Rock Star Retirement Plans

[natw42]

Hi Justin,

I had a long drive last night after I got done work and decided to listen to the mxdwn.com interview you did last year in my car. Great stuff in there, particularly about honesty in art and catharsis/healing through creativity.

One particular subject got me thinking; namely how moving from being a tour-monster into the producer role would allow you to "age gracefully" while being a working musician and also allow you more time with your family. This got me pondering as to what most successful musicians' long term financial goals are like.

Without having to disclose too much personal info, what thoughts can you share about how people in the industry generally treat their earnings and planning for their families (college planning etc) as well as retirement/semi-retirement? I assume in most cases, people in your world aren't getting a W2 with payroll deductions etc. so the onus is really on one's self to be proactive about it.

Do most guys at your level work with financial planners or just 'wing it'? What about guys at, say Trent Reznor's level? Or even the more up-and-coming acts like Paramore or Anthony from M83? Are they good savers or is there often a case of MC Hammer syndrome going on? And at what point in their careers do most people tend to start to look more long term?

Sorry to barrage you with questions and I definitely appreciate your insight!

Best,
Nat

 

[bcplemons]

Excellent questions; I've wondered the same things myself.

Add health insurance to the list, too. Just pay out the butt for coverage, I assume?

 

[sevdog]

Excellent questions; I've wondered the same things myself.

Add health insurance to the list, too. Just pay out the butt for coverage, I assume?

I don't know about other regions but in Austin there is an organization called HAAM that provides low cost health insurance for working musicians...."Rock Stars" probably make too much money to qualify but since 99.9% of professional musicians are po' folks, it's a really great and often life-saving community organization. I would imagine or hope that there are similar groups operating in other areas of the county.

Now retirement, that's a different story.

 

[natw42]

Bumping this for feedback from JMJ or anyone else who might be able to contribute ideas!

 

[pbass2]

You can get insurance through the AFM if you do enough union work. I used to have coverage for my family through the AFM when I was sessioneering more--it was nice. Now that I'm composing full-time and with the trend toward non-union contracts I have to purchase my own--it's pricey. When I was younger and didn't have a family I went without insurance for periods of time. Once you have kids it changes your priorities though!
Other than that, it's just like any freelance lifestyle. It takes time, but eventually you (sort of) get used to it--the income and cashflow is usually VERY erratic. I have a financial planner 'cause I suck at that stuff, but some folks have a good head for it, even some rock stars: Invalid Link Removed

 

[jmjbassplayer]

I have no trouble sharing personal details on this stuff.

I have Anthem Blue Cross. $3k deductible, not that great. But that's because I spend most of my time solving physical ails (whenever they might come up) through naturopathic care providers where insurance doesn't factor in. Anyway, it's expensive, but not bonkers expensive. About $200/month for me. My wife and daughter have similar plans, though my wife is an actor and does slightly better via SAG.

I'd say half the people at my level wing it, half have planners. I'm somewhere in the middle. I have various things cooking (a couple of different IRA's, a decent mutual fund, a whole life policy, couple of smaller term life policies, regular savings accounts), but I think that I'm going to have to start consulting a pro a bit more as my income starts to get a bit better over time due to royalty/pub earnings.

Someone like Trent has ALL his ducks in a row, but pays handsomely for people to organize it for him.

Someone like Anthony (m83) doesn't quite have that going on yet, and has a more simple and direct financial scheme.

The MC Hammer model doesn't go down much at all; seems like most "stars" I hear about learned well from that lesson long ago. That said, I've heard about some rather surprising financial failures lately that I find pretty shocking.

I do a thing where, since most of my income is 1099 rather than W2, I put aside 35% for tax withholding in a high interest account, and I pay quarterlies from that. I also take 10% of any income I get and, without fail, sequester it away into an untouchable account . That's for long-range stuff: Zelly's education, house buying, that kind of thing...in actual fact, I'm trying to not even use it for those functions, and have it strictly be a rainy-day fund and/or retirement account which I will gradually start reinvesting. As separate from retirement accounts. That might seem terribly basic, but it's fun and useful to see savings climbing up, even if it's really gradual. But let's say I see some royalties or publishing/licensing income showing up for, say, $10k. That $10k then breaks down, for me, like this:

$10k
- $1500 (15%) to management commissions
- $1000 (10%) to deep savings
- $3500 (35%) to tax withholding account
_______
$4k net

Not much money, is it? But it's alright. It keeps things on the level. AND: I usually don't need ALL 35% at the end of the year, I might get a taste back due to overpayment. Then that particular money all goes into investment accounts annually, some of which has tax benefits (certain IRA's, etc).

