Talking to Alan Lastufka About Early Retirement
Alan and I recently caught up to talk about how his finances have changed since he co-founded DFTBA Records, and how he combined his success and a considerable amount of financial savvy into an early retirement.
ND: What was your relationship to money like as a child? Were you a spender or a saver? Were you influenced by your parents?
AL: I earned a small allowance as a kid. My parents were separated and neither had much money, but both worked hard and put me and my brother first.
I spent my allowance almost exclusively on music CDs. Even through my mid-twenties I was a big time spender, no savings at all. Not that I had any substantial money to throw around, but I was very much influenced by my mom’s easy spending. Payday was a lot of fun, and then we were broke until next payday, which lead to her being over $100,000 in credit card debt for a while. By the time I was 25, I was almost $30,000 in debt.
At what point did you decide to teach yourself about money? What resources did you use? Did you follow any well-known financial personalities? (Did you agree with them?)
I was 26 and had stopped paying my Sallie Mae student loans. I just couldn’t afford them (which, in retrospect, I probably could afford them, but I had no idea how to manage my money yet). I assumed that at worst they would call every day asking for a payment and I could ignore them. Well, no. They sent me a letter a few months later stating they’d be taking me to court and suing me for non-payment.
As I quickly learned, student loans — unlike other consumer debt — can’t be ignored or written off as bad debt, they follow you through bankruptcy and pretty much everything else.
So after some research I stumbled on to financial personality Dave Ramsey. He has a book called Total Money Makeover, which a lot of people were recommending. I started watching his talk show (it was available on Hulu at the time), and I bought a used copy of his book. Ramsey is the one who popularized the “debt snowball,” and it made sense to me. While the debt snowball practice isn’t the best way to attack debt from a purely numbers standpoint, it is the best way for quick wins and to keep yourself motivated.
I finally worked up the nerve to call Sallie Mae and set up a payment plan I felt I could afford. I organized all of my debt (which at that time included a car loan, numerous credit cards, my school loans, and money I owed my dad), and then set out working on my debt snowball.
This was just a few months after I had started DFTBA Records with Hank Green. So I basically had two full-time jobs at that point… a teaching job at a local non-profit during the day, and building my own company at night.
DFTBA grew quickly and the extra money coming in from that project helped me work the debt snowball faster. I was also doing a bit of freelancing at that time — I wrote scripts and edited YouTube videos for MadTV’s Lisa Donovan (aka LisaNova), I landed a book deal with O’Reilly Media to write their YouTube: An Insider’s Guide to Climbing the Charts book, and I was one of only six channels broadcasting live on BlogTV that had a monetization agreement, which paid very well. Ridiculously well, in fact, and that’s why they went bankrupt just a year later.
Everything I learned after that Sallie Mae letter kept me on track, which meant that when extra money came in, I finally knew how to put it to work for me instead of wasting it.
As you said when we discussed your experience with DFTBA Records:
“In those early years my time-to-income ratio was probably minimum wage or less. […] As the project developed, that time-to-income ratio swung hugely in the other direction, so you will never hear me complain about those early years.”
This means, I assume, that early retirement was not a possibility for you until DFTBA Records became successful. Was it something you thought about before that point? Was it a long-term dream? Or was it something that was a more recent decision?
It was a long-term dream, but nothing more than that. Before DFTBA and the apex of my “YouTube career,” I was broker than broke and, as I mentioned earlier, $30,000 in debt. But I knew early retirement was something that I wanted since getting my first job in high school. There were so many other projects and things I’d always rather be doing with that time (which I assume is true for the vast majority of people), so I was determined to eventually figure it out. And I had been trying. DFTBA was not the first company I had started, it was just the most successful, so far.
How did your money education change when you decided to pursue Early Retirement? Did you read any specific books? Seek out people who had already done it?
I started reading more personal finance and early retirement blogs. All the steps are out there for others to follow. Mr Money Mustache, Early Retirement Extreme, Get Rich Slowly, there are thousands of these types of blogs out there.
I’ve only read a few money books. Total Money Makeover, The Automatic Millionaire by David Bach, and The Bogleheads’ Guide to Retirement Planning by Larimore, Lindauer, Ferri, and Dogu are the only three I still own. I recommend all three in the order I just listed them, as they will get you through a debt repayment plan, a saving and spending plan, and then a retirement plan.
The most important thing I’ve learned after pouring over this stuff for hundreds of hours is that there really is no secret. You develop a plan, you work the plan, and you hit your goal. Which is actually great news! Few things in life are so straightforward. It’s not easy, of course, but it is simple. Your biggest obstacle will be yourself, wanting to spend money that should be going somewhere else.
