We recently received an email that we are paraphrasing for privacy purposes. In essence, a single forty year old man (“John”) has $2M and no interest in having kids. But. He does not believe he is “rich” and continues to work in a career he loathes. The problem? He didn’t take into account an eventual draw down on principal. We’ve noticed that many people become stressed out once they get to a 7-figure net worth because they are concerned that all of their hard work could one day evaporate and their freedom would go away. Fortunately this just isn’t the case!
John’s Situation Solved in Three Paragraphs
Principal Draw Down: Lets look at our anonymous friend and call him “John”. John believes he may have to work even though he has $2 million today at the age of 40. Unless he decides to blow through money there is a very limited chance that this will occur. He stated that $5,000 a month was enough for him to live (responding to our cash flow article) and was *still* concerned that he would run out of money! Doing the quick math, we can see that he could live for 33 years if he had a return on investment of 0%. This means all of his money is sitting in a checking account and yet he would be able to live till the age of 73.
Minimal Returns of 2%: If we make an extremely small adjustment and say all of the money will grow at a rate of just 2%… John can now live the same lifestyle until he is 96 years old (expansion of 23 years for a return profile of only 2%). What are the chances of living until 96? Somewhere around 10% if we’re being generous. What About 3% returns? At this point he’ll live into perpetuity.
Doing Something You Dislike: At the age of 40 it does not make sense to work in an industry you dislike. When you’re younger, you’ll have to do a lot of things you dislike (whatever it takes to succeed). But. If you’re already well off… It’s time to move on. Why would someone continue doing work they dislike just because there is a <1% chance that something will go wrong? Instead we would suggest a transition period. John should find a way to make a few thousand dollars a month doing something he enjoys. He will now have something to do and he will unlikely draw down on the principal at any time in the future.
What to Do When You’re Set
While the back and forth with John was quite simple (although, we think he will end up starting a Company instead) we thought about his situation some more and realized there is not much information on how to operate once you’re set. Below is a quick overview of our thoughts. (Note, these are simply opinions and if you’re rich go ahead and buy yachts/boats and party hard if that is really what you want to do – just don’t lose it all)
Lie Down: In general, lie down. If you’re worth a million or if you’re worth $100 million we suggest adjusting the number based on who is around you. Generally speaking, you’ll “make” 80% of what the other people make. In addition, you’ll be “worth” 80% of what they are worth. This will prevent the following: jealousy and people asking for jobs/work… There is a time and place to show your cards, however, we lean heavily towards the Lie Down approach.
No Excuse to be Unhappy: Once you’re set financially, there is no excuse for you to be unhappy. If you’re not happy in your city… Move. If you’re not happy with your current source of income… Quit. If your health is suffering… Stop immediately!
If you’ve made it and you are in “purgatory” just do a quick cost benefit analysis on what is causing you the most problems. Get rid of those items and see how you feel about your new situation. In addition, if you find yourself getting upset over things you cannot control, we suggest reading about Stoicism.
If You’re Bored… From what we have seen, boredom sets in for most people around 3 months after “making it”. Since you’ve accomplished more than ~97% of the United States Population in less than ~30-40 years… The next high will be difficult to top. We suggest learning something new (anything) so you feel like a beginner again. After you throw a wrench into your current life, you’ll come up with new ideas. Just remember, boredom is a personal problem so you should take ownership of it and fix it.
Don’t Sell the Assets Yet! Assuming you made your money without selling the entire asset (company), we strongly recommend that you keep it for at least a year. You can take your foot off the gas a little bit for a few months, but selling the entire company may lead to a large vacuum. See how much fun it is to grow your company. If you don’t like it and are certain you want to sell it? Be 100% certain of your next move. As you can see, the common thread is avoiding a “vacuum”. You don’t want to sit around with nothing to do for multiple months in a row.
Avoid Drug Abuse: Many, many, many people with money end up developing alcohol/drug addiction problems. Do your best to avoid this. While you’ll likely celebrate (for a good amount of time) it is best to put a stop to it before it gets out of control. Once you can go a full month without using any substances and remain content, you’re free to create a more stable/healthy lifestyle…. We’re not saying to avoid all vices. We’re simply reiterating the same mantra since the beginning of time. Health>Wealth. So make sure you don’t do any serious or permanent damage.
