I’ve been focused on building passive income since 1999, back when I had to be in the office by 5:30 a.m. and worked past 7 p.m. often. Weekends were another eight hours or so. I knew I couldn’t sustain a traditional 40-year career working those kinds of hours, so I began saving and investing aggressively to break free by 40.
Now I’m focused again on building enough passive income to fully cover our family’s desired living expenses by December 31, 2027. And I’ve been reminded of an ongoing battle: the trade-off between generating risk-free passive income versus taking risk to earn higher potential returns.
As I’ve gotten older, I’ve become more risk-averse, partly because the dollar amounts at stake have grown.
Losing $20,000 on a $100,000 portfolio feels like a kick in the shins. But watching $1 million evaporate from a $5 million portfolio? That hits like you like a truck crossing the sidewalk. Without any day job income—as is the case for me and my wife—losses of that magnitude can feel unbearable.
This post will cover the following important topics:
- The trade-off between earning risk-free passive income and taking more risk for potentially greater returns
- How focusing too much on risk-free passive income can lead to increased fear and potentially lower wealth
- The distinction between risk-free passive income and risk-required passive income and why it matters
- The importance of sticking to your financial goals and risk tolerance no matter how much greed and fear take hold
Earning Risk-Free Passive Income Can Make You More Fearful
One important takeaway from building a rich Bank of Mom and Dad is that it gives your adult children the option to take more risks. The more risks they can afford to take, the higher their potential for financial success.
It’s like shooting 100 three-pointers at a pitiful 10% accuracy versus just 10 shots at an incredible 60%. Although you may be a far more talented shooter, you'll still lose to the volume shooter. This is why a lot of rich people from rich families have an unfair advantage and keep getting richer.
But before you can be a supportive bank for your kids, you need to be a strong bank for yourself.
Ironically, the more risk-free passive income I earn, the less motivated I feel to take on risk. And with less desire to take risk comes less potential wealth in the future.
Fear, complacency, and diminished wealth are the hidden dangers of relying too heavily on risk-free passive income.
Let me explain further.
From Taking A Lot Of Risk To Throttling Back Risk
In May 2025, I began trimming some of the stock positions I bought during the March–April dip. I had just sold a property in March and begun reinvesting most of the proceeds in the stock market. At first, I was losing my shirt as the stock market kept dipping through the first half of April. Then, my portfolio began to recover and profit.
I'm in the process of moving from a 100% equities portfolio to around a 60/40 split between equities and Treasuries/cash. I had invested over $1.35 million in stocks during the downturn and it was stressful. In retrospect, going all-in on my public investment portfolio that I rely on to provide for my wife and me to stay unemployed felt reckless. I was relieved to have a second chance to de-risk and rebalance.
That month, my Fidelity money market fund (SPAXX) paid me $1,847.62. Annualized, that’s $22,171 in risk-free income just for keeping a chunk of cash parked. That return, at 4%, required no stress, no tenant calls, no market-timing anxiety, and no risk. It felt amazing! I want to earn more risk-free passive income.
However, as the S&P 500 continues to climb, that amazing feeling gradually fades. This is a fundamental struggle every investor must face—the tension between feeling secure and still wanting more. After all, roughly 75% of the time, the S&P 500 delivers a positive return in any given year.
Risk-Free Passive Income vs. Risk-Required Passive Income
Thanks to the rise in interest rates, we all now have the opportunity to earn more risk-free passive income. As a result, we not only have to weigh how we feel about earning different types of risk-required passive income, but also how we feel about earning risk-free income versus taking on more risk for potentially higher returns.
As an investor, we must always think about opportunity cost.
For example, comparing risk-required passive income from a dividend aristocrat ETF like NOBL, which yields about 2.15%, with income from an S&P 500 ETF like SPY, which yields around 1.25%, isn’t a huge leap. NOBL may be slightly less volatile since it holds cash-rich, large-cap names.