If you have a plan that works on paper, and you follow that plan, you will succeed. If you don’t, you probably won’t. Aside from a few details, that’s it. The books and blogs I just mentioned will not only fill in those details and help you make a plan (with real examples included), but will also give you a few tips on how to stick to your plan (again, including real examples from readers).
How much planning and maintenance goes into Early Retirement? Is it “set it and forget it,” or do you actively manage your finances? Or do you have someone else manage them for you?
I manage my own finances, though I wouldn’t say “actively.” I keep an eye on things, but I am not a regular stock trader. I buy and hold. So when I see the market’s down and I have a little extra cash sitting around, I’ll pick up a few shares while they’re “on sale.” But all that’s doing is helping to add a buffer to my finances. For the most part it’s “set it and then occasionally check in.”
Do you still keep to a budget every month? What are your major overhead expenses?
I do keep a budget, just to keep myself in line. It’s a simple spreadsheet where I enter line items for each payment I make or check I write. I was a spender for the vast majority of my life so far and those habits are hard to break. Being fairly poor before starting my own company, I am used to spending until the checking account says $0.00. I can’t do that anymore because I don’t have a paycheck coming to refill the account.
As far as overhead expenses go I’ve got most of the usual, utilities, groceries, health insurance, property taxes, etc. I haven’t had any debt for a few years now (thanks snowball!) aside from my mortgage, so the first thing I did after selling my company in 2014 was to pay off my mortgage in full. So other than property taxes I don’t really have any housing expenses, which is usually everyone’s largest overhead expense.
All in, my fixed expenses come to about $18,000/year. Which, again, are only so low because of the no debt and no mortgage thing. I really see no debt and a paid-off mortgage as being requirements for a healthy retirement, early or not.
Do you see yourself sustaining Early Retirement for the remainder of your life? Have you done the long-term math on your assets?
According to the math, yes this is very sustainable! I track my spending, but I also track my passive income and dividend earnings. Last year my fixed expenses were a little over $18,000 as I just mentioned, but my dividend payouts totaled just over $36,000. So the dividends not only cover my $18,000 in expenses, they also provide another $18,000 in discretionary spending.
For me, that discretionary spending ends up being on rare coins (I love my coin collection and it’s even won a few awards), music (both purchasing CDs, but also producing my own original music), adding to my movie and video game libraries, and flying my mom out here for a week-long visit once or twice a year.
I set up an annual budget based on how much in dividends I made the previous year. So this year’s budget was determined by the dividends I earned in 2015. That’s how much I have to spend. And next year I’ll be able to spend whatever I earn in dividends this year. Following this plan, I should never have to sell any shares of the stock I own. That’s really the ultimate goal to make this early retirement thing last.
In addition to the dividend income, I also made a little over $7,700 in freelance and passive income last year, bringing my total income up to over $43,000 for 2015. This passive income is mostly royalties from music, book, and t-shirt sales for items I’ve released in the past. These royalties require no real upkeep or additional work from me now, but will slowly fade if I don’t occasionally work on something new.
So if you combine the surplus in dividends of $18,000 plus the $7,700 in passive income, my disposable spending becomes about $25,000 per year, or just a little over $2,000 per month. That’s definitely enough for my hobbies and any unexpected expenses that come up.
Again those numbers are all based on never selling a single share of stock or a single bond; this is just dividend, interest, and passive income. Which is important because I don’t want to start dwindling down my stock shares too soon, I hopefully have a very long retirement ahead of me to fund.
Speaking of a long retirement, some of your readers might wonder about inflation. While inflation is certainly a risk that needs to be considered, historically over the last 50 years, the average yearly dividend growth was 5.4 percent while the average yearly inflation was just 4.1 percent, meaning dividends should not only keep pace with inflation, but should exceed inflation costs by more than 20 percent, giving me a larger buffer each and every year on average. That buffer I plan to split between additional investing, and continuing my creative projects.
Of course, you’re also continuing to create, with The Caulden Road’s new album Reflexion—which I LOVED—as well as other projects like How to Adult and your new Money Talk Podcast. How has your professional work changed since it became detached from the requirement to earn a sustainable income?
Well the biggest change came after selling DFTBA of course. I went from running that company on a day-to-day basis to a few occasional freelance projects almost overnight. That was huge. But now the little bit of professional work I do is by choice. I don’t need it to survive, but it’s always nice earning a little extra, being challenged by different assignments or tasks, and I’m always open to that.
