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Comment by noname123 | Hacker News Reader

Why be depressed? If you are young and a programmer making 100K at 25, party with your hipster friends and sock away 40K in savings every year. You'll end up with 200K by 30, not a cool billion dollar but with 6% muni-bonds, you suddenly have tax-free interest income of equivalent of $1.2 million at regular 1% CD rate.

Work on interesting projects that you want to work on. Do some traveling. Go back to grad school for fun. Learn a new language, sport or talk to girls. Go to your favorite startup or software company website and click on the mugshot of the guy who's in 40's in blue dres-shirt, is that who you want to be when you want to be?

If no, don't get on the VC rat-race; it's just as soul-crushing as the investment banker's rat-race except less lucrative.

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Everyone knows startups are not the optimal economically rational way to make money. But to an entrepreneur, living off 6% muni bond interest is profoundly uninteresting, and dare I say soul crushing.

Repeat after me: If you think it's only about the money, you're missing the point.

And even if it is all about the money, most 25 year olds would jump at a 1% chance to make $10 million over a $100% chance to make $200K. Not mathematically rational, but if everyone was rational there would be no outliers.

nitpick: It's a loooooooooot less than 1%

Source? I've seen data pegging startup failure rates anywhere between 50-90%, but I've never seen a credible source claim that over 99% fail. Mathematically, no investor would be able to stay in business if 99% of their investments fail. I'm guessing failure rates for startups that have funding or bootstrap through revenue are closer to 75%.

The thing as always is how you define failure and success. Do all the founders of a startup that is considered a success make $10M? Of course not. In my opinion, that's where the "it's a lot less than 1%" might come from.

It's not that 99% fail, it's that well over 99% of participants fail to hit a $1m payout. Top founders and early VC, as well as key executive hires, may win. For staff, including early engineering hires, "a good year" is a more likely outcome, after 2-6 years, or more, of sweat equity. Payout of 5-6 figures.

Assuming this is referring to founders. If you're an employee, you're the engineer making $100K in OP's comment.

> "If you're an employee, you're the engineer making $100K in OP's comment."

Except when you're not. I can't count how many times people I've met have been suckered into taking substantial pay cuts for not a lot of equity.

It's a real facepalm moment - what do you mean you're giving up $40K+ a year in salary. Did you know that even if your startup hits all of its wildest dreams you'll cash out for $80-100K after about 5 years? How in the world did that math ever make sense?!

I flat out refuse to talk to any founders that try to swindle people like this. Either put more equity on the table or pay me market. Quit relying on a tired lie.

Better way to make money is to take out a personal loan for 100K, same opportunity cost of two years of programmer-salary on startups. Buy out of the money options on small-cap pharmacuetical facing FDA decisions, you have the ability to also make $10 million overnight with 30% success. Go for insider-tips to max out on your success.

Tell me more.

Wouldn't the insider tips be illegal insider trading?

IANAL, but I don't think it would in this case. Insider trading generally applies to using private information held by the company. But in this case what you're looking for is information from the CRO or FDA.

Is this... legit? or was it ever?

Wow, I had no idea Mathew Martoma frequented HN.

A scheme similar to this is why I was reading medical and science journals in the late 90s for background knowledge, then scouring the pink sheets for applicable companies.

In the end, the hits I had were more or less luck, though. And on microscopic levels of investment, so I didn't get rich.

That sounds like the beginning of typical amateur trader career that ends up with 90+% probability in losing all invested money.

Maybe the rational way to play the game then is to make that $200K, then stretch your reach and make $1M, and so on... until you've taken care of the money problem. Then that's when you're ready to start taking shots at the big opportunities, without being motivated by money or being held back by it.

I would argue it's easier to go all with a smaller hand.

Easy, but a lot higher-risk. It takes money, resources, and connections to actually do big things, and past wins improve your execution ability and chances of success.

But prescient market timing greatly skews the odds in your favor and gives you a huge edge too -- I think that's apparent in all the startup successes that started off with a small hand.

The problem is by the time you've saved up $200k, most people are committed to a certain lifestyle based on their annual income. They're generally in their 30s or older, married, couple of cars, kids in school, mortgage, used to spending $X/yr on a vacation, etc etc. And, they've worked so hard to save up that $200k that it's unlikely they burn it to fund living expenses while they work on a startup.

Most entrepreneurs (generally, not just tech) are in fact in their 40s-50s. Well established professionals with good relationships and skills. Thing is they are usually doing it with Other People's Money, not their nest egg.

I don't think we're talking about "saving up $200K", at least I wasn't at all. Instead build and grow a profitable business to achieve that, not as ambitious as a "startup" but also nowhere near as risky. You're still an entrepreneur either way, just learning to crawl before you walk, so to speak.

