away with a cool $5,000,000 at the age of 30 (well, $4m after taxes). Assuming you live 50 years, that gives you $80k/yr (non-inflation-adjusted dollars). Perfectly comfortable, but certainly not the image of wealth that a $5,000,000 windfall historically brought to mind. So if you’re young and angling for greatness, I think you’re better off aiming for “f@#$ you influence and credibility” (which has as much to do with your personal brand as it does your financial success). THAT is the investment that keeps giving. It allows you to charge $30k+ for a 1 hour speaking engagement. It gets you a feeding frenzy of investors when you start making noises about your next startups (reducing your financial risk to near-zero). It gets you fat advising gigs (where you trade advice and influence for ~1% of startups), seats on boards of directors (which can be compensated for in various ways). It gets you access to the best angel investment opportunities. Hell, it could allow you to raise a $30,000,000 seed fund (rock on, Dave!).

Better yet, in the mercenary vs. missionary debate, don’t think like a mercenary at all. Focus on creating value, being passionate about what you’re building every day and let the windfall (if it happens) be a happy surprise.

  • http://www.nosnivelling.com daveschappell

    That's the first time I ever heard someone define it as “F@#$ You Influence and Credibility” — it's the ultimate in personal branding. The ability to speak your mind, and have people know that you're going to follow through on anything and everything you set your mind and energies to. It doesn't mean that have to be rude — rather, that you can and do spend your time and energy focused on projects that match your passions, backed/supported by people who understand what gets you fired up. It's powerful, and a very respectable goal to strive for.

  • http://cyberfox.com/blog Morgan

    If you take 2 mil, and ladder it into 5 five-year CD's earning 2.5%, you're netting about $52.5K/year without touching your principal, and that's in this market. Not great, but not bad, and leaves your money relatively dry, so you can move it around if the markets get better, or other opportunities arise.

    If you net out $4M, then you're looking at a baseline of $106K/year income using laddering without touching principal, from what is possibly the most conservative investment strategy possible. :) At that point, you can blow 5 years working on your s00pr-c-krit algorithm for flurgling plurbuses, never see a dime in income because there are only 4 plurbuses in the world, and just not worry. Need more? Dip into principal. Things get better in the market? Move some cash into the market, and pick up a few years of 8% average returns.

    I'm not disagreeing that it's a great approach to become famous and live off of that, but there really are only so many Linus Torvalds or DHH's out there (to use examples from my field).

    The other problem I have with 'F-You Influence' is that you have to keep selling it. Go a few years without selling yourself, and your 'funds' (that is, credibility) dries up.

    That's not retirement, that's a permanent sales job.

    I doubt I'll ever _actually_ retire; I love computers and programming too much, and just doing cool stuff throws off “gettin' paid” opportunities regularly, but I do imagine a time when I stop having the NEED to get paid.

  • Guest

    fffffuuuuuuuu money

  • http://currentlyobsessed.com/ joe heitzeberg

    Good point: “be[ing] passionate about what you’re building every day and let the windfall (if it happens) be a happy surprise”

    Ultimately, if you focus on self-worth, creating a positive impact on society and those around you and are passionate about what you do, you'll be happy, no matter what the financial side says.

    When you say, “pretend that you sold a startup tomorrow and walked away with a cool $5m….well, $4m after taxes” — wow, what country do you live in? Or is there some kind of tax haven in Alaska? Please let me know, because I want in on THAT deal.

  • Joe Gold

    A very easy solution to this: Go live in a cheaper country. Go now, before the heavily debted countries lock down money transfers.

  • http://twitter.com/hillel Hillel Cooperman

    I always thought of the goal as independence… not as FU money. FU money is one way to get independence. And I guess you're saying that influence and credibility are another path. (Though I'll admit that seems like a difficult path as I need to become a speaker/writer/consultant or employee to leverage that credibility) and none of those things feel independent to me (though they may to others).

    One option that you didn't seem to mention is the possibility of getting independence through a business that generates cash every year. Having a great business from which you can remove 500k in cash every year is like having 10 mil in the bank at 5%.

    To me this seems like the highest percentage shot, but I seem to be in the minority in terms of finding it an attractive and worth goal.

