Ask HN: Income Share Agreement for high earners? | Hacker News Reader

Ask HN: Income Share Agreement for high earners?

5 pointsozb5 comments

As a high earner with relatively modest assets so far, I often wonder about how much I should be spending: if my income were reliable then it would make sense to smooth consumption over the long term, ie spend a large portion of my income (and only save for known and unknown future expenses). But in practice it's more prudent to also save for unexpected changes in income, either from being laid off, or economic recessions, or long-term change in demand for my skills; there's disability insurance, but that's just a part of the picture.

So, is there any way for me to say "give me $X00,000 now, for 10% of my income over the next 10 years"? Obviously details would have to be worked out, eg pre- vs post-tax income, potentially adding a large "standard deduction" before earnings are shared, and a minimum yearly income for the sharing to take effect in a given year and count towards the 10. Target yield would presumably have to be around 10-15%. If there were such a deal available, would you as a high earner be interested? I'm wondering if I could make something like this happen for a group of us via private investment (think Yieldstreet and similar platforms).

The obvious weakness in such a deal is that the customer disappears after taking the upfront money. Instead of disappears this could also be "suddenly loses interest in working" or "gets into a car accident and physically cannot work anymore" or any other variation, it doesn't have to be fraudulent or malicious. I think it would be very difficult to find investors who would agree to terms like "10% of income, whatever it is" since it would be so unreliable.

If you change the terms to "give me $X00,000 now, for $XYZ each month over the next 10 years" then you get a regular loan, which is obtainable from a variety of institutions. If you are particularly worried about being disabled or laid off, insurance can cover most of that but those only pay out at the time of any incident actually happening, not upfront.

The standard advice for people who are worried that their current good times might not last is to keep your monthly spending well below your monthly income and build up an emergency fund of at least 6-12 months of living expenses. This will give you enough time for job hunting if you are ever laid off unexpectedly and (more importantly IMO) relieve you from most of the stress of being dependent on your current job to survive. Look up the FIRE/ERE movements online for strategies to get started with this.

Yes, moral hazard is an issue. But in general a 10% cut doesn't eliminate the incentive for people to work, and the legal system makes "disappearing" non-trivial. That's also why I've included the possibility of automatically skipping low-income years, and not counting them towards the 10 years; ie, it's not just the next 10 years but the next 10 reasonably-profitable years. Finally, a chunk of the risk can be managed by the investor by diversification across different individuals, industries, skill sets, etc. And the rest is risk premium, which would result in a higher average return than a simple loan.

I don't think the difference between a guaranteed annuity and a lump sum is the main blocker here, those tend to be relatively interchangeable (at the appropriate interest/return). The part I'm more interested in is the insurance aspect. As mentioned, disability insurance is a part of it, and an emergency fund is another part for short-term changes in income. But even with both of these in place, the remaining risk means that eg my effective buying/renting power for a house is significantly diminished.

Note that income share agreements already exist for student loans. They're not so widely used and have their own issues, but it's also a much harder market than people who are already confirmed to be able to take in high earnings.

I don't find this dissimilar to seed-stage VC. I think there's probably some ways of shopping this around if there were some provisions that trigger loan terms; think "if you don't exceed X% of minimum yearly income in _ years, here is a payment schedule with a variable interest rate"

I've been exploring this idea and had this pinned to respond. My email is in my bio if you'd like to chat.

Wow, you've discovered lending and personal loans.

See my other comment. I'm less concerned with converting between a lump sum and an annuity, and more concerned with insuring systemic risks.

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