The Art of the WordPress Startup: Part 7

Founder Retirement

This post is part 7 of a series on how to launch your startup on WordPress. Last time I talked about the various startup tools I find useful and gave a little bit of background on each. Today’s post is about something you’re all hopefully working towards and should be thinking about…retirement. However, people who create companies tend to be the worst at retirement planning and investing, for a few reasons:

  • The assumption that putting all your money into your company is the best strategy, foregoing contributions to any type of retirement plan.
  • Lack of corporate 401K and access to the investment advisors that come along with it (it can also be spelled adviser, both are correct).
  • Attitude of “I can found a company; I can do anything myself”.

Before we begin, none of the following should be considered official financial or legal advice. I do hold a degree in both finance and economics, so I tend to know what I’m talking about in this arena so take what you want from this post and ignore what you don’t like. This post will mostly apply to citizens of the U.S. because that’s where I live and studied.

Let’s address the first point first. It’s fine to put a lot of your money into your company, I’ve done it. The trick is to not put all of your money into your company. Why? Well, a few reasons. One is that your company could fail for a number of unforeseen reasons. People think they’ll have time to play “catch up” but the bus will have passed you by, because if your business is in the disappearing phase you’ll be plenty busy doing other things and will be using whatever cash you have to stay afloat and keep the lights on.

Even big companies can disappear fast. The Huffington Post recently did a story on ten brands that will disappear in 2014. Among those listed are J.C. Penney, Nook (launched in late 2009), LivingSocial, Volvo, and even Mitsubishi Motors. Forget about those for a moment, remember MySpace? At the peak if you had told its founders their company would basically disappear in a couple of years they would have told you to go see a psychiatrist. The point is that if it can happen to these established brands, it can happen to your company which is probably a lot smaller, and depending on your industry, maybe faster than you could imagine. Just like you should always be allocating a certain % of your revenue to marketing, you should always be allocating a certain % of your income to retirement.

And I haven’t even touched on the concept of compounding interest, which means that while you’re poking fun of your friends working “for the man” in corporate, they’re piling up interest on top of interest in their 401K. That’s why most advisors will tell you the #1 key to retirement is starting early. Albert Einstein called it the “the greatest mathematical discovery of all time” due to its power. There’s a great article about it in-depth here, but the one example they cite is that if someone aged 20 makes a one-time $5K contribution to their Roth IRA and earns 8% average annual return, if left untouched that $5K will grow to $160K by the time they retire at age 65. But if they waited until they’re 39 to plop that $5K down, it would only grow to $40K by the time they’re 65. So those 19 years of waiting cost you $120K, ouch. This is one of the rare cases where the Rolling Stones were right, time is on your side.

Now the second point, lack of access to corporate 401K and investment advisors. When you work at a big company you get handed paperwork during on-boarding and part of it is to signup for the company 401K. In fact, some places have auto-enrollment which means the default is that they start taking a piece of your check each month (from gross, not net) unless you opt-out. So it’s like forced retirement savings. On top of that, you don’t have to do much except fill out some pretty easy paperwork. Setting up your own retirement as a founder is a pain. Do I go with SIMPLE IRA, SEP IRA, Traditional IRA, Roth IRA, Solo 401K, Keogh Plan, or ESOP? Even once you pick an investment vehicle, and if you’re really slick a combination of more than one to create a bulletproof tax shield, you then have to pick a provider. Some providers handle one vehicle but not the two you want and so forth, so it’s like a very long Easter-egg hunt setting things up. Because of this, many founders perpetually put this process off year-after-year.

In addition, someone who works at big corporate will be paired up with an investment house like Fidelity or Vanguard, and then given a phone number to call where they can get basic advice on what they should do in terms of investing. What you should do depends on a number of factors like your goals, the current investment climate, and of utmost importance your age. If you’re 63 and want to retire somewhat soon, the advisor would likely keep your portfolio largely out of equities because if the market tanks like it does every X years, you’re SOL and if you get canned during that same recession it’s possible you’ll be 68 working some minimum wage job after having lost the bulk of your nest egg. It happens so often there should be a law against it, because no matter how many times that sob story plays out on 60 Minutes each recession, people continue to play equities like it’s blackjack and the house always wins.

Now the final and maybe most important, is what I call Superman Syndrome. Founding a company is really hard, and if you have success you feel invincible. You think you can do just about anything. Who needs an investment advisor or high-priced tax attorney? I can just Google stuff and pick stocks on my own. Well I have news for you, unless you’re Warren Buffet, you’re chasing your tail. My one finance professor who had a PhD from Columbia said that most of the people who pick stocks were on a “fool’s errand”, and that water cooler pickers are like sheep running blind. Why? Think about it for a moment. When the market is hot (like right now) and way up, everyone is talking about what stocks they’re putting in their portfolio. So they’re buying at high prices. And guess what they do when the market starts to tank or already has tanked? They liquidate. So they’re buying high and selling low, which is the worst strategy ever no matter what asset class you’re talking about.

I can say this with high confidence. When really really smart founders exit at a high level like Zuckerberg or Romney1, the first thing they do is surround themselves with really smart (expensive) people who do tax and retirement shielding planning for a living. Why? Because they’re so smart they understand they don’t know squat compared to those who live and breathe that type of thing. Trying to be your own high priced investment advisor is like trying to do your own plastic surgery. It’s kind of stupid.

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Even Buffet who is the one exception often mentioned as “beating the market” has gone on record saying Berkshire Hathaway’s future performance will most likely barely beat the S&P 500. And keep in mind Buffet’s past performance is often analyzed by experts with the conclusion it’s his huge amount of cash and negotiating skills (partly due to that pile of cash) that have given him an edge. This is all excluding the fact that it was his entire life’s obsession and somehow we think we can trade like Buffet because we watch the news and read The Motley Fool blog?

So what do you do? Well, start doing research on the types of retirement plans so that you can figure out which is a good fit and so you sound educated. Then find yourself a very good financial advisor and tax attorney, and ideally one who does both, meaning they have both a JD and CFP among other things. Don’t be greedy. Your advisor should give you high-level guidance about things like ETFs, TDFs, and more. If they work on something other than a flat fee (it’s okay if it’s expensive as long as their credentials match their price), then be wary. And if they promise they can beat the market or get you some crazy return, run for the hills because you’re about to get Madoff’d. Then repeat in the mirror several times “I am not Gordon Gecko, Warren Buffet, or The Wolf of Wall Street”. Sure you can open your own online discount brokerage account and start trading blind, but Vegas is a lot more fun.

Footnotes:

1-Mitt Romney did not found the entire Bain & Company consulting shop, but he did co-found Bain Capital & made most of his wealth from that.