Nobody has mentioned taxes yet.

I assume your "making 100K" is the salary. The pre-tax salary. Taxes will chop that pretty much in half. So if you save $40K/year, you get to live off of $10k in the second most expensive MSA in the US. Good luck.

You and I are looking at different marginal tax rate tables if you're talking about US income tax.

  Annual Gross Pay	$100,000.00
  Federal Withholding	$19,794.50
  Social Security	$4,200.00
  Medicare	$1,450.00
  California	$7,257.14
  SDI	$955.85

  Net Pay $66,342.51

http://www.paycheckcity.com/calculator/netpay/us/california/...

And if the only tax break one takes advantage of is the 401k (ie no mortgage, no business deductions, etc):

Annual Gross Pay $100,000.00 Federal Withholding $ 15,292.50 Social Security $ 4,200.00 Medicare $ 1,450.00 California $ 5,518.04 SDI $ 955.85

401k $ 17,000.00

Net Pay $ 55,583.6

This is way overly pessimistic. At 100k total taxes (Federal+CA+SS+Medicare) are in the 30% range. That leaves 30k to spend (not too hard for a single 25 year old assuming you don't have lots of student loans, even in SF) and 40k to save.

And this ignores tax-advantaged savings

At 100k, take-home pay is $65,278. Closer to 35% "total taxes"

And that's excluding the possibility of 401k, or IRA, or SEP-IRA, out of which you've got to be eligible for at least one.

well, your lease is $25k, so $40 saved == is naked, barefoot, hungre and not yet even at the office =D

Where are you getting those numbers? Not saying you're wrong, just curious. A quick look online shows ~18k federal, ~6k CA, and ~6K SS + medicare, which is 30%ish

Apologies. I used the paycheckcity.com calculator, which gave take-home pay after all withholdings. It did not take into account over-paying (and thus the refund at the end of the year).

Wikipedia says federal tax for those making between $83,600 and $174,400 is a fixed $17,025 + 28% of the amount over $83,600.

ftb.ca.gov says that California state tax for those making between $48,942 and $250k is a fixed $2,154.83 + 9.3% of the amount over $48,942.

This gives

California: $6,903. Federal: $21,617.

Then there's about $6600 in SS+Medicare+SDI and approximately $5500 standard federal deduction for a grand total of about $30k in taxes.

Are there any tax-advantaged savings options besides IRA and similar retirement savings that you essentially can't access until you are 60+?

There's also HSA (although still taxed in California you'll still avoid federal taxes) which is tax deferred and if used for qualified medical expenses you'll never pay federal tax. After age 60 it can be drawn down on similar to an IRA. (Has the caveat that it to maintain an HSA you need to be on a HDHP, which for a healthy 20 something is probably a reasonable choice).

HSAs are a great choice for someone without ongoing medical costs. I'm currently earning 2% in mine. Best part about it is that contributions stay in the account & continue earning interest, unlike an FSA where it's use-it or lose-it each year.

and since FSA maximum got cut and HSA maximum increased, it makes a lot more sense

If you do any freelance work or own your own business you could do an Independent 401k which lets you stuff more money away than a normal 401k. Good idea for some of the freelancers on HN.

http://www.investopedia.com/terms/i/independent_401k.asp

There are different rules for "IRA". If you are a sole proprietor instead of a corporation, you can do a SEP IRA. That, depending on your earnings, will allow you to sock away up to $49k/yr. If you are incorporated, you must offer the same 401k plan to all employees (you and your team). Also, company 401k plans cost money to manage... more than you might think. When you are small it is more than you'd expect. I incorporated last year and this is my experience in So. CA.

Where can you buy muni bonds that earn 6%? Most of the muni bonds yields I've found online are in the 3.5-4% range.

That is unless you're talking about the city of Detroit (which is flirting with bankruptcy) that pays 7% plus and is riskier imho than doing a startup.

http://blogs.marketwatch.com/fundmastery/2010/03/12/goldman-...

Found some Mass. bonds (because it's my home state, so tax-free for both federal and state) yielding 6.43% just now, with expiration date of 2029-05-01 and with credit rating of AA+

http://massachusetts.municipalbonds.com/bonds/issue/914440KJ....

Also can also buy some REITs with annual high-dividend yield of 17% such as AGNC or NLY. These are a bit riskier due to fluctuating principal out on the open equity market. However, can mitigate this risk by owning ITM calls prior to ex-dividend dates and capture also run-up profits.