But compare either of those to earning 4% risk-free in a money market fund, and the difference in feeling can be stark. After a 20% market dip, trying to claw back to a 10% historical annual return feels exhausting. Earning 4% with no drama felt peaceful.
At the same time, I didn’t have to manage tenants or respond to maintenance issues like I do as a landlord. Even though I’m bullish on San Francisco single-family homes over the long term—thanks to the AI boom—I still preferred the risk-free income at this high rate.
This easy, risk-free passive income has made me less motivated to chase bigger returns, which is a problem if I want to hit my $380,000 passive income goal by December 31, 2027.
This is the curse of the rising risk-free rate of return. When the risk-free rate was under 1%, it was much easier to invest aggressively in risk assets.
Too Much Focus On Earning Risk-Free Income Can Make You Less Wealthy Over Time
I still have a $60,000 shortfall in gross passive income. To close that gap, I’d need to accumulate another $1.5 million in capital in under three years, no small feat without a high-paying job or a financial windfall.
Authors don’t make much money. A typical book advance is around $10,000. Even a top 1% advance—starting at $250,000—is paid out over several years. Meanwhile, AI is eroding search engine traffic and attribution, weakening online income for independent publishers who write all their work like me.
Treasury bonds and money market funds likely won’t get me there in time. The main way to achieve my goal of accumulating $1.5 million or more is to take more risk by investing in risk assets.
Imagine entirely sitting out the 2023 and 2024 bull market with back-to-back 20%+ gains given you found risk-free Treasuries yielding over 4% too enticing. Sure, you'd still be up, but you'd lag far behind those who went all-in on stocks. Over time, focusing too much on risk-free passive income could, ironically, make you poorer.
It’s the dividend vs. growth stock dilemma: dividend-paying companies are considered safer and often return cash because they’ve run out of better investment opportunities, while growth companies reinvest 100% of earnings to capture potentially higher returns. In this case of risk-free passive income, the dividend-paying company is the U.S. government.
For over 25 years, I've invested almost entirely in growth stocks. This is now changing thanks to age, wealth, and higher risk-free rates.
Principal Growth Versus Income Dilemma
Let’s say you have a $5 million stock portfolio. To generate an additional $1.5 million in capital, you’d need a 30% return—possible over three years. But stocks could just as easily go nowhere or even decline, especially with valuations already stretched.
Remember, if stocks stagnate for three years, you’re effectively losing money compared to what you could have earned in a risk-free investment over the same period.
Given today’s high valuations, many analysts are forecasting low single-digit returns going forward. Below is a chart showing Vanguard’s 10-year forecast for equities, fixed income, commodities, and inflation from 2025 to 2035. So far, it's actually quite prescient with U.S. equities struggling while global equities outpetforming.
A 3%–5% annual return in U.S. equities isn’t exactly exciting given the risks involved.
The Guaranteed Path Can Lull You Into Complacency
Now imagine putting that $5 million into 10-year Treasuries yielding 4.5%. That generates $225,000 a year—guaranteed. So compelling! It would take six years to grow from $5 million to $6.5 million, but it’s essentially a sure thing. If you believe Vanguard’s U.S. equities forecast of 3%–5% annual returns over the next 10 years, why not lock in a 4.5% risk-free return today?
Would you risk allocating 100% of your portfolio in equities just to maybe get there in three years? After two strong years (2023 and 2024), another three years of 9%+ annual returns to get to $6.5 million would be extraordinary, but that outcome is far from guaranteed.
Yet most of us still take some risk, driven by hope and greed. We hope that AI will permanently boost productivity and reset stock valuations higher. We also greedily want even more returns than the historical average.
Higher Risk-Free Passive Income Should Result In A More Balanced Portfolio
I'm no longer as greedy as I was in my 20s and 30s, partly because I'm more financially comfortable today. The other reason is the much higher risk-free rate of return.
As a result, it makes sense to increase the bond or cash portion of your portfolio if it's offering higher returns.
With 40% in Treasuries held to maturity, a $5 million portfolio generates $90,000–$112,500 in risk-free income. With 60% in equities, there’s still meaningful upside potential without putting everything on the line.