The other rule: debt is not your friend. The only exception is a low-interest home loan. Debt has no place in my life other than credit cards which I pay off monthly so I can get points.

Hope that helps. I personally have very little interest "holding my cards close to my chest" when it comes to things like finances, because I want to see people win at this. I'm no genius or shining example of success (i.e. I sometimes spend too much money on gear and/or silly Italian cars which I lose money on), but I do alright, have no debt, and am starting to plan for retirement.

Best,
J

 

[chechunka]

This is great advice. Thanks for sharing! I feel like a lot of us (pointing at myself) struggle with gear as being a financial pit hole. #simplify

 

[KJung]

I have no trouble sharing personal details on this stuff.

I have Anthem Blue Cross. $3k deductible, not that great. But that's because I spend most of my time solving physical ails (whenever they might come up) through naturopathic care providers where insurance doesn't factor in. Anyway, it's expensive, but not bonkers expensive. About $200/month for me. My wife and daughter have similar plans, though my wife is an actor and does slightly better via SAG.

I'd say half the people at my level wing it, half have planners. I'm somewhere in the middle. I have various things cooking (a couple of different IRA's, a decent mutual fund, a whole life policy, couple of smaller term life policies, regular savings accounts), but I think that I'm going to have to start consulting a pro a bit more as my income starts to get a bit better over time due to royalty/pub earnings.

Someone like Trent has ALL his ducks in a row, but pays handsomely for people to organize it for him.

Someone like Anthony (m83) doesn't quite have that going on yet, and has a more simple and direct financial scheme.

The MC Hammer model doesn't go down much at all; seems like most "stars" I hear about learned well from that lesson long ago. That said, I've heard about some rather surprising financial failures lately that I find pretty shocking.

I do a thing where, since most of my income is 1099 rather than W2, I put aside 35% for tax withholding in a high interest account, and I pay quarterlies from that. I also take 10% of any income I get and, without fail, sequester it away into an untouchable account . That's for long-range stuff: Zelly's education, house buying, that kind of thing...in actual fact, I'm trying to not even use it for those functions, and have it strictly be a rainy-day fund and/or retirement account which I will gradually start reinvesting. As separate from retirement accounts. That might seem terribly basic, but it's fun and useful to see savings climbing up, even if it's really gradual. But let's say I see some royalties or publishing/licensing income showing up for, say, $10k. That $10k then breaks down, for me, like this:

$10k
- $1500 (15%) to management commissions
- $1000 (10%) to deep savings
- $3500 (35%) to tax withholding account
_______
$4k net

Not much money, is it? But it's alright. It keeps things on the level. AND: I usually don't need ALL 35% at the end of the year, I might get a taste back due to overpayment. Then that particular money all goes into investment accounts annually, some of which has tax benefits (certain IRA's, etc).

The other rule: debt is not your friend. The only exception is a low-interest home loan. Debt has no place in my life other than credit cards which I pay off monthly so I can get points.

Hope that helps. I personally have very little interest "holding my cards close to my chest" when it comes to things like finances, because I want to see people win at this. I'm no genius or shining example of success (i.e. I sometimes spend too much money on gear and/or silly Italian cars which I lose money on), but I do alright, have no debt, and am starting to plan for retirement.

Best,
J

You, sir, have it figured out. I am now a part time player, but have my own small consulting firm, and pretty much have been following your planning strategy (including immediately setting aside 33% of my gross income into a separate tax account or quarterlies, and maxing out a SEP IRA at around 13%) for 20+ years now.

I always wish I could talk to some of the entertainers that are currently making a ton of money, and tell them:

a) Your shelf life is pretty short
b) Planning is not that difficult
c) DON'T chase returns resulting in massive risk.. just save at least 10% of your gross, put it in a balanced portfolio, live within your means, and live a happy life.

Refreshing for me to see your post. It isn't that tough, and with a little discipline, most of us can make it into (hopefully) old age without having to live in a van down by the river.

All the best,

K


Edit: And, as a final note, stick to index tracking funds for the stock part of your portfolio, and don't stress over diversification within the stock part of your portfolio. No human can beat the S&P500 over the long term, so why pay for the fantasy that someone can do it. And, regarding small cap, large cap, international, the question to ask yourself is 'what fund or investment class is going to be 'OK' if the S&P500 crashes and burns?' Answer... none! Keep it simple... index matching funds, some cash, some inflation protected reasonably short term bond funds.

