Editor’s Note: This post was originally published on Seattle 2.0, and imported to GeekWire as part of our acquisition of Seattle 2.0 and its archival content. For more background, see this post.
By Mark Maunder
Please note: The article below is my opinion [Mark Maunder] and does not constitute legal, financial or other advice. The course of action mentioned in this article may not be suitable for you. In addition, I am not offering any advice regarding the nature, potential value or suitability of any particular investment, security or investment strategy. Before making any decision that will affect your or your family’s financial outcome, please contact an authorized financial advisor.
Here are some thoughts that may lean you towards burning the 401K. Lets look at the two scenarios.
You decide to give up being able to save for the next 5 years to start and grow the business. Possible outcomes:
- Success. You net $5 million in cash and never have to work again. [But probably do, because you love your work.]
- Break even. You net $700K in lost income when you exit.
- Failure. You get nothing and at the end of the 5 years you get a job and have to work harder than most to save enough so that you have a comfortable retirement.
- Complete and utter failure. You got sued or were financially irresponsible and have to declare bankruptcy.
The other option is that you keep your job and earn a salary for the rest of your life. Possible outcomes:
- You work for the rest of your life earning a moderate salary that pays your bills and helps you save enough to enjoy a comfortable retirement.
- You lose your job and have several quarters of unemployment during your career that you have to work hard to make up for during times when you do have a job.
- You lose your job and aren’t able to get another one and have to declare bankruptcy.
The United States is one of the few places in the world where you can choose to start a company and because funding is readily available, you can actually earn a moderate salary during the 5 years. This massively offsets the risk for the entrepreneur and the amount of equity you have to give up to get that salary is very little.
Another thing that makes the entrepreneurial route more attractive is that an exit of $5 million is comparatively small, but it provides enough of a financial base that you never have to work again. Even if you exit for $1 million, the financial base that you now have will have a significant impact throughout your entire life because, for example, in many situations where you would have gone into debt you won’t have to which means you save the cost of servicing that debt.
Even if you start a company and the exit at the end of 5 years only covers lost income: You were forced to live a more frugal life during the 5 years without income. So assuming you didn’t borrow money to sustain yourself and have the cost of that debt, it has the effect of forcing you to save.
Here’s another more oblique argument: Lets say you earn 5% interest on your 401K (about average for a mix of money market and bond mutual funds). And lets assume the US dollar is going to devalue by 25% over the next 5 years. (Argue with me 5 years from now if you disagree). At the end of 5 years, while you may see a balance that is increasing, price inflation (because we import everything) has negated any interest you may have earned. What if instead, you invest that 401K over the next 18 months to build a business. Well your 401K has more buying power now than it will have in 5 years so that helps. And the business you build has a 50/50 mix of dollar and non-dollar revenue. What you find is that as the dollar falls over the next 5 years, you can raise your prices for non-dollar customers and they’re happy to pay it because your product is still the same price for them. You also find that as the dollar devalues it becomes relatively cheaper to run your business in the USA. Now instead of hitching your wagon to the whims of the federal reserve and the global economy, you control your own destiny. You have a hedge against a weak dollar and against inflation.
We find ourselves in times of great change. The stability that employment provides and the certainty that your 401K will provide for retirement have all come into question. One may be able to make an argument that it is more financially responsible to spend your savings to start your own business than to rely on the tried and true model of employment and tax-efficient savings. Have no doubt that the US economy will survive. But the economic shifts that you’ll see during the next decade in the form of a devaluing dollar, changing sovereign debt ratings, the emergence of new economic super-powers to name a few, mean that you need to be nimble, aware and have good reflexes to survive and prosper.