What to Do Financially
While we think the above 5 points are the most important since they are higher level comments. Below is what we’re currently doing with extra money/cash flow.
Building Streams of Income: While this is a much more “risk on” blog than most, once you’re set it may make more sense to build stable streams of cash flow. Why? Well swinging for the fences takes a lot of effort if you want to do it right. You could purchase a basket of small-cap/micro-cap stocks… But… You could also do that with your excess cash flow from stable recurring income businesses. Now you see why we recommend it! Take your time and build stable income streams and use all of it to invest in the assets you’re interested in.
Invest in Growth or Recurring: Ideally, you’re not spending more than you earn in *real* passive income. If that is the case, your passive income principal amount should increase every single year so there is no reason to worry about that piece of the portfolio. Instead, we focus on building more yield income (see approved products) and high risk/reward growth assets (such as small but scalable websites). This gives you two types of investments: 1) yield investments and 2) risk/growth investments. If the growth investments work out… They end up becoming yield assets and you’ll just reinvest that back into the same two baskets.
Continuous Cash Build: With a passive income stream and a growing portfolio of riskier assets set up, we then move to building a larger and larger cash position every year. Overall, while ~$50K is needed to start a new idea ($10K website design/sales page; $5K demand check, $30-35K product manufacturing and design) we then recommend expanding the “balance sheet” past this level. Specifically this is done through CD staggering (can also be done in online savings accounts).
We provide an example below and note the following assumptions: 1) we assume you will get a 1% return over the course of a year to keep the math simple and your monthly cost of living is $5K, 2) we assume you *first* put away a few thousand dollars in case a one time life event occurs – injury or “something just happened”, 3) you will eventually hit an inflection around year 15 where it practically grows by itself making you *nearly* 100% resistant to a recession (most recessions do not last longer than 2 years or so). Here is an example of how the cash flow will look and please note that you will likely use differing time frames – not just 1 year CDs. (click to enlarge)
How Much in Each Asset Class? While we’re now leaning towards those three investments the most, here is the rough outline on a percentage basis. 1) Cash at 10%: Every year, about 10% of all excess income (net income – living expenses) goes into boring old cash; 2) Real Estate at 30%: This is probably high. That said it has worked so far as we’ve done a lot of work in identifying solid risk/reward assets today. This may change very quickly (in fact we bet these good ideas will be gone in a year or two); 3) Scalable Assets at 35%: This will also decrease in the near future. There are only so many items you can work on at the same time. That said in 2016/2017 we found good opportunities when it came to buying smaller assets (maybe we’ll be wrong long-term who knows!); 4) Stocks and Bonds at 20%: Even though we’re no longer interested in the market we still invest since you “never know”. Buying baskets of stocks and bonds keeps your passive income going up and it also prevents you from missing out on either a run up or a huge buying opportunity; 5) Gold and boring stuff at 5%: The remaining 5% goes into boring stuff like precious metals. This is an extremely small amount to own but if you’re investing 5% of your income into it for a good decade or so it ends up being a relatively high *dollar value* while representing a *small* percentage of the portfolio.
To top it all off we’ll leave you with a formula. We think this is the most valuable part and it is quite simple. Take your total asset allocation and multiply all of those numbers by 10 (simply add a zero). If you’re comfortable with the allocation when you add a zero… It means your risk is too low. If you’re uncomfortable with the allocation but not “worried about it” then you’re about right (an art vs. a science)
Example: Person is 23 years old with $10K Cash, $40K Bonds, $50K Stocks… Leads to $100K Cash, $400K Bonds, $500K stock. Since the portfolio seems reasonable even if we add a zero he probably wants more stock. So if he had $10K Cash, $10K Bonds and $80K Stock… Leads to $100K Cash, $100K Bonds and $800K stock at that level having $800K in stocks in a $1M portfolio is a bit aggressive unless he’s still extremely young.
