You are Richer Than You Think and What to Do When You’re Set

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)

Cd

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.

Concluding Remarks

If you’re rich? Well. We have no right to tell anyone how to spend or use their money. This post was created due to the number of questions we have received. More importantly… if you’re interested in learning more about making money, staying in shape and doing so without choking off your personality… You’ll probably like our upcoming book Efficiency (currently with the Editors!!!). The benefits include:  1) How to get into the top 10% physically with one hour a day of exercise; 2) How to eat correctly to be in the top 10%; 3) How to figure out what type of intelligence you have; 4) How to use this type of intelligence to choose a career and the *right* company: Wall Street, Technology or Sales; 5) How to start an online business and sell (the basics and all you need to start); 6) Clear outline of how to create and start an online product business with correct copywriting; 7) How to go into affiliate marketing if someone wants to take a stab at the competitive space; 8) Overview of how affiliate marketing operates and how to do it, 9) How to do all of this and maintain a normal social life (avoid choking off your personality). Efficiency will be available in July, subscribe to receive discounts or follow us on Twitter for the launch. Remember we can give the tools, but no one can execute on the plan but you.

Comments

  1. Jason says

    “Why would someone continue doing work they dislike just because there is a <1% chance that something will go wrong?"

    First thing I think of when I see this, is "There's a 100% of everything already being wrong by sticking around in a dead-end career!"

    As someone who spent ages 19-26 following "the rules", and has since begun creating personal equity through entrepreneurship, thank you for this. Fantastic article as always, gentlemen!

  2. CantFeelMyFace says

    Longtime reader with a throwaway here.

    Many, many, many people with money end up developing alcohol/drug addiction problems.
    Yes. Yes, yes, and yes. Brilliant, very successful (professionally) people, late 30’s, can’t relate to 99% of the population due to too high IQ and material success. Party too hard, which scares other high net worth daughters/women. Last week alone it was in high quality and quantity coke, ecstasy, acids, speed and obviously booze at last 4 days out of 7. I told myself it was the last time I’d get in a car with them driving in that state. This is not sustainable.
    Oh and add the cliché S&M parties once every quarter for good measure. When you don’t know where your limits are, and they’re far beyond everyone else’s, I guess there’s a finite amount of things to try.
    I always learn a lot with them and we party hard but this is NOT what i want to become. This is a trap that i urge every reader to avoid.
    //
    Also, this is gold:
    If you’re uncomfortable with the allocation but not “worried about it” then you’re about right (an art vs. a science)

    • RE Guy says

      “can’t relate to 99% of the population due to too high IQ and material success.”

      Not can’t, won’t.

      The issue is that “high IQ” is just a way of saying you (them) find it rewarding to discover nuances in highly theoretical mental models.

      That’s fine, so do I.

      But what you’re doing is avoiding the business of relating to other human beings about real practical things that matter to them and/or providing an emotional stimulus through humor or otherwise to simply make them “feel good”.

      Even when you’re discussing theory with other “high IQ” people, you are by definition being objective (your assertion applies regardless of perspective) instead of subjective (make it all about your and/or their perspective). In other words discussing the latest developments in theoretical physics with your buddies (or worse, a girl) isn’t relating… which may be another reason to turn to drugs etc. to fill the void.

      That’s why those times you’ve discussed esoteric theories with a girl, thinking how amazing it was to find a smart one, you’ve been crushed when she didn’t want to hook up with you (in the past I did this many, many times). While just learning to be silly and role-play a funny story about you and her might have gotten you the bang (which may be the other issue with those daughters/women. And also the underlying issue… banging a hottie soon after meeting her is a much better drug in my opinion, and it may alleviate the need for the other drugs).

      Why not make it a goal to get everyone you come in contact to like you? Then try to do it quickly, like with only a few words or a small gesture? Put that “High IQ” to the test and become super efficient at making friends a.k.a. develop your Charisma IQ instead of just your Analytical one… which you can always parlay into closing your next bit deal ($) or getting a beautiful woman to fuck you based primarily on the strength of your personality alone, if you need a challenge to fill the vacuum.

      (And on the material wealth part, search “stealth wealth”)

      • Rubac says

        “The issue is that “high IQ” is just a way of saying you (them) find it rewarding to discover nuances in highly theoretical mental models.”