Historically, a 60/40 stocks and bonds portfolio has returned about 9.1%. A 100% stock portfolio has returned about 10.3%. That 1.2% gap adds up over decades. But if you're later in your financial journey, the tradeoff may not be worth it. A 100% stock portfolio can suffer much steeper drawdowns—up to 85% more based on history.
The Importance Of Sticking To Your Financial Goals
At this point in my life, I’m content with a steady 5%–8% annual return in my taxable portfolio for survival. Based on history, a 30% stock / 70% bond portfolio would suffice.
Yet, because of my lingering greed, I'm constructing a 60/40 portfolio instead. Further, I’m still 100% invested in public stocks across all my tax-advantaged retirement accounts, my kids’ custodial accounts, and their Roth IRAs.
In other words, I’ve taken a more conservative approach with the portfolio I rely on to support my family today, and a more aggressive approach with the portfolios that won’t be touched for 15+ years. Unfortunately, I feel the job market is bleak for my children, so I want to hedge by investing more for their futures.
If you want to retire early, building a large taxable portfolio beyond your tax-advantaged accounts is essential. This is the portfolio that generates passive income and provides tappable equity—without penalties—to live on. Not building a large taxable portfolio consistently comes up as one of the top regrets for older workers and retirees.
Age and Stage Matter For How You Invest
If you’re under 40, feel free to take more risk. You’ve got time, energy, and decades of work ahead to recover from losses. I wish I had taken more risk in my 20s and 30s for sure. Here's my suggested asset allocation for stocks and bonds by age.
But when you’re over 40, with family obligations and reduced energy, it’s different. You don’t want to lose the wealth you’ve spent 20+ years building. Reducing your risk exposure as your risk tolerance fades is a wise move.
For me, I’m tired from being a stay-at-home parent and writing my second traditional book, Millionaire Milestones. By 2027, I’ll be 50, holy crap! Where did all the time go?
I plan to publish a third and final book, then transition into a more traditional retirement lifestyle—one with less doing and more being. By then, AI might have rendered Financial Samurai obsolete or automated me out of the process entirely. Who knows? Maybe lived experiences from real human beings will no longer be in demand.
So I’m embracing preservation more today.
I’ll keep saving and investing 50% of any income, splitting a portion of it between stocks and bonds at a 60/40 ratio. I’ll also continue allocating capital to private AI companies through platforms like Fundrise Venture to stay in the game. Frankly, every $1,000 I invest in AI makes me feel a little less worried about my children's future.
But I won’t be going overweight in public stocks anytime soon with valuations around ~22X forward earnings. Until I sold my house, I never had this much cash available to take advantage of higher interest rates. While climbing the property ladder, I was always saving to buy a nicer home.
Now, I have no more material wants that can’t be covered by cash flow. Tennis shoes don't cost too much. And the risk-free passive income I can earn today is simply too good to pass up.
The Gift and Risk of a High Risk-Free Rate
A high risk-free rate is a double-edged sword. On the one hand, it offers comfort and stability. But if you lean on it too heavily too early, you might delay reaching financial independence. The longer you delay, the harder it becomes to catch up—often requiring more risk when you're least comfortable taking it.
On the other hand, if you're close to financial independence or already retired, today’s elevated rates are a gift. When I left work in 2012, the 10-year Treasury yield was just 1.6%. I had to go risk-on with stocks and real estate. Now, earning 4%–4.5% risk-free feels like a blessing, especially with a family to support.
Sweet, risk-free passive income has never felt so good, but it likely won’t last forever. And that could be a good thing!
Readers, what are your thoughts on becoming more risk-averse as you earn more passive income over time? Has your focus on investing in dividend stocks or earning higher yields/income actually throttled your wealth-building potential? Are you willing to risk more money for greater returns that you don't need?
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Those Vanguard returns of 3-5% for equities, are those real returns (after inflation)?
I believe they are nominal.