Thanks for sharing a specific example. Could be an interesting investment. At the same time, you have to weigh out the other risks such as Mass. being one of the most in debt states in the country.

http://www.usgovernmentspending.com/state_debt_rank

Can you actually buy them at that price? Don't they get auctioned off, and so that the actual yield is lower? From reading that web page it looks like the effective yield was only 4-4.5%

UPDATE: as svachalek points out, the 4-4.5% is not even the right yield. That is 4.5% interest per year, but if you pay $110 for the bond, you will only get a principal returned of $100, so the effective yield-to-maturity is even lower.

Could you explain the second part of your comment... I'm not sure I quite understand what you're saying. Wouldn't owning calls hurt you when the stock price likely falls post-ex-dividend? I'm pretty new to options trading...

Also, are you speaking from experience with your hypothetical? If so, I'd be interested in discussing some other things further.

I can't see the details on this because I'm not going to set up an account, but in general don't believe the yield; you want to see the yield-to-worst.

http://www.forbes.com/sites/rickferri/2012/07/19/the-yield-t...

>> can mitigate this risk by owning ITM calls prior to ex-dividend dates

Don't forget to mention that those calls aren't cheap.

Leveraged closed end bond funds are an option to get close to 6% with the added benefit of diversification (but the disadvantage of management fees, but the 6% yield are AFTER subtracting the fees): http://cef.morningstar.com/quote?t=FCUSA0004E&ops=&p...

Personally I have a diversified portfolio that yields about 6%, with corporate junk bonds (US and emerging market), emerging market sovereign bonds, business development companies, REITs, mREITs, and international high dividend stocks.

This stock/bond chart blew my mind. The bigger question is how long high bond rates will last?

http://www.businessinsider.com/t-rowe-price-us-equity-outloo...

If you think success will cure depression, your youthful inexperience is showing.

Maybe off topic here, but there is a song that is popular out here in Texas that makes a useful observation (fame don't take away the pain, it just pays the bills): http://www.youtube.com/watch?v=tBjxmJIRnS8

Success cures depression that is caused by lack of success or, relatedly, low social status.

That doesn't apply to most depression, that being often a serious biological problem. No amount of success will cure that. That requires psychiatric help.

It does alleviate a certain gnawing unhappiness that most ambitious people experience (unless the definition of success is raised, which it often is).

It is hard to tell if this is a serious or sarcastic response.

If you think Muni Bonds will stay at 6% for a lifetime, you're misinformed. 1) Government owned consumer debt is up nearly 5x in 5 years 2) Lately Muni Bonds have been swinging more than stocks themselves 3) Take Pimco Municipal Income Fund (NYSE: PMF) as an example. It's price has appreciated 7% over 10 years, TOTAL. Even with dividends you're looking at best 3% and at that point you've successfully managed to do nothing more than keep up with inflation.

I'm not buying JNK or ETF tracking bond funds but underlying bonds. If you are buying the ETF, you are not getting the best yield but at average the 3% yield for lesser risk due to diversification - which is kinda BS given the systematic risk we've witnessed over the past 10 years. Pick muni for high yield and low default risk yourself.

Given that the last ten years include the greatest financial crisis since the Great Depression, a net gain of 7% is pretty good. Plus, the annual distributions were consistently over 6%, so you're looking at a total return of almost 7% per year. That's actually pretty good.

You are correct. I didn't realize PMF was such a consistent dividend that far back. On top of the 6% average, it is also tax free since it is Municipal so true return could get up to 8ish which is pretty incredible considering the last 10 years.

Eh? Having $1.2m beats having 200k any day... If 6% muni-bonds are a good investment (I personally have no idea), then presumably the guy with the $1.2m portfolio could buy them too... why is the 1% CD his only investment option?

Point is having FU money, for most people it's $3mil at today's current interest rate to generate $30K which is annual young person's cost of living in a big metro.

If you can cut your cost of living down $12K, then only $200K is needed.

Careful with that. That ignores inflation, which as a great man once said, is the most pernicious tax of all. Inflation is currently around ~1.8% per year. Money in a 1% CD is effectively losing 0.8% per year.

If you're happy with a $30k return on a $3m portfolio, you need to get a 2.8% return in today's inflation environment.

Interest rates on investments take into account estimated inflation, so the $30k already takes into account likely inflation (but would not take into account higher-than-expected inflation).

Hell no. You invest in a 1% CD, you get 1% absolute return, even if inflation is raging in the double digits.

Edit: I assume you mean that over time interest bearing account rates rise with inflation. That's true in general, but as the current situation shows, there's no guarantee they're actually even above the inflation level at any point.

He means that if you keep spending all of your investment's returns, you'll end up with a fixed income of $30K (1% of $3M) that, due to inflation, will have less purchasing power as the years go by.

If you're happy with a $30k return on a $3m portfolio...

-- You should never be happy with this. IMHO.

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