W2 income vs Investment Income/return - tipping point

R

Rotaflex

Confused about dryer sheets
Joined
Mar 3, 2019
Messages
9
This question has been bugging me for a while and have been searching for answer.

There is a point in working life towards retirement that the investment portfolio returns consistently more than the W2 income. I would imagine after crossing such point, time spend working is of diminishing return (financially speaking) vs spending more portion of time to safe guard sure investment return.

Is there a rationally way of determining what that “tipping point” or criteria might be?

Appreciate if anyone could share or point me in a direction to this “bugging” question. Thanks!
 
Often the more people time people spend to safe guard sure investments, means a lower rate of return due to all the mistiming and meddling.

Actually it's not the income amount of W2 vs savings income, the tipping point is really: Will the savings support a guaranteed lifetime income for the remainder of life. ?

Once you hit that, the W2 income just adds cushion by increasing the savings and decreasing the "remainder of life" time.
 
Instead of consistently, you could look on an historical average basis.

If you have money at Vanguard, it will tell you, for your portfolio, what the historical rate of return has been. Let's say 9% just as an example.

If you're making $40K in your W-2 job, then to have your investments - on average historically - provide the same amount, you'd need $40K / 9% = ~$444K.

With investments, some years will be better and some years will be worse. So you could look at it each year if you wanted to - if you happened to make 20% last year on your investments and you had $200K invested, that would have also been $40K. But the $200K could have lost 10% for a result of -$20K.

@Sunset is right though...it really doesn't take much time to tend to a portfolio if you're a passive investor as I am - it's on the order of a few hours a year of necessary stuff, and probably only a few days of effort I do because it's fun. And 99% of the time that extra stuff doesn't result in me actually *doing* anything. @Sunset is also right that messing with stuff can have a deleterious effect.

Yes, there is a point where the contributions from work via savings and adding to investments pale in comparison to the portfolio growth. Even so, towards the end of my career, I was still paying attention to and working towards increasing my income from both my W-2 job and my investments. Partly because I'm just wired that way, and partly due to the realization that the portfolio could tank or the job could - in theory, anyway - be lost at any time and it's worth striving until one actually crosses the FIRE finish line.
 
braumeister said:
Have you spent some time with FIRECalc?
Click to expand...



I did. I probably should have prefaced that I have crossed the FI line a while back. Trying to rationally determine (financially speaking) to spend the x hour working (for $) or x-y hours managing the investment.
 
I'm not sure how spending more time on investment/portfolio management is a sure way to safeguard return. When I think about what would be the safest, the idea that comes to mind is to be 100% in TIPS with enough principal to cover spending through however long I expect to live (90+). That would be a large sum, with significant opportunity cost that most people don't pursue...

It's a personal decision based on your own risk tolerance.
 
Since stocks almost never deliver their average return (it's almost always much better or much worse), I don't see a "crossover" as being terribly useful. Long before you are financially independent, you are likely to have a great year where your stocks outdo your paycheck. And of course you can have years where your investments do lousy and wipe out all of your W2 income and more.

You are right that as you get closer to retirement, most folks should dial back the risk. Typically they add bonds as a capital preservation step in the event the market goes down and stays down for a long time. We have had multiple times in history where (after inflation) it took more than a decade for stocks to come back (1905-1921, 1929-1941, 1966-1982, 1999-2013). Even those are not as predictable as they look as each long downturn had two or more big events within them. Being in withdrawal mode and being all stock when one of those long downturns hit can be disastrous.
 
SnowballCamper said:
I'm not sure how spending more time on investment/portfolio management is a sure way to safeguard return. ....
Click to expand...
The behavioral finance studies say that it isn't. People who spend the most time on their investments have lower returns than people who pay less attention. Ref "Misbehaving" by Nobel laureate Richard Thaler.

I have been told that the Schwab robot keeps track of how often a client checks their portfolio and may email a warning like: "Successful investors do not check their portfolios as often as you are doing it." True or not, I don't know, but the research says it would make sense.
 
Sunset said:
Often the more people time people spend to safe guard sure investments, means a lower rate of return due to all the mistiming and meddling.

Actually it's not the income amount of W2 vs savings income, the tipping point is really: Will the savings support a guaranteed lifetime income for the remainder of life. ?

Once you hit that, the W2 income just adds cushion by increasing the savings and decreasing the "remainder of life" time.
Click to expand...

