One Million Dollars!

My friend/colleague/employer/foil Marco Arment was employee #1 at Tumblr, and it thus is no surprise that people have been curious as to the number and total value of the bags of cash that will be thrown out of helicopters onto his palatial Hastings-on-Hudson estate soon. His boss, David Karp, reportedly received from Yahoo's $1.1 billion offer about $220 million or $250 million, depending on the source.

Marco wrote a blog post about his time working for David from 2006 to 2010, which began as a collaborator on consulting work and morphed into Tumblr. It's a lovely bit of writing about how two people (even in an unequal power relationship) can produce sums greater than their parts through productive agreement and disagreement.

But on the Accidental Tech Podcast (ATP), Marco and his two co-hosts, John Siracusa and Casey Liss, go into the issue of money much further and in a rather interesting way.

When ATP first went on the air as an outgrowth of the Neutral podcast on cars that the three of them cooked up, I figured I wouldn't listen. I already have enough podcasts on my list, and I know Marco and John well enough (and see their tweets often enough and read their blogs) that I figured I already knew everything they might say on given topics.

I was totally wrong. When they talk through a topic, whether technical, moral, or aesthetic, they bring that wonderful synthesis and expansion of ideas that remains the reason that people meet in flesh space (or at least aurally) and have dialog. Dialog produces synthesis unless it's just people talking at and over each other. It's in my must-listen list, which is hard to get through as I have 5 to 10 hours of podcasts I want to listen to each week now. (Plus recording my own and listening to a final edit to write show notes.)

The discussion about Marco's windfall parallels what I've learned about large sums of money over time (not based on my own experience, sadly). Having started developing Web sites in 1994 and worked at Amazon in 1996 and 1997, many people I knew became millionaires to hundred-millionaires. A few even became billionaires.

The first thing one learns that is that a few million dollars doesn't go very far in life, as absurd as that sounds, and as nearly offensive as that certainly is to people starving on the street and the working poor. And probably everybody. But it's true.

If you live a solidly middle-class life with a mortgage in any medium-sized to large city, with current interest rates and volatility in markets, a few million dollars doesn't let you preserve your capital and generate enough return to stop working.

If you have a family of four and put $5 million in the bank, you're lucky to get over 1% interest in the least risky methods of handling such a large sum. Assuming that you use part of your capital first to pay off a mortgage, the $40-odd thousand in interest from the remaining capital has to cover health insurance, property insurance, home insurance, car expenses, braces, toilet paper, and food before you even get to have any fun.

So if you decide to take your husband and kids to a resort in Hawaii for a month and fly first class, you could eat up a good hunk of a year's worth of interest right there. If you decide to burn capital, well, once you start down that path, you can't stop, and unless you get the money at 60, you'll find you'll need to work again at some point in your life.

[Update: My friend Matthew-Amster Burton, a food writer with a bizarrely deep knowledge of personal finance that he shares every week over at Mint.com, says I am nearly insane in two regards. First, a well-diversified portfolio on average over the long term produces a high-enough return to allow much higher withdrawals on a percentage basis than living off interest. Matt Haughey of MetaFilter notes his investment guy says clearing 3–4% on average right now with conservative investments is possible. I took the stance that someone with a zero-percent interest in risk of any kind is stuck with a return at the rate of CDs. Most people are willing to assume a slight degree of risk based on historical long-term returns from the stock and bond markets when diversified.]

(This could all change if we had some actual inflation. People with large sums of cash relative to their expenses get a disproportionate benefit from an increase in inflation that also brings an increase in savings and CD rates. This affects the elderly dispropoprtionately after they sell a home.

(Let's say a retired couple nets $300,000 from a house and gets $20,000 in Social Security payments. They live frugally and rent and pay for Medicare, and now have $40,000 a year in expenses, or a net of $20,000 after Social Security income. Even with no other investments, $300,000 at a not-long-ago typical 5% five-year CD rate would have brought in $15,000 a year in interest, while inflation might have only increased their expenses by $2,000 a year. This is sustainable or almost — they might work a little on the side to keep their capital intact. But if interest rates are 1% or lower, even for long-term CDs, the $300,000 brings in paltry returns, and inflation on expenses eats up that return. Senior citizens wind up tapping their savings.

(If we take our person with $5 million in the bank, a 1% return brings in $50,000 while a 5% return grosses $250,000 before taxes. If that person is living moderately large, spending $200,000 a year, a 5% increase in expenses over a year adds $10,000, while the rise in interest rates far outpaces it.)

Thus, millions in the bank gives you a huge cushion and the ability to pay for your children's education and retire in comfort and so forth. You'll never be on the street, and you know it. But it's not a replacement for most people for how they will spend the rest of their lives. Marco talks about that a bit.

They also get into the issue of how the way in which you have spent money your whole life doesn't really change when you get a whole lot more of it. Spendthrifts just spend more; the frugal and mean, continue to pinch to various degrees. Marco notes that having had a fair amount of success over the years already, he and his wife pretty much have everything they want — and he bought his new car before either the Instapaper or Tumblr deal were in place.

There's also the issue of misfortune that comes with fortunes. I believe that dotcom wealth in the 1990s and early 2000s came often to those not well equipped to deal with the change in their lives that it wrought, much like lottery winners. Those who win many millions or much more in lotteries often wind up miserable. Their friends hate them, their families demand of them, and they become isolated and without any motivation to work or make friends. It's almost like a penalty. (I read recently of a store clerk winning $1 million from a ticket she bought in the store she worked in. She has a disabled son. It won't destroy her life. It just smooths over all the bad parts, especially if she doesn't take it in a lump sum.)

I witnessed so much unhappiness among my colleagues and friends at Amazon after the money started to descend after I left. So many marriages fell apart and so many friendships became tattered or ruined. A few people, especially those with partners or spouses who also had modest to significant stock options that turned into value, seemed to navigate the shoals by not transforming their lives too much, too fast.

I worked at Amazon for six months and didn't vest, and walked away from millions to tens of millions of dollars, but watching many of my former co-workers led me to never regret it. There's another reason, too. I had just started dating Lynn in my last months at Amazon. I would never have had time to pursue our relationship had I stayed. We would not have moved in together and married, and I would not have had all these wonderful years with her.

And, even more importantly, we wouldn't have had children together, and Rex and Ben would never have existed. We navigated the probability waves, and produced prizes beyond all measure.