  • curmudgeonly troll

    don't forget taxes and inflation. If I were retiring I would not expect 2.5% after fees, taxes and inflation from risk-free investing. Keeping up with inflation is a conservative assumption.

  • http://dokdok.com Bruno Morency

    “When you say, “pretend that you sold a startup tomorrow and walked away with a cool $5m….well, $4m after taxes” — wow, what country do you live in? Or is there some kind of tax haven in Alaska? Please let me know, because I want in on THAT deal.”

    Exactly what I thought as well, $5M pre-tax = $4M after taxes!? Are taxes really that low in the US?

  • http://www.rescuetime.com webwright

    That's a great point. The F@#$ You Business. The most obvious one is property management (buy properties that, when occupied, throw off a pile of cash), but there are probably other low-effort businesses. I knew a guy who LOVED the idea of buying laundromats (probably because you can dodge taxes on some meaningful amount of the revenue).

    I think you're right that it's higher percentage.

  • http://www.rescuetime.com webwright

    I never thought of the “F@#$ You” part of the credibility bit to be literal… But people with that level of credibility tend to be pretty damn outspoken (outside of US politics). The thought leaders of tech tend to be out there throwing punching (McClure, Chris Sacca, Tim Ferriss, the 37signals crew all come to mind)

  • http://www.rescuetime.com webwright

    Inflation over the last 10 years has been 2-4% per year… I worry about the CD option a bit.

    I'm with you on the retirement bit.

    I'm not sure fame is the same as credibility. Josh Schachter (of Del.icio.us fame) has a ton of credibility where it counts and it's been years since he sold his company. He cut from similar cloth as you, I think– much more geek than politician.

  • http://www.rescuetime.com webwright

    Aren't long term cap-gains taxes around 15%? I guess it depends on deal is structured (stock sale $ would be 15%, bonuses and earn out stuff would be at the normal income tax rate?).

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  • Anonymouse

    Depends on what class you are, in that tax class yes it definitely can be. The richer you are the less the lower the %. Technically the standard rate goes up, but when you have that much money you can pay someone to go through the endless IRS addendum's and loopholes to bring it down.

  • http://sawickipedia.com/ todd sawicki

    I actually know a former VP for BD at Universal Music who left and bought a couple of laundromats. He's still not working 10+ years later.

  • Rc

    The big fear now is deflation. If inflation returns to a steady 2-4% per year, you will be able to find bigger returns in the stock and other markets (such as real estate).

  • Ron

    15% long term cap gains federal (on your shares) plus 8-9% on your state gains. 25% is not impossible.

  • John

    Brilliant! Thanks! It's very rare that I read a blog post that actually causes me to plan to act differently (i.e. a useful blog post). This is it!

  • Ax

    I think the investment options presented here are a bit alarmist. And Wall Street types tend to think on different time horizons. Remember that “long-term” for an investment banker means 366 days and generally not 30 years. So we may see Dow 4000 before 12000, but if you don't need the money between the two points what's the difference to you (except your dividends will buy more shares while the market is down)?

    While not a guaranteed 6%-10%, off the top of my head I can start you with DVY (Dow Jones index fund tilted toward dividend payers) yielding 3.89%. If you're comfortable with individual stocks, there are quite a few high-quality (S&P or equivalent) that pay a few points more. Some examples: MO, AZN, T, VZ, DUK. And that's in this crappy environment, before capital gains.

    But ff your central investment thesis is that the global capital markets will have zero easily attainable returns that meaningfully beat inflation over the next 30 years, you probably shouldn't stop working as your thesis implies a real doozy coming up.

  • http://www.rescuetime.com webwright

    Yeah, long term prospects might be better. But it took the Dow 14 years
    (with a rockin' economy) to get from 4,000 to 12,000. I talked a bit with
    the guy about long term (10-20 years) and he wasn't very bullish. He cited
    the population growth flattening, the ratio of retirees to workers, and
    global competition heating up.