This!!
 
One tipping point is when your portfolio growth exceeds your living expenses grossed up for taxes. At this point you can retire.
 
Rotaflex said:
I did. I probably should have prefaced that I have crossed the FI line a while back. Trying to rationally determine (financially speaking) to spend the x hour working (for $) or x-y hours managing the investment.
Click to expand...

I'll just agree with what others have said - you seem to be under the impression that "spending hours managing the investment" will produce better results. That is probably incorrect.

It should take very, very little time to manage your investments:

https://www.bogleheads.org/wiki/Bogleheads®_investing_start-up_kit
 
chassis said:
One tipping point is when your portfolio growth exceeds your living expenses grossed up for taxes. At this point you can retire.
Click to expand...
I agree that this is the obvious point where W2 work would be inadvisable. But the tipping point could be sooner if you don't want to die with a big pile of money.


The idea that the decision would be made on how the annual sums of each type of income compare to each other doesn't seem like the best approach. Just model the situation through all years and if it's enough, quit.
 
sengsational said:
I agree that this is the obvious point where W2 work would be inadvisable. But the tipping point could be sooner if you don't want to die with a big pile of money.


The idea that the decision would be made on how the annual sums of each type of income compare to each other doesn't seem like the best approach. Just model the situation through all years and if it's enough, quit.
Click to expand...
It's not the best approach at all. Very flawed.

Suppose your living expenses are $50K. You have $200K in your portfolio, all in stocks because you are still working and are investing for the long term. The market goes up 30% in the next year, a strong but not unprecedented rise by any means. Your portfolio increases by $60K. You now have $260K. You're going to retire because your portfolio grew by more than you need for living expenses? That's absurd.
 
Hi Roto, I see you have 6 posts, I could infer from that that you have just started trying to understand what kind of net worth you need to retire, on the other hand you may have lots of study under your belt.
I can only be helpful in the first scenario. Don't be offended if you are past this info.

The first thing most would look at is your total yearly spending requirement.
Let's say you require $50,000. The two major studies that have analyzed decades of stock market performance have found that withdrawing 4% of your net worth will give you portfolio a very high chance of surviving 30 years. That would mean you would need $1,125,000 to fulfill that 4% requirement. Two ways to calculate that, 25 x $50,000=$1,250,000 or $50,000 / 0.04 = $1,250,000. This 4% guide does allow you an inflation raise every year. It also has a certain minimum investment in the stock market. Some will say, you should spend less than 4%, others will tell you that the study authors have updated there study and have increased the 4%, you have decide your comfort level. Here are the studies.


https://www.researchgate.net/public...thdrawal_rates_from_your_retirement_portfolio


https://www.retailinvestor.org/pdf/Bengen1.pdf
 
Thanks.

Time2 said:
Hi Roto, I see you have 6 posts, I could infer from that that you have just started trying to understand what kind of net worth you need to retire, on the other hand you may have lots of study under your belt.
I can only be helpful in the first scenario. Don't be offended if you are past this info.
Click to expand...
None taken. Thank you for the links posted. Will definitely take a look. My financial advisors has provided pretty sound allocations - (backtested, risk adjusted... all that wonderful stuff) with respect to the financial instrument side of the investment portfolio. It's more of a time management question than investment that I'm looking for a frame work that might not exist which I thought I ask.
 
Rotaflex said:
None taken. Thank you for the links posted. Will definitely take a look. My financial advisors has provided pretty sound allocations - (backtested, risk adjusted... all that wonderful stuff) with respect to the financial instrument side of the investment portfolio. It's more of a time management question than investment that I'm looking for a frame work that might not exist which I thought I ask.
Click to expand...

You mention financial advisors.

Many, but not all, of the people here do not pay financial advisors. Of those that do pay their advisors, I think they pay them an hourly rate rather than a percentage of assets under management.

To find out why this is:

Take your current portfolio value today and figure out how much you think it will grow based on the nominal rate of return those advisors are saying you'll get. Or use the average historical nominal rate of return of the US market, which is around 10%. Compound that growth rate out over your life expectancy and write down that ending number.

Then do the same math, but subtract 1% from the rate of return - so if you used 10% above, use 9% this time - because you're probably paying that much (maybe more) to those advisors. Compound that 1% lower growth rate out over your life expectancy.