 

[Stick_Player]

Anyone's Retirement Plan

1) Accept that you will be OLD one day. Your income will need to come from your investments.

2) Have NO credit card debt. If you can't payoff your charges during the monthly billing cycle, you have charged too much.

3) Health Savings Account. Get one. If you don't know what it is, learn.

4) Long Term Care policy. Get one as soon as possible - before you can't.

5) If you think the government is going to take care of you, you are a fool.

 

[KJung]

Anyone's Retirement Plan

1) Accept that you will be OLD one day. Your income will need to come from your investments.

2) Have NO credit card debt. If you can't payoff your charges during the monthly billing cycle, you have charged too much.

3) Health Savings Account. Get one. If you don't know what it is, learn.

4) Long Term Care policy. Get one as soon as possible - before you can't.

5) If you think the government is going to take care of you, you are a fool.

More good points. That Long Term Care Policy is a tough decision. Get it too early, and you pay and pay and pay. Wait too long, and you can't get it. That is a tough decision for those with limited resources.

No credit card debt is one of those things that is so important as to be life changing. But, sometimes, there is no avoiding it. Bad news.

 

[Stick_Player]

More good points. That Long Term Care Policy is a tough decision. Get it too early, and you pay and pay and pay. Wait too long, and you can't get it. That is a tough decision for those with limited resources.

The earlier one gets a policy, the less expensive it is.

If one waits too long:
1) Can't qualify
2) Can't afford the super-increased premiums based on your age
3) Not available - some insurance companies are getting out of this type of policy.

I'd rather play the in-of-luck rather than out-of-luck game.

* * *

An HSA (or similar) is also VERY wise. Sure, high-deductible (but it is sitting in the account), but LOW premiums. In the long run, way less expensive - YOU keep the money, it rolls over to the next year, you add in more, you can pass it on in your will.

* * *

One should at least have a term life insurance policy of at least a half-million $'s, if you have any dependents. One is chump if they don't have this.

* * *

Create a "Family Trust". Eliminating probate is a win-win.

 

[natw42]

I have no trouble sharing personal details on this stuff.

I have Anthem Blue Cross. $3k deductible, not that great. But that's because I spend most of my time solving physical ails (whenever they might come up) through naturopathic care providers where insurance doesn't factor in. Anyway, it's expensive, but not bonkers expensive. About $200/month for me. My wife and daughter have similar plans, though my wife is an actor and does slightly better via SAG.

I'd say half the people at my level wing it, half have planners. I'm somewhere in the middle. I have various things cooking (a couple of different IRA's, a decent mutual fund, a whole life policy, couple of smaller term life policies, regular savings accounts), but I think that I'm going to have to start consulting a pro a bit more as my income starts to get a bit better over time due to royalty/pub earnings.

Someone like Trent has ALL his ducks in a row, but pays handsomely for people to organize it for him.

Someone like Anthony (m83) doesn't quite have that going on yet, and has a more simple and direct financial scheme.

The MC Hammer model doesn't go down much at all; seems like most "stars" I hear about learned well from that lesson long ago. That said, I've heard about some rather surprising financial failures lately that I find pretty shocking.

I do a thing where, since most of my income is 1099 rather than W2, I put aside 35% for tax withholding in a high interest account, and I pay quarterlies from that. I also take 10% of any income I get and, without fail, sequester it away into an untouchable account . That's for long-range stuff: Zelly's education, house buying, that kind of thing...in actual fact, I'm trying to not even use it for those functions, and have it strictly be a rainy-day fund and/or retirement account which I will gradually start reinvesting. As separate from retirement accounts. That might seem terribly basic, but it's fun and useful to see savings climbing up, even if it's really gradual. But let's say I see some royalties or publishing/licensing income showing up for, say, $10k. That $10k then breaks down, for me, like this:

$10k
- $1500 (15%) to management commissions
- $1000 (10%) to deep savings
- $3500 (35%) to tax withholding account
_______
$4k net

Not much money, is it? But it's alright. It keeps things on the level. AND: I usually don't need ALL 35% at the end of the year, I might get a taste back due to overpayment. Then that particular money all goes into investment accounts annually, some of which has tax benefits (certain IRA's, etc).