    I'm not contending that there's no end to our current state… But I am
    contending that if your retirement coincides with a downturn, your idea of
    FU money might need to change (and change RADICALLY). And, there are plenty
    of smart people who see this as a multi-decade problem. Check out the
    Nikkei: http://www.forecast-chart.com/historical-nikkei… <- Having
    20 years of that to look forward to would be no fun.

  • Ax

    Re: stocks, don't forget dividends. If you make 6% annually on an investment that makes no capital gains for 30 years, that actually covers your FU money if you start with enough capital (assuming low inflation). If the Dow makes a 20-year trip down and then roils back, even better for you because you can acquire more stock with your dividends when the price is low. Of course, if companies lose cash flow and can't pay dividends, this fails.

    I actually think we're on the same page, if you add global investing into the mix. An early retiree in Japan in 1990 did great by investing in the US instead of his home country. Similarly, an early American retiree now can invest in countries without the structural problems in the U.S. economy. I agree that this is a multi-decade problem for the U.S. and Western Europe. Smart people disagree on whether this will necessarily apply to the entire world, including rapidly growing developing economies. So the Dow might be in a hole for a while, but when you're well off you can cherry-pick from the best the world has to offer. I'd wager that investment vehicles available to accredited investors will post gains comfortably in the 6%-10% range for the foreseeable future (otherwise the money management/hedge funde/private equity businesses will collapse as nobody's paying 2 and 20 for T-bill returns).

    But as to your basic thesis, yes, the free lunch is over.

  • SB

    I would invest part of the money in long term (10 years or so) to get more interest and use principle in the mean time to pay expenses. Might think about investing in real estate in developing countries for long term investments. In developing countries real estate rises by 10% Y-o-Y.

  • http://twitter.com/jlaing/ jlaing

    I was going to write a reply about how $5m isn't really FU money (in my book). But this is sorta missing the point. The point seems to be that you should be putting your time/heart/soul into something meaningful. If you're doing it just for the money then a) you probably won't succeed b) you probably aren't going to make enough to make up for time spent. You only live once. Do what you love.

  • http://www.adrianscott.org/ Adrian Scott

    I think you should study investing and markets more, and think more internationally. There will always be ways to invest and make money with money.
    You might actually have to work at it though and use your brain significantly.

  • http://twitter.com/asmartbear Jason Cohen

    Completely agree about the declining value of a saved dollar — in fact it's worse when you count 3% annualized average inflation — and the increasing value of influence.

    However there are of course still amounts of money where the equation works even with 5% inflation and 0% investment growth and 0% social security. In fact, it's not that much more than $2m. Maybe $5m or $6m depending on your lifestyle and TTL.

    So really it's just that an amount which seemed OK ten years ago is not enough, and the “FU” number is just bigger than we'd thought.

  • Sam

    Everything you said is true. At that age (elder people) we think of cash outflow, no incomes and maybe a national burden (social security, medical expenses etc). Most of these people are fortunate and must have paid off the mortgage (no rents to pay), have grown up children/grand children (emotional support, fun, maybe reduce expenses), developed a hobby, most important have a decent health (less cash out flow).
    With all these assets (intangible and tangible) I d'nt see an issue if you have 30K disposable income. Cost of living should not be an issue, if mortgage is paid off. Yes, if you want to spend money in casino, desire the lifestyle as shown by retirement homes (the fact is no one wants to live in those places, remember the move ‘UP’?) If they have space, they can partially rent their place-cash inflow and less things to take care (more time to spend on hobbies).
    Stop thinking and start living.

  • http://blog.ernestsemerda.com/ Ernest Semerda

    Great write up Tony. Thanks for sharing.

    I think its human nature (thinking / greed) to want immediate gain. Whether it's immediate success, wealth or a large bunch of money in the one hit. How sustainable long term that is is debatable. I believe we should be focusing on building our self as a brand – building value in our self. This takes time but has long term rewards so you can retire from employment (not life) with a passive income.

    When we have built value, what we say and do magnetizes. For example, becoming an expert in an area where we have passion for can turn into a seminar, a book, advice / consultation, a movie etc… most of these have an ongoing financial rewards paying ongoing commission / right of use etc…

    So thinking today about how I can be better & bring long term value is more rewarding then thinking about how I can make a quick $5m bucks and satisfy my immediate greed for money that may not last a long term in today / tomorrow’s economy.