Compare the new ending number to the ending number from the previous paragraph. Because of compounding, it would not be surprising if you end up with around half of the money.

Think about that.

Their "only 1%" is taking half of your money.

...

Two quick notes:

Typical advisors will respond to the above with two points:

1. They'll either say they're not taking 1%. This may be technically true in the way they say it ("Our management fee is only 0.25%") but not actually truly true (They leave out or ignore other costs and fees which are considerable).

2. They'll imply investing is complicated, dangerous, confusing, and risky. Therefore you can't go it alone and need their help. I personally don't think this is true either.
 
Rotaflex said:
Thanks for this - added to my reading list.
Click to expand...
If you enjoy that one, you'll also like "Your Money & Your Brain" by Jason Zweig and "Thinking Fast and Slow" by another Nobel winner, Daniel Kahneman.

Punch line on these: 100,000 or so years of evolution have baked into us some behaviors that are not optimum for investing success. It's easier to avoid or mitigate them if you know what they are.
 
Thanks!

OldShooter said:
If you enjoy that one, you'll also like "Your Money & Your Brain" by Jason Zweig and "Thinking Fast and Slow" by another Nobel winner, Daniel Kahneman.
.
Click to expand...
Thanks! Daniel K is an interesting read. Keep it coming!
 
sengsational said:
I agree that this is the obvious point where W2 work would be inadvisable. But the tipping point could be sooner if you don't want to die with a big pile of money.


The idea that the decision would be made on how the annual sums of each type of income compare to each other doesn't seem like the best approach. Just model the situation through all years and if it's enough, quit.
Click to expand...

Yes. For some people this results in a “high” initial withdrawal rate. I encourage this (high initial withdrawal rate).

The guidance given in many of these threads is comically conservative. Each person should become savvy in using a full featured complex retirement model of their own construction. Or use the RPM model, it’s good.
 
chassis said:
... The guidance given in many of these threads is comically conservative. ...
Click to expand...
You have a reliable crystal ball?

chassis said:
... Each person should become savvy in using a full featured complex retirement model of their own construction. Or use the RPM model, it’s good.
Click to expand...
Why would I waste much time doing that? Inductive reasoning can never prove anything, as Taleb's Turkey illustrates. Man plans and God laughs.
 
@OldShooter you don’t have to. Do what you are doing if you are happy with it.
 
Rotaflex said:
This question has been bugging me for a while and have been searching for answer.

There is a point in working life towards retirement that the investment portfolio returns consistently more than the W2 income. I would imagine after crossing such point, time spend working is of diminishing return (financially speaking) vs spending more portion of time to safe guard sure investment return.

Is there a rationally way of determining what that “tipping point” or criteria might be?

Appreciate if anyone could share or point me in a direction to this “bugging” question. Thanks!
Click to expand...

I think that using FIRECalc is a good way to plan for retirement (and to time it as well). What your investments are "making" is variable and there may come a time when you lose a year's salary in a month of investing! So, just enjoy the wins when you have them (I too was excited the first time my investment results exceeded my salary!)

Another interesting "diminishing return" would be for the person who could take a pension and continues to w*rk. You could say "I'm working for peanuts now since I could simply retire and make x% of my salary with no w*rk."

My point would be not to be distracted from your overall plan of when/how to retire. I like FIRECalc, but you might want to use Fidelity's tool or someone else's tool. In any case, there may be more important questions to ask here. For instance. What is your age in relation to, say 59 1/2? That may determine how you have to take your tIRA money or 401(k) money out once retired. There are lots of other questions perhaps more pertinent to retirement than when your returns exceed your salary. Just sayin' and remember that none of us here proclaims expert (or professional) status. Therefore YMMV.
 
You must log in or register to reply here.

Similar threads

R
Seeking Advice - for retiring at 52.5
2
Replies
44
Views
5K
LateToFIRE
LateToFIRE
Tranquility Base
Bonds/Fixed Income and Asset Location
2 3
Replies
53
Views
6K
jldavid47
jldavid47
T
AA with TIPS for FI
Replies
3
Views
735
GravitySucks
GravitySucks
K
A Golden Age for Fixed Income Investing - Provided you use TIPS
2
Replies
25
Views
3K
daylatedollarshort
D
M
Real Estate in 2024?
Replies
9
Views
773
DrRoy
DrRoy

Latest posts

Back
Top Bottom