From Morningstar:
Vanguard’s equity forecasts are typically in nominal terms, meaning they do not account for inflation or taxes. This means the returns are expressed in dollar values without adjustments for the impact of inflation or potential tax liabilities. Vanguard’s Capital Markets Model (VCMM) generates these forecasts, and they are used to inform Vanguard’s investment strategies and portfolio construction. While Vanguard also provides subasset-class forecasts, these are often presented in both nominal and real terms. For example, a recent forecast by Morningstar cited a nominal return of 5.7% and a real return of 3.1% for US equities over the next 20 years.
So much to think about here!
The question that’s easy to ask and so hard to answer: when is enough, enough?
Let’s say you’ve had it in your head that $10M is enough. I ask a lot of people this question and $10M is the most common answer. How many of us are truly able to shut it down when we hit that number? Like you said, hope and greed are real. They’re strong feelings.
When you’ve worked so hard to hit your number, you’ve developed habits. You’ve likely taken risks and won. You’ve also likely lost. Those choices are what make you who you are.
Intellectually, we can agree that we should stop taking risks at a certain point. But, will our life experiences, or maybe the desire to keep striving for something, prevent many of us from playing it safe? If we could reach $10M, why not go for $15M? $20M?
It’s that hope and greed that has me thinking most people end up staying aggressive longer than they need to.
Thanks for such a thought-provoking post!
Matt
I think age and energy plays a huge factor. If your 40 and have accumulated 10M, sure go for it! Go for another 10-20M. You have time and energy to make it up in the event the market craters. IF you are 60 like me I don’t have the time or energy to grind in my business anymore, which if I had 10M all in the market and it corrected 30% I am not sure I would feel as comfortable retiring . I mean – having 5M of the 10M in the market will fulfill my “greed and growth” needs. The 1M is much more than I need a year to live the high life (no debt, house paid off, etc).
Bonds can also rally too, as interest rates come down. So you can make more than the interest rate if held to maturity.
Didn’t know the performance difference between 100% equities and 60/40 was only 1.3%. I’m happy to give up 1.3% to minimize a potential extra 80% plunge in downside!
Fantastic article, Sam! As a first-time commenter but a dedicated reader for over a decade, I want to express my gratitude for your insightful posts. They’ve been a cornerstone of my financial journey since my mid-20s.
I’m still in the growth phase of my financial life but prioritize maintaining a robust emergency fund. One challenge I’ve encountered is the tax burden on interest earned from these funds. To address this, I’ve been allocating a significant portion of my emergency fund to BOXX, an ETF that replicates short-term Treasury bills but treats returns as capital gains rather than ordinary income. While selling the ETF could trigger state taxes—unlike Treasuries—the combination of long-term capital gains and state taxes is still lower than ordinary income tax rates.
Additionally, BOXX has proven advantageous in my situation. Earlier this year, I harvested capital losses from my portfolio, resulting in a carryover. This allows me to potentially sell BOXX shares to cover emergencies, offsetting gains with my loss carryover for tax-free access to funds.
As BOXX is a relatively new ETF, I’m mindful that its tax treatment could evolve if the IRS scrutinizes it. I’d love to hear your thoughts on this strategy and whether it could benefit other readers.
Again, thank you for everything you have done for the community!
Timely post- I’ve really been thinking about these issues lately with the market swings since I tend to be very heavily risk weighted. To me, it feels like debasement of currency has greatly contributed to the high rise in valuations, corresponding IPOs, salaries ect on top of uneven inflation (as you have posted regarding education, healthcare costs ect).
I also feel like outside of AI/Tech, most people’s salaries aren’t increasing anywhere near enough annually to beat inflation + debasement unless they have great stock compensation packages. I’ve read that the debasement is 8% annually, and assuming inflation is 3% – would 11% annual returns be needed annually to maintain comparative wealth? Or is tech (including quant firms) just accelerating the accumulation of wealth? Would love to hear your thoughts.
What about something like Ares Private Income Fund. The class I shares are paying over 9%. It’s a Private Credit Solution and non traded BDC run by Ares with ~15 billon in assets across the 3 share classes and pays monthly. How does this compare to Fundrise’s offering?