The other rule: debt is not your friend. The only exception is a low-interest home loan. Debt has no place in my life other than credit cards which I pay off monthly so I can get points.

Hope that helps. I personally have very little interest "holding my cards close to my chest" when it comes to things like finances, because I want to see people win at this. I'm no genius or shining example of success (i.e. I sometimes spend too much money on gear and/or silly Italian cars which I lose money on), but I do alright, have no debt, and am starting to plan for retirement.

Best,
J

Justin,

Thanks for the response and openness. It sounds like you're on the right track, saving systematically and have some protection in place. As you said, as things pick up on the royalty/publishing side it probably would be a good idea to work with an adviser in order to be as tax-efficient as possible and really get everything to gel together in a plan. But strong kudos on being proactive with the long term vision for yourself and the fam.

Anyone's Retirement Plan

1) Accept that you will be OLD one day. Your income will need to come from your investments.

2) Have NO credit card debt. If you can't payoff your charges during the monthly billing cycle, you have charged too much.

3) Health Savings Account. Get one. If you don't know what it is, learn.

4) Long Term Care policy. Get one as soon as possible - before you can't.

5) If you think the government is going to take care of you, you are a fool.

The earlier one gets a policy, the less expensive it is.

If one waits too long:
1) Can't qualify
2) Can't afford the super-increased premiums based on your age
3) Not available - some insurance companies are getting out of this type of policy.

I'd rather play the in-of-luck rather than out-of-luck game.

* * *

An HSA (or similar) is also VERY wise. Sure, high-deductible (but it is sitting in the account), but LOW premiums. In the long run, way less expensive - YOU keep the money, it rolls over to the next year, you add in more, you can pass it on in your will.

* * *

One should at least have a term life insurance policy of at least a half-million $'s, if you have any dependents. One is chump if they don't have this.

* * *

Create a "Family Trust". Eliminating probate is a win-win.

Some good advice here Stick Player. Points 1 & 5 are especially true - a lot of people don't think long term and assume the best. I like to plan for the worst while hoping for the best.

Re: Long term care - it's always good to get it as young as possible, the caveat being if you do it to young it can take away funds from things folks in their 30s to young 40s deal with such as paying down debt. Of course if one's health changes they're SOL down the road

I have a smallish policy (I'm 31) that I got in before the specific insurer did away with their lifetime benefit option and plan to pick up more down the road (barring any health changes). My parents have it too - they plan on retiring in 5 years, and having that in place will give them peace of mind that all the hard work they've done saving won't be wiped away if they need care.

...

Thanks again for the responses everyone. Interesting to see what musicians have to do; My take-away is essentially the sooner they start thinking like a business owner with long term goals in mind, the better off they'll be.

 

[ShoeManiac]

I do a thing where, since most of my income is 1099 rather than W2, I put aside 35% for tax withholding in a high interest account, and I pay quarterlies from that. I also take 10% of any income I get and, without fail, sequester it away into an untouchable account . That's for long-range stuff: Zelly's education, house buying, that kind of thing...in actual fact, I'm trying to not even use it for those functions, and have it strictly be a rainy-day fund and/or retirement account which I will gradually start reinvesting. As separate from retirement accounts. That might seem terribly basic, but it's fun and useful to see savings climbing up, even if it's really gradual. But let's say I see some royalties or publishing/licensing income showing up for, say, $10k. That $10k then breaks down, for me, like this:

$10k
- $1500 (15%) to management commissions
- $1000 (10%) to deep savings
- $3500 (35%) to tax withholding account
_______
$4k net

Not much money, is it? But it's alright. It keeps things on the level. AND: I usually don't need ALL 35% at the end of the year, I might get a taste back due to overpayment. Then that particular money all goes into investment accounts annually, some of which has tax benefits (certain IRA's, etc).

Good stuff here, JMJ!

Since you're doing 1099 filing, do you find that you're able to write off a fair ammount of your expenses, equipment included? I've always thought that for a professional musician, writing off gear might come across as a huge red flag with the IRS. From a pure business standpoint, I know that writing off business equipment is a standard practice. But I'm wondering if that kind of write-off might get more scrutiny given the nature of the music business.

 

[natw42]

Good stuff here, JMJ!

Since you're doing 1099 filing, do you find that you're able to write off a fair ammount of your expenses, equipment included? I've always thought that for a professional musician, writing off gear might come across as a huge red flag with the IRS. From a pure business standpoint, I know that writing off business equipment is a standard practice. But I'm wondering if that kind of write-off might get more scrutiny given the nature of the music business.