        This hit home. 18 yrs old, going to top 5 college this fall.

        Society, our schools, and our teachers jack us off so much for being “gifted”.

        I couldn’t find a way to phrase it. But this is exactly all it means “rewarding to find nuances in highly theoretical mental models”. A completely useless skill — even a top programmer/quant is only pulling a measely 300K a year.

        Everyone says you get such a good education at these schools. It’s a joke.

        Thank God I’m getting great at copy. Graduate to enterprise sales, or drop out and start biz with family money.

      • RE Guy says

        Rubac, it’s not useless to understand nuances in theory, so long as you then come back and ground it in reality by taking action.

        The issue is that becoming a specialized expert is interesting and useful to you, the smart individual who wants an exclusive skill set (or just likes to nerd out about something, which is fine if that’s what you find enjoyable and you aren’t harboring illusions about how useful it is), but it may not be interesting to others not in your field and on your level.

        In fact you may get a lot of push back from others who would sooner view you as crazy then “smarter than them” by virtue of your superior knowledge.

        And you’re 18, I don’t know how old that programmer is who’s making 300k/y, but if he’s under 25 I’d say he’s doing well.

        Really the best thing to do would be to buy the book Efficiency when it comes out, that will give you a much better understanding than a series of disjointed comments on here (mine and others on various posts).

        The point I was making to the last guy was that if he’s in his mid to late 30’s, already a (multi) millionaire, and finding himself and his friends consumed with drugs/alcohol while having a large amount of contempt for others, he should consider re-connecting with the human population in various ways.

        For a young guy just starting out, he may need to have MORE contempt for the human population i.e. “Regulars”, and spend less time socializing (enough to not be weird probably), and more time grinding. Again, read Efficiency for a cohesive blueprint.

        I hope this is clear.

      • Rubac says

        Thanks for taking the time to respond.

        100% get you. If I told my peers about my goals they’d just call me a selfish privileged pig.

        Meant that unless you find away to apply our “intelligence” it won’t do anything for you. Put yourself in a job instead of a career (or worse — public sector), and all that talent goes to waste.

        Definitely buying Efficiency. Been following for a good 3 years now.

  3. says

    Interesting article! Well we are nowhere near financial independence yet, I have wondered if we will struggle with “pulling the trigger” and retiring when the time comes. But as you mentioned above, once you reach a safe financial position to retire, there is no excuse to remain unhappy or doing work that is less fulfilling in life.

  4. techasles says

    What about trying to get to the top of your chosen profession?

    40-50 is generally where you have the opportunity to hit the c-suite… a lot of careers don’t even really take off until 40+. Isn’t this a terrible time to take your foot off the gas?

    Hell in Tech sales you have VPs of Sales cracking 5m+ a year, and we’re not even talking household tech company names.

  5. YM says

    ““Why would someone continue doing work they dislike just because there is a <1% chance that something will go wrong?"

    I personally know 50+ year olds with $3m+ continually working jobs they hate because they think they *need* to… sounds like a crappy way to end your life to me.

    Secondly –

    "Many, many, many people with money end up developing alcohol/drug addiction problems. "

    Notice rich guys in certain industries getting black out drunk 2 times a week and literally not giving a sh$*. Once they come out of they fog its regret and then usually a 3 month period of being a hermit. Need to find that balance.

  6. Futurewhat says

    As a young guy who is a devout follower of this blog, this does have me thinking about the future. I guess the saying “its lonely on top” applies here but I think what it comes down to is having that social circle as you get older.

    So many older guys age themselves out of the game or get married, this means less potential cool friends to hang out with. Then “adult life” comes in meaning kids and wives for most Americans. It has me thinking about what is at the end of the tunnel in regards to finding that sense of belonging in the world.

    For so long I have had this view of life after 30 as either family life or being alone in the world, going places by yourself and doing things by yourself. It just doesn’t seem like that same sense of community really exists once you’re older and make it because society as a whole goes one way and if you do your own thing, you will go another way. It will be tough to relate to losers who married early and had kids.

    It is like when this whole being social thing was at its highest in youth, we were working to get to where we wanted in life but then when we get to where we want in life, they’re all gone.