I guess many consider my music projects professional work, I do hire a team to work with me and produce the best end product possible, whether that’s my awesome producer Christian Caldeira, or music video director Nick Jenkins, or mastering engineer Stephen Marsh. But I’ve always considered music a hobby. I put more money into it than I make back in sales and streaming revenue, but that’s fine, most hobbies work that way.
And I love How to Adult. Almost as much as writing my music, but unlike my music, writing for How to Adult is profitable. I think How to Adult is a wonderful resource and I’m a little jealous I didn’t think of it first. So I try to contribute as much as possible. In fact, I don’t think I’ve ever turned down a single script assignment from Mike Martin (co-founder of the series). I mostly write personal finance topics for the show, so it’s an area I feel comfortable talking about, and an area in which I feel I’ve proven myself a bit.
How much of your financial success would you attribute to:
- Personal knowledge of how money works
- Entrepreneurial and workplace skills
- Being at the right place at the right time
- Spending less than you earned, avoiding consumer traps, all those reasons they tell the rest of us we aren’t getting rich
It’s really a combination of personal knowledge of how money works/spending less than I earned and being in the right place at the right time.
If I hadn’t learned how to manage my money after that Sallie Mae letter, I would have blown through the windfall of selling my company, just like all those lottery winners you hear about who end up broke after a few years. According to the National Endowment for Financial Education almost 70 percent of lottery winners end up in bankruptcy. That’s almost unbelievable.
But on the flip side, had I not co-founded the right company at the right time, I wouldn’t have much money to manage. There was such a need for DFTBA at the time Hank and I co-founded the company, and that need only grew and grew over the following years. Now that need has been fulfilled, not only by DFTBA but by a number of other online merch retailers focused solely on YouTubers. That’s not a space that would be easy to break in to today, but eight years ago it was wide open and Hank and I, and all of our artists, were rewarded for seeing that opening.
It’s worth noting that at one point you were probably spending more than “the rest of us,” in that you bought a house, you were able to invest your time and your cash value into DFTBA when it started, and so on. Do you think that’s a fair assessment? I’m trying to figure out if your financial assets are related to your ability to spend large amounts of money/time/value when necessary, and this may be me scratching at a wrong tree here.
I had a lot of catching up to do by the time I actually realized how far behind I was. So when the money started coming in from DFTBA in the form of my salary and annual bonuses, yeah, I was “spending” a lot. Debt repayment, down payment on my first house, maxing out my IRA and then spilling some over into a taxable brokerage account.
The first year of DFTBA my salary was half what it was at my non-profit job. By the third year of DFTBA my income was in the lower to mid six figures and I had quit my job at the non-profit to focus on growing DFTBA. I was putting to use everything I had learned from the three books I mentioned earlier, driven by the anxiety that being poor had left me with. I never wanted to experience that uncertainty and stress again, so I focused on building assets and equity instead of spending that money as frivolously as I would have in the past.
Not everyone will have the opportunity to dig themselves out or get ahead so quickly, I fully acknowledge how rare of an opportunity that was, and I’m grateful for that every day. But because early retirement was only a dream when I wrote out my first money plan, I know the opportunity I got is not required for someone to be successful with their money, it only accelerated the plan I already had in place.
Do you believe it takes wealth to grow wealth, even if that wealth at the beginning is time, talent, the ability to live on the cheap while starting a company, etc.?
Not always, but it certainly makes things easier. I was still about $25,000 in debt the day Hank and I launched DFTBA Records. I put no money in at the beginning, my 50 percent stake was earned entirely through “sweat equity” and coming up with the basic idea. And Hank earned his 50 percent by capitalizing the company and developing my basic idea. So I was putting in the wealth of time, but had no monetary wealth at the time. I was also very much living on the cheap, mostly out of necessity. Before DFTBA took off I was making $9/hour at the non-profit, I was renting a single room in my friend Jenny’s house, and was in the process of slowly working my debt snowball plan.
So yes, you need to put in something, whether that’s your own money like Hank did, or your time like I did. And living on the cheap is almost always a good idea, whether you’re rich or not, you should only spend your money on things that are necessities (food, utilities, etc.) and on things that bring you great personal joy. For me those joy things are coins and music, for others it might be fancy coffee or video games or vacations. By cutting as much as possible out of your regular budget, you will have more for those joy things. And again, regardless of how much money you have, everyone can always use more joy.
How does investment management feature into your Early Retirement strategy?
My money’s currently invested as if I were 65 years old. That’s because I’m trying to live the life of a 65-year-old today. I’m retired at 32. I can’t go around taking huge risks with my money the way an average 32-year-old should to grow their savings for the future. There’s a popular saying on investment forums which is “if you’ve won the game, stop playing,” which basically means if you’ve saved enough to hit financial independence, stop taking risks, go for the sure-er thing.
