Is $1 Million Still F.U. Money?

Painting: The Tribute Money by Masaccio (1401–1428)

Ask someone how much they’d need to quit their job and follow their dreams. For most people the magic number to walk away from it all is $1 million. That’s their F.U. (f@ck you) money.*

*F.U. money is the money you’d need to have saved to say “F.U.” to your boss and job.

However, people have been quoting that number for many, many years. Realistically – with inflation – $1 millions means less today than years ago. But it’s a nice clean amount so it has retained its status as the magic number.

Is $1 million still a lot of money?

Let’s not pretend to be stupid. A sudden inheritance of $1 million would be life changing for most people. You could take care of a lot of shit with that kind of money. But is it enough to buy a lifetime of freedom?

If you won $1 million, you’d probably first need to pay off your debts and mortgage. If you’re lucky to live in a an area with reasonable house prices you’d probably be left with about $700,000. (If you live in a place like Toronto, New York or Tokyo, consider moving to a city with a lower cost of living.)

If you invest that $700,000 in a balanced portfolio I think it’s fair to say you’d get a conservative return of 4-6%. If you didn’t touch your initial capital, you’d be generating $28-42k annually. This is livable, if you have your primary residence paid off. However, it might be an unreasonable range if it’s only 25% of your current income.

Of course, one must consider taxes in a situation like this. Often, income from investments is taxed more favorably than regular income. So $30k from investments might be worth more after tax than a $30k salary. Meaning, you might require slightly less capital to generate a desired level of after tax income. However, for purposes of simplicity – and because I don’t know who you are and where you live – I will ignore taxes.

A 75% cut in income would most likely require a substantial change in lifestyle. Moreover, the real value of that lower income will be eroded by inflation as time goes on. The longer remaining life you have the worse it’ll get.

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The previous example assumes you don’t touch your initial investment. If you change your strategy by withdrawing initial capital along with your gains you can draw a larger income. The downside is you will eventually run out of money.

For example, if you drew an annual income of $50,000 (assuming 5% rate of return), you would run out of money in 23 years. Increase that income to $60,000 and you’d run out in 17 years.

To achieve a consistent annual $50k income over 40 years you’d need $885k in starting capital (given a 5% return assumption). Again, that $50k is worth less and less as time proceeds, due to inflation.

For some, that amount and timing works perfectly. For others it doesn’t. If you can handle a $50k lifestyle and are well into retirement age, $1 million might be your magic number. However, $1 million no longer appears to be F.U. money for anyone with a considerable time horizon.

Additional sources of retirement income (e.g. government pension) will help, but it won’t amount to much for most people. Many people will require more.

After reading all this, if you’re anything like me, you’re thinking “well that’s just f@cking great – I’m going to be a corporate schmuck forever then.” Maybe. Or maybe there are other options.

For starters, you can take out a smaller income and supplement it with part-time work…perhaps a secret passion project. Or you can live like a student on ramen noodles and Pabst Blue Ribbon.

Cut and supplement. If you can’t do that, I’m afraid you might need to play the corporate game for longer. Because $1 million is no longer F.U. money.


The S&P 500: Biased and Misleading

You’ve seen headlines like these:

“S&P 500 crashes today”

” The S&P 500 rose as earnings optimism rises”

“Record year for stocks, as S&P 500 up double-digits”

…and so on.

The problem with these statements is that they’re using the S&P 500 as a proxy for the overall market. I’ll be the first to admit that no index completely represents the market at all times. But in this article, I’ll point out some of the issues with the S&P 500.

The S&P 500 index is a market-capitalization weighted index made up of 500 of the largest publicly-traded companies in the United States. The stocks within the index represent a significant portion of value of all companies in America.

I am a big fan of low cost index investing. So why am I shit-talking the S&P 500?

Three reasons:

First, the index is arguably actively managed. All indices have a pre-programmed set of rules to determine its constituents, weightings and rebalancing frequency. An index and its characteristics need to be defined – like everything else in life – and that definition is the creation of a human being (or team of humans) making some sort of decisions. The activity undertaken to create these rules (and the activity in executing these rules) means that indices (like the S&P 500 index) may not be as passive as investors believe. While an investor can make a passive allocation to an index, that investor must first understand and believe in how that index is constructed.

