What is the magic number for JohnnyHumongous?

[JoeC]

[ QUOTE ]

I will be graduating from an Ivy League university shortly. I have been offered an entry-level job in management consulting that will pay between $70K and $80K to start (including bonuses- base is around $55K). The company is absolutely terrific, I will get a lot of responsibility and a ton of relevant experience. The obvious pros are the business education I will receive, along with potential opportunities for career advancement, B-School etc. which can possibly lead to a very very lucrative life down the road.

For a long time I thought this job was a clear homerun, but now I'm not so sure. Poker has become so lucrative for me that I'd be throwing away a ton of money to take this 50-60 hour per week job. I am averaging around $100 per hour in earnings playing poker as it is right now. As my skill improves even further this would be expected to go up. Putting in 45-50 hours per week, I would be very surprised not to pull in at least $180-200K in a year. Furthermore I have relatives who live in a Caribbean island nation and if I went to live with them, I could earn all this money tax-free.

Of course, in business one can also expect rapid increases in earnings, and the "runway" is much greater in the business world, meaning the ceiling of earnings can be much much higher. Also playing cards, while fun and interesting, isn't necessarily something I would want to spend a lifetime focusing on (don't get me wrong though, I will probably keep it as a serious hobby for the rest of my life). And in theory, I can rejoin the business world after a year or two playing cards (although I don't know how I'll deal with the pay cut).

I know that I am blessed with two very good choices here. I would love your guys' input on the situation... because there are countless pros and cons for both 'careers'. Thanks.


[/ QUOTE ]

I didn't want this to get buried in another thread because I think it is an important question. Since you guys are all telling Johnny to pass on 180K annually from playing poker, how much would his income have to be for it to be worthwhile for him to skip out on this job? I'd guess about 400-500K but I'm eager to hear your opinions.

[flair1239]

To me it is not necessarily a lump sum question.

Choosing to pass on the job and play poker could limit his future career options. While taking the job really does not limit his poker options too much.

If he is determined he could still put in a decent schedule, and if he is as successful as he says he is, may still clear 6 figures playing poker.

IMO opinion a younger person should not choose paths that may limit their future options. Taking the job gives him more options, while really not costing him much as far as poker goes.

[JoeC]

I don't think this is true. If Johnny could make $20 million a year like Phil Ivey does, I think it's pretty obvious he should be playing full time. There is a "magic number" somewhere between 180K (or lower) and 20M... now what is it?

[TimM]

[ QUOTE ]
There is a "magic number" somewhere between 180K (or lower) and 20M... now what is it?

[/ QUOTE ]

At a high enough income level, he could quicky save and invest enough to provide an income for the rest of his life. Let's say the goal is to have enough principal to provide both a steady 70K/y income, plus some growth to match what he could expect to see at a job via raises, promotions, etc. How much would that take? How long would be acceptable to reach that goal?

[masonx]

having a secure income makes life alot more enjoyable.

[masonx]

but for reference i would probably play poker [img]/images/graemlins/wink.gif[/img] (hehe)

[bogey]

[ QUOTE ]
having a secure income makes life alot more enjoyable.

[/ QUOTE ]

not if in order to make the secure income you have to pretty much give up the rest of your life

[Mr. Zero]

[ QUOTE ]
I don't think this is true. If Johnny could make $20 million a year like Phil Ivey does, I think it's pretty obvious he should be playing full time. There is a "magic number" somewhere between 180K (or lower) and 20M... now what is it?

[/ QUOTE ]

The figure you want is actually pretty easy to ascertain. The difficulty is the assumptions you choose to make regarding the numbers you plug in to some pretty basic financial formulas.

Basically, the "magic number" will be an annual salary made playing poker, added together and discounted to a present value, that equals what JH would make by taking the job, also discounted to a present value.

So let's make some very broad and inaccurate assumptions just to illustrate. Assume that JH will start off at 70k at his job. This includes base salary and benefits. Also assume he gets a 8% raise per year to cover COL increases and also merit raises. Let's also say his maximum salary is capped at roughly 500k. He also works for 39 years at this job, and makes no additional money playing poker on the side.

Now we also need to pick a discount rate. Again, out of thin air, I'll pick 8% - a figure less than what the S&P 500 returns per year, but still a nice rate on an investment.

Ok, now with those figures in mind - plugging them into Excel - JH's net present value of taking the job is $2,238,449.50.

Now all we have to do is treat that number as an annuity and determine what the annual payment needs to be on a 39 year annuity returning 8%. In this case, it's $188,444.19 per year.

This means JH needs to make $188K every year for 39 years playing poker in order for poker to be the "right" decision for him.

Now, this result means pretty much nothing, since I've made so many assumptions, the bulk of which I think aren't particularly accurate. But if this was a finance 101 exam, that's the answer I'd give.

[TimM]

This can't be right. Let's say he earns $150K after tax playing poker every year. He invests the difference between this and his first year after tax salary in the 8% annuity, and the 8% is also reinvested every year. After about 15 years, the income from the annuity would exceed what his pretax salary would have been. Now he can sit on his ass for the rest of his life and have an income always exceeding what his salary would have been had he taken the job, and have a big lump of principal left at the end of the 39 years.

The real question is, will he be able to make $150K at poker for the next 15 years? Who knows. Also he would have to live on a fixed amount of income for that first 15 years, which is a long time.

But what if it were $300K after tax. Now he gets there after only 6 years.

[Mr. Zero]

[ QUOTE ]
This can't be right. Let's say he earns $150K after tax playing poker every year. He invests the difference between this and his first year after tax salary in the 8% annuity, and the 8% is also reinvested every year. After about 15 years, the income from the annuity would exceed what his pretax salary would have been. Now he can sit on his ass for the rest of his life and have an income always exceeding what his salary would have been had he taken the job, and have a big lump of principal left at the end of the 39 years.

The real question is, will he be able to make $150K at poker for the next 15 years? Who knows. Also he would have to live on a fixed amount of income for that first 15 years, which is a long time.

But what if it were $300K after tax. Now he gets there after only 6 years.

[/ QUOTE ]

No - I made no assumptions as to his investment of any of the funds. Essentially, he spends everything he earns under my model.

I guess my point was really that a "magic number" is pretty easy to come up with, but the assumptions you make behind it are fairly complex - as you've pointed out by coming up with something I didn't even factor in - making it nearly impossible to come up with a "right" answer.

But FWIW - take the job, and it's not even close.