Im unfamiliar. The Fundrise Opportunistic Credit fund has been returning 10-12% since 2021, so it’s similar.
areswms.com/solutions/asif
here is the link to the Ares site with the details. We just recently invested in the class I shares.
Cool, good luck!
It’s a 10% piece of our larger portfolio or oil and gas production, rental properties, venture capital( through a fund and SPV’s) equities, business ownership interest and cash.
We started our journey at 29 acquiring production in oil and gas via working interest and royalties and spent the last 13 years building our investment base. Ares seemed like a good fit to our model, but time will tell
Great post – I have a similar mindset and have accumulated quite a bit in bonds in taxable at this point shifting down to about 60/40 at 40 years old. Definitely missed out on some growth over the last few years but the peace of mind during the drawdowns we have experienced makes me know that it is right for me.
I am mostly rolling T-bills with about 6 month duration. When 10-year hit 5% I dipped my toe in a bit to lock in a bit for the long haul, but have been cautious. Are you considering going longer in duration at these yields at all? Would definitely not want to go all in but I would be dismayed if we went back to zero/low interest rate policy and the opportunity to earn risk free yield disappeared for another 15 years!
When you account for inflation the 4.5% risk free rate is much less than that in real terms. With taxes as well you might be getting little real after tax return.
It is, but it’s the same with every single investment and return when you account for inflation.
Some people are in much lower tax brackets, and have ways to adjust down their income to pay less taxes as well. All other people are stuck, just earning W-2 income.
Are you 100% invested in risk-assets with no risk-free passive income? If so, what stage are you at in your financial independence journey? Thx
Hi Sam,
As always, I appreciate your perspectives. One downside to raising up the fixed income allocation for me, is the long term effect of the annual taxation. Unless I’m meeting my tax obligations with a different pool of liquidity, then the drain on the overall portfolio can start to add up because not everything is being reinvested, which is what I believe the Vanguard models you posted assume. I’m also not a fan of paying taxes on income that I don’t immediately need, although I sure do like the safety it provides… In recent years my mind has shifted to dividend growth from companies that can remain durable in most economic environments. I still don’t feel great when I draw down, but seem be calmer when I’m reminded that my real goal is grow the income from my portfolio in a tax efficient manner -at a rate faster than CPI. I make the assumption that the account balance will likely rise overtime as the companies distributable income grows. -Not as exciting as growth investing, but it helps me remain invested
Tell me more about your dividend growth investing. Because I see that as somewhat of a contradiction. Fast-growing companies usually don’t pay a high dividend or any dividend. They having a cake and eating it too is a nice thing.
Tax is definitely an issue. But I’ve just come to accept it as someone who’s paid a lot of taxes since 1999. It’s the cost of utilizing some of your investment returns and income to pay for life. Otherwise, there’s no point investing.
And when one is finally at a stage when they have to Rely on their investments to pay for life, then you either have to sell or you have to borrow against your investments.
But perhaps, at that time, your tax liability will be low because your active income will be low. Mine is so much lower now than while working, which feels great from a tax perspective.
I largely hold VIG, DGRO and SCHD. All three track different different dividend growth strategies. From what I understand, valye has outperformed growth over the long term, which implies dividend payers have done better than non-dividend payers.
Sam, you might appreciate this. It compares VOO to VIG. Basically the same return, but VIG has a lower standard deviation. Dropped roughly 10% less than VOO in the GFC and recovered 1.5 year faster. The main difference as I see it, is that part of my return has come in form of a small dividend yield that has grown a lot over time. My focus has been on the growth of the dividend versus looking high yielders, which I actually avoid, as do VIG and DGRO https://www.portfoliovisualizer.com/backtest-portfolio?s=y&sl=2y2KJ6jVqhj0e060YyQ728
We have a staggered approach to risk:
FWIW current annual run rate is about 2.5%.
Everything gets readjusted annually.
There probably is a simpler way to look