Second, the index is highly concentrated. The chart at the beginning of this articles shows that the largest 5 stocks of the S&P 500 accounts for the same market cap as the last 279 companies of the index. These five companies are Microsoft, Amazon, Apple, Alphabet and Facebook. While these companies may seem like behemoths that could survive anything – thus deserving their big weights in the index – one only has to go back as far as 2010 to see a completely different composition. In 2010, the largest five stocks in the S&P 500 included Exxon, GE and Berkshire Hathaway. Where are they now? This degree of concentration presents a risk to investors, as the success of index constituents waxes and wanes. Essentially, the performance of the S&P 500 is dependent on the success or failure of just 5 companies.

Third, the index is effectively a buy-high sell-low strategy. Put simply, to get added to the index a company needs to be meaningfully large. Companies aren’t born large, so by the time they are big enough to be added to the S&P 500 they have often experienced years of growth. In other words, companies are added to the index AFTER they have performed well and potentially already trading at elevated levels. In contrast, a company is removed from the index if it falls from grace and has shrunk considerably (or even gone bankrupt) due to years of weak performance. Ideally, investments should be bought BEFORE they perform well and sold BEFORE they start to underperform. The S&P 500 (and many other indices) does the opposite, and is effectively a buy-high sell-low strategy.

Takeaway: If you are looking for simple, diversified access to passive exposure to equities I would first look for indices that are well constructed. These well constructed indices may not be what you see in the newspaper headlines, and some are proprietary to mutual fund or ETF manufacturers. Look for investment products that provide ‘total market’ exposure while capping the weight of each underlying holding. Take a look at the top 10 holdings of whatever index ETF or fund you are researching to ensure they represent no more than 25% of the overall assets. Finally, also consider an index ETF or fund that includes small, mid and large cap stocks to provide exposure to all phases of company growth (i.e. not simply to companies that have already gotten big).


Poverty at 40 is Not Cool

When I was 20 years old, somehow I lived off $50 a week and still managed to eat, go out and mingle with the ladies. I probably managed this because – other than my own education – I had few responsibilities, shared a tiny shack with roommates and mooched off various people.

Now that I’m in my 40s I often joke that I make much more money but have much less to show for it.

The truth is I earn a decent paycheque and have a lot to show for it: a house, car, kids, savings, etc. I am doing things I could not have done during my sardines-on-toast-eating 20s.

Let’s look at this another way. How would I be living today if I had the same income as I did in my 20s? 

I’d probably be living exactly how I did in my 20s: sharing a small apartment, no car, likely alone. 

Maybe I’d have a sugar-momma, because that’s probably the only way I could afford anything beyond peanut butter sandwiches for dinner. But what kind of sugar-momma material is a 40-something year old, balding guy with a little extra cushion? This is why I think most sugar-mommas cut off their boy toys at age 30.

Poverty at 20 is cool and artsy. That’s what we all reminisce about. We had nothing, yet we had it all. We had newfound freedom and were discovering life. Our curiosity and the value and energy of youth made up for whatever we lacked. Plus, most of our friends were in the same boat.

Poverty at 40, however, is a very different story. It’s no longer edgy, it’s no longer grassroots, it’s no longer artsy. The broke people who surrounded you in your 20s have grown up, built careers and saved money. Not everyone becomes a Rockefeller, but flat broke at 40 is just sad. Perhaps this is for good reason, as it signifies a lack of foresight and discipline. Even people pursuing the most noble of causes have bills to pay and want to enjoy the occasional nice restaurant meal.

If you’re reading this and you are in your 20s, picture your life in a decade or two. Picture where your friends will be. Ten bucks says they will have done something with their lives. They did this by working hard on themselves – even though they claimed they enjoyed SPAM as their primary source of protein. I suggest you invest heavily in your brain and body. Because you’re going to need at least one of those things when you’re my age.