Over half of my investable money is in a boring old passive index fund, specifically Vanguard’s LifeStrategy Moderate Growth Fund. This fund tracks the market with 60 percent being in stocks and 40 percent being in bonds, both domestic and international. Vanguard automagically rebalances the fund and the underlying equities. The fund is super diverse with over 9,000 different stocks and over 10,000 different bonds. All equities in this fund are market weighted so it’s set it and forget it and I’ll probably hold this fund forever.
Another 12 percent is split between two actively managed funds. Active funds are kind of a no-no because their expense ratios can be higher, but these two funds have done a superb job at beating the market for a long time now. The two funds are T. Rowe Price Capital Appreciation and Vanguard’s Wellesley Income Fund.
Another 10 percent is in Vanguard’s High-Yield Tax-Exempt Fund, which holds municipal and other high-yield bonds, but their distribution payments are completely state and federal tax free, which is nice.
And finally I have about 16 percent in my favorite investment, Realty Income. I hesitate to say favorite because you’re not supposed to get emotionally attached to investments. But I can’t help it. I love Realty Income. They’ve paid a consistent monthly dividend now for over 22 years, and every year that dividend has seen an increase of some kind, I believe the average annual increase has been about 5 percent, which well beats inflation, and even during the early 2000 crash and then the 2008 Great Recession, Realty Income never wavered and was still raising their dividends. Swoon.
So to answer your original question, I plan to hold and maintain the above investments for the long haul. There’s not really much to manage. Unless one starts seriously underperforming for a few years in a row, I like the diversification I have, and I like that I understand all five investments. You should never invest in something you don’t understand completely, and I’ll be honest, trying to figure out alternative investments gives me a headache sometimes.
The only other wealth building or “investment” I make outside of the above is in my gold and silver coin collection. Precious metals may or may not be an investment based on who you ask, but again, I like diversification. The economy has been doing well enough over the last few years that you don’t hear much about precious metals in the news any more, which is great, when people forget about gold and silver spot prices are nice and low, which is when you want to be buying.
And some of these coins are so beautiful, it feels more like buying art or mini sculptures than it does bullion. I don’t go crazy with it though, my entire coin collection accounts for just under 5 percent of my net worth. I’m not a silverbug predicting the end of fiat money. It just never hurts to diversify. And coins are so fun!
What advice would you give other people who wanted to retire early?
Multiple streams! I’ve read countless early retirement blogs and I can’t recall a single person who reached a successful early retirement without multiple streams of income. A full-time job is great, but most people don’t consider their jobs careers anymore. And jobs come and go. Positions come and go. When that happens, if that’s your only source of income, you’re stuck.
If you start building multiple sources of income, then when one gets hit, the others can help support you until you get back on track. And when they’re not needed, those additional streams can flow right into your brokerage account and start building your early retirement funds.
When I was running DFTBA yes, I had a salary, and that was my main source of income. But I also wrote and sold my own music earning royalties on that, I made monetized YouTube videos getting an AdSense check every month, I wrote a book for O’Reilly Media and earned royalties that way, I designed t-shirts and posters and again earned royalties on those, and when I moved to Montana in 2013 I bought a house with an extra bedroom to rent out and now, when it’s occupied, I earn rental income.
Most of the above is considered passive income. Yes, you have to put in the time to make the initial thing — the poster design, the song, the book, the whatever — but then those royalties come in for months or years without you having to do any additional work.
Retiring early means you need more than everyone who’s working until they’re 65, because you have many many more years to fund. Assuming a life expectancy of 75 to make the numbers easy, a “normal” retiree only needs to fund 10 years of living expenses and hobbies. If you retire early at 45, you’ll need to fund 30 years. Retire at 35 and you have to fund 40 years! So not only are you trying to accumulate and hit your number faster than most, you’re also hoping to make it last for three or four decades longer than most. I just don’t see how anyone can do that without managing multiple streams of income, or winning the lottery.
And maybe have some idea of what you’ll do once you’re done working for the paycheck. Do you plan to volunteer? To play video games 12 hours a day? To travel? Most of your peers will still be at work for another two decades or more, so you’ll have to get good at entertaining yourself.
If your entertainment is expensive, make sure you budget for that. You don’t want to start running out of money after being out of the workforce for 10 or 20 years. You’ll be older, your skills will be dull, and I believe you’ll have a very hard time readjusting to the workplace after a decade or two of advancements and progress.
Also, good luck! It’s quite rewarding that first morning you don’t have to set an alarm, and then realize you’ll never have to set an alarm ever again.
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