I've recently learned about this concept of a crossover point whereby your investment earnings exceed your 'real job' income.
It seems related to FIRE to a large degree, but not completely. Anybody familiar with the concept and designation. Are you there or think you will attain it?
Also, is it necessary even to get there in order to feel confident in their investment or retirement decision making?
Personally, I never imagined such a state for other than the independently wealthy or very very fortunate amongst us.
Anybody considered when they'll hit their crossover point?
byu/zenny517 inpersonalfinance
Posted by zenny517
20 Comments
Feels like if you’ve got to this point you could have retired earlier? Your yearly costs will go down when not working id expect
It is a somewhat arbitrary point. No, you don’t have to reach it to feel confident in your financial planning. But you probably have to reach it and even exceed it if you ever want to retire.
Assuming you’re not withdrawing from your investments for living expenses, you can retire will before you hit this number.
I think the more fun number to hit in terms of feeling momentum is when the annual growth in your investments starts exceeding your annual contribution. Really gives the feeling of biking downhill and being carried by gravity more than your pedaling.
Depends on how you define investment earnings. Generally speaking the retirement number is bigger than the number required to hit the crossover point, but heavily dependent on assumptions.
Generally people aim for withdrawal rate of 3-4% when they FIRE. Say 4%. But if you are averaging say 10% on investments, and you assume that you are replacing your income 1:1, then you can see that you need less to get to the crossover point. For example, at $50k per year at 10% interest is $500k savings. But for FIRE at 4% withdrawal rate @ 50k per year is $1.25 million
Wife and I made 110k in 2015, investments grew 132k. 20k of that was contributions but we were ecstatic.
It’s a cool milestone, but not necessary.
Your questions seem very oddly formulated and its not clear what you even want to know.
If you earn $100,000 salary and your stocks/bonds/bank account interest earn/grow by $100,001 in a year (ignore the money you are adding to that from your salary) then your investments have earned more than your real job. That’s its. its not some obtuse calculation.
Can you retire when that happens? maybe. depends on a lot of things. Can you readily access that money? What is your risk tolerance for downturn in the market? Will that 100,001 dollar number outpace your future promotions and inflation?
Not really sure what this is supposed to mean. “Investment earnings” meaning dividends? Monthly unrealized gains that average more than their paycheck? Poor formulated question.
Married, 60. Our 401ks have $3m in them and have averaged about 12% over the last 5 years. That’s enough for us to quit and we did at 58. We have a smaller amount $575k, in savings and other liquidish products, so we are out of the working loop. It is positively strange seeing the world change so dramatically over the last few decades and theirs a bit of guilt creeping in. Not enough to change our minds, but it is still there. 😁
I think it can be a little misleading. It’s interesting but I don’t know how helpful it is in meeting retirement goals.
My investment earnings so far this year exceed my income, but I would need that to be true for many years still in order to retire.
I’m not targeting to fully replace my income in retirement, because I don’t need that much to sustain a retirement.
My investments are also way more aggressive now than they would be in retirement, so I still need it to grow to a certain amount before I can think about altering those allocations to a less risky/volatile portfolio.
Still, it’s fun to think about that inflection point as f-u money, as in I’m working because I want to and not necessarily because I have to.
My personal income last year was 110k+Some bonus. My investments increased by 100k in the same year. 31m with about 400k in investments. 33% is not sustainable but it technically happened so I’ve hit the crossover point 1 time 🙂
I’m teetering on that point now. Last year investment earnings surpassed my income by a few thousand $. Got a big raise this year, and likely a big bonus coming in Q3 so my income will likely outpace my investment earnings again this year. Still around 7-ish years from being ably to retire early.
If you assume
– 10% returns
– 4% raises (not inflation adjusted in either case)
– start working at 25
– 15% savings rate
You get to crossover in your mid 50’s. Bigger raises pushes that back, earlier work, more savings, and better returns pulls it forward.
IDK how you actually calculate this for a mostly equity portfolio, except in retrospect.. and that feels more like getting lucky with investments than something to rely on going forward
You are talking a full income replacement at 7% growth.
That’s way much more than FIRE that is able to live within 4% withdrawal annual inflation adjusted (not returns).
If you quit your job it’ll happen way sooner!
Its a fun number but some people get too caught up on it. Investment gains beating out contributions doesn’t mean further contributions arent still a huge difference maker by retirement after another 5-10 years of contributions.
Sure at a certain point contributions may run out of realistic marginal returns. But that takes a while. For quite some time you can either shorten time to retirement, improve retirement, or reduce the risk of an underperforming market causing you to miss your retirement goals.
I don’t think it’s a math problem that works, at least without a bunch of other considerations (which is why we have CFPs and retirement planning software).
Our investment returns were about 3x our spend this year, and it was a higher spend than typical since I bought a car. Still not near comfortable to retire, even though I want to.
I don’t think it really matters but certainly a good sign if you are retirement ready. For a sustainable projected return of 7%, you’d need 14x your annual compensation which is a lot.
You don’t need as much money at the start of retirement because you don’t have to pull money out to “save” anymore.
What you really need is a model that shows you can fund your NEEDS, not whatever your salary is.