Interesting question - I'm sure he can elect to depreciate gear on his taxes (I'm not an accountant btw)

Also, re: write offs. Justin - you should be able to deduct the management fee from your taxable income, so I'm a little unsure of why you're withholding 35% of your gross pay before fees. Unless you were just doing that in your example just to simplify the explanation.

 

[Stick_Player]

... I'm a little unsure of why you're withholding 35% of your gross pay before fees. Unless you were just doing that in your example just to simplify the explanation.

Don't forget, separate from Income Tax, if you file a Schedule C and most of your income (from 1099s) is on there, you have a 15.3% (additional) Self-Employment Tax.

Mathwise -- 20% Income Tax + 15% Self-Employment Tax = 35%.

What if you are into a higher tax bracket? Current top rate is at 44.6%

Add in 15.3%, and you are at a total of almost 60%!

Of course, there are some write-offs and other built-in deductions - no one is paying 60%, but still!

 

[jmjbassplayer]

Not to get too pedantic, but yes: I need to w/h that 35%, in addition to a fair amount that is withheld from me in W2 form. Anything less just isn't safe at my income bracket. It's always too much (to varying degrees), but that's fine with me. Safety first.

Write-offs in terms of equipment purchased and subsequent depreciation are and have never been a problem in all my years, along with things such as management commissions, obviously. I'm also incorporated as of this year, so that's going to lower my exposure a bit more. Next: getting more serious about long-term investing with my advisor, because it's hitherto been fairly basic and elemental. Time to spread out my risk and get into investments that work for me more.

I like the point of view that we do not have a long shelf life doing what we do...likewise, royalty income does not typically go on forever.

J

 

[KJung]

Good stuff here, JMJ!

Since you're doing 1099 filing, do you find that you're able to write off a fair ammount of your expenses, equipment included? I've always thought that for a professional musician, writing off gear might come across as a huge red flag with the IRS. From a pure business standpoint, I know that writing off business equipment is a standard practice. But I'm wondering if that kind of write-off might get more scrutiny given the nature of the music business.

Writing off equipment of any type for any business will not in any way result in a red flag. Totally legitimate (along with travel, etc.). Zero issue. Of course, if you write off so much stuff that you barely show a profit year after year, they will come looking eventually (i.e., that is a sign your playing is a hobby, and not a business).

 

[KJung]

Don't forget, separate from Income Tax, if you file a Schedule C and most of your income (from 1099s) is on there, you have a 15.3% (additional) Self-Employment Tax.

Mathwise -- 20% Income Tax + 15% Self-Employment Tax = 35%.

What if you are into a higher tax bracket? Current top rate is at 44.6%

Add in 15.3%, and you are at a total of almost 60%!

Of course, there are some write-offs and other built-in deductions - no one is paying 60%, but still!

+1 I find that if I set 33% aside, it works perfectly. However, that assumes a quite high income level (my wife works, I have a consulting business, and I play a reasonably high number of relatively good paying gigs).

Put all that income together, along with the full 'self employment tax', and then hitting the 'alternative minimum tax', which results in losing many deductions, and a total, weighted tax rate of around 33% is just about right (remember, even if you are in the highest tax bracket, that highest rate only kicks in on a certain percent of your income past the other bracket amounts).

If you are just starting out, and have lower income, of course, you can dial that quarterly payment down to 25% or so.

 

[Stick_Player]

Not to get too pedantic, but yes: I need to w/h that 35%, in addition to a fair amount that is withheld from me in W2 form. Anything less just isn't safe at my income bracket. It's always too much (to varying degrees), but that's fine with me. Safety first.

Exactly! Do as much of your own withholding as possible, and earn some interest (i.e., more taxable income) doing it.

Why ANYONE would want the government to withhold for them is silly. Plus, the government does not pay you any interest.

However, some people get a big kick out of getting a "Refund" from the government.

For some, the government gets you be requiring quarterly tax payments.

I guess they do not trust you!

 

[JazznFunk]

Great, great info here. Something to consider - the health care reform legislation that is revving up is effectively trying to kill off HSA plans if you are not already 'grandfathered' in. My plan is, fortunately. Just be sure that your chosen provider can/does still offer an HSA plan if you are interested. If you already have an HSA plan, stick with it because even if it's grandfathered in, if you switch or default on your premiums, you can't get it back most likely.