  • http://www.rescuetime.com webwright

    Sure there are. And they all have a fair bit of risk, which means you
    probably need to diversify. The point is that 6-10% used to be fairly easy.
    Now it's elusive. So much so that an older couple with millions of dollars
    (who can afford paid money management advice) and one of the top wealth
    managers in the country were anxious.

  • http://www.rescuetime.com webwright

    Yep– seems scary big to me, from a founder perspective (if the goal is to retire young). The most common (by far) liquidity events nowadays are $10m – $25m. That seems like a lot (unless you have 2 co-founders and a Series A round), which means you get ~22%.

  • dshen

    FU money – definitely a worthy goal.

    but i think that people need to rethink long term investing and how it relates to generating a yearly income and being able to live off that.

    too long have we had easy 10%+ off stocks and the like. after this last crash (and the crash of 2000), we watched our stocks drop by more than 50%, and in many cases more than that. so many people should have been much more conservative and weren't; they got caught up on riding the returns and then upping their lifestyle to match and then having to backpedal painfully when the markets dropped, with no certain time when they would return. or they played too much with their principal and now their principal was much lower with little chance of recovery.

    it's pretty tough to make 10%/year. i think it's more realistic to budget for 4-6% off a bond portfolio, and then have another pot of money to bet on riskier things. in good times, you shave off returns from the risky portfolio and throw them to your bond portfolio. in good times, your bonds can get you even more than 6%. but when times turn south, your risky portfolio drops in value, but doesn't risk your lifestyle because that is determined by your bond portfolio.

    thus planning should look at 4-6% as a % of your net wealth versus your example person's 6-10%. once the markets cratered, he was in big trouble.

    so if you have $10MM in a bond portfolio, you're netting 5% or $500k/year. at $5MM, that's $250K/year. at $2.5MM that's $125K/year. not bad for $2.5MM in the bank. but as your principal lowers, your ability to create a risky portfolio dwindles and you may not be able to increase principal with a risky portfolio to shave returns off of.

  • http://how2startup.com/ Roy Rodenstein

    Great post, Tony (and kudos on RescueTime, I have friends who are big fans).

    Although there are still several other solutions, as Jason and other commenters point out below, I think your central point of “it's harder” or at least “you need to really think it through now” is very valid.

    Personally I agree with your “F-you influence and credibility” idea. It's something I've been thinking about as to why I gravitate or not toward certain companies. In my case, I started Going with two co-founders and a few rounds of VC, but I bet on the learnings, networking and influence opportunities and those are certainly still paying dividends. I'm definitely in the camp that enjoys public speaking, consulting, writing so that's a good goal you outline.

  • http://twitter.com/SteveSanders24 Steve Sanders

    Completely agree that the windfall should be a happy surprise. Many people don't realize just how quickly FU money can become F-Me money. Do what you love.

  • http://www.facebook.com/BrandonChristianWhite Brandon White

    It's an interesting perspective. My thoughts seem in parallel Hillel's on things. I like to take the approach of building wealth. Wealth is not just money, it's your assets, those things are, as you suggest, your personal brand that allows you to harvest it for real cash. Everyone always be working on his/her personal “brand”.

    When it comes to building wealth with a business I am of the thought process to build a business that can increase in valuation on a yearly basis because it has real cash flow and to manage it for profitability. What you get when you do that is a business that increases in value over time and you get to make a real living off the free cash flow while having a good time doing it. This wealth does not happen over the model of build something over 24 months, raise a bunch of capital and get your FU money, what it gets you is a really great lifestyle, with a great yearly income, that when the time is right you can sell for a lot of money (i.e. your FU money). Then you can use that FU money to start another company you build the same way. Basically a profitable, cash flow positive business becomes an annuity for you with a potential pay off at the end.

    I am putting my money where my mouth is and building a company for the long term concentrating on profitability and cash flow. It has not happened overnight, but I am beginning to see the fruits of a lot of patience and work. Hopefully it all works out, given the times we live in and long road to recovery I think we are headed for, I believe it's the best bet to make.

    Thanks for sharing your thoughts.

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