    • Tomaz says

      So true.. I had the vision – save a lot of money, never marry, never have kids, party, travel etc. But this was back then when all my friends were also single and we were having good times. Now they are all married, 2 kids, living paycheck to paycheck. I have money, but the only option for me now is to travel alone.. Either that or to find “new friends” with money and a lot of free time…

  7. OP says

    I run a small asset mgmt firm (global macro).

    Some take-aways from my experience:

    – Control your risk. Only value investors/ hold to zero. You can always re-enter.

    ..it is best to put a stop to it before it gets out of control.

    WSPs are right and it applies to investments, drugs, bad relationships etc. Never pleasant but mandatory for success.

    – Position size. How much you own will usually trump what you own.

    – Know your skew. The skew of your portfolio should be positive – no one likes deep drawdowns, even if you can handle them.

    – Learn basic option strategies. Option theory provides a useful perspective on risk taking.

    – Understand leverage and use it. Hint: futures are cheaper to trade, more liquid and more capital efficient.

    – Portfolio vs single names. It is the portfolio return that matters – if a single position excites you, have a second look at position sizing

    – Two or more uncorrelated return streams will provide a higher return per unit of volatility (risk). Trendfollowing funds + equities is one example.

    – Have a system / plan / protocol. Call it what you want. Follow said system.

    On drugs:

    ‘If you’re going to be addicted, be addicted to something else’: Renton gives old friend Spud a life lesson as they take to the hills in Trainspotting 2

  8. says

    People in better financial position than John – who choose to continue working – have an advantage. Financial independence enables you to work lighter, more creative and bolder. The paranoid need to maintain employment no longer exists. There is no more fear of being fired and losing the standard of living.

    So the person who achieves this condition is more apt to create what he wants, to speak what he wants, to disagree with bosses, to present risky projects, to simply preach the f*¨%$ in everything that held him.

    Trust is visible and results appear. 99% of people in the same corporate environment are trembling in fear of losing their jobs, so the advantage of those financially independent is immeasurable.

    The result can be incredibly rewarding.

  9. Anonymous says

    4) Stocks and Bonds at 20%: Even though we’re no longer interested in the market we still invest since you “never know”.

    Why aren’t you interested anymore?

  10. JP says

    Thanks for the insightful article as always. Regarding John, he will also have to factor in inflation. That $5k monthly amount will inevitably move higher etc…

  11. James Hunt says

    I really wish I could meet the commenters on this blog. We could all be one big family of friends in real life. Someone else pointed out the Bhagavad Gita on another post, and the commenter above mentioned Trainspotting. I am very selective in what material and media I consume, including reading self-help itself, but I have been meditating on these two pieces of material and their core messages since the beginning of this year. It really seems like great minds do think alike! Also, another one up for the ” these posts always come in at the right time in my life,” I really appreciate the art post and creating luck post, both highly relevant to my current spiritual awakening and career position. I would like to see these type of posts dealing with mindset, spirituality, addictions, etc more in the future. However, it may alienate the those that think too dichotomously in black and white, or think this stuff is too “voo-doo” or esoteric namely those who are boring or lack personality, or the types who say “I need to see the scientific studies first, anecdotal evidence is not enough.” These posts also require people to think a lot since they contradict some your earlier posts, just like the Bible and other ancient text contradicting themselves in different verses. Is WSPs the next modern day Jesus haha? Anyhow, there may be much cognitive dissonance for people when trying to understand these points. Ex. people may fail to understand what you when you imply ” you need to get rich,” but then say “you are already rich.” or “stop caring and worrying so much it will come to you” but on the other hand “push yourself to the limit to be in the top bracket.” or “all the information is out there for you to learn to be successful” versus “stop your mental masturbation reading too much information instead of taking action.” Hope to see the contradicting posts, and esoteric stuff in the future.

  12. says

    WSPs…why don’t you care about the stock market anymore? Do you guys ever see yourselves out of it completely? Thank you…

  13. says

    “The remaining 5% goes into boring stuff like precious metals. This is an extremely small amount to own…”

    This is extremely high amount to own. 5% – are you guys drunk? Not gonna say exactly what that number should be, but let’s just say it rhymes with “zero”.

  14. rocko says

    Hey guys! Just stumbled across your website and it’s great!

    In your post you mentioned owning precious metals like gold. Recently, I started investing in silver, since while I’m single and have a decent job, due to bad decisions in the past and not enough cash to play with, I’m laying off gold. What’s your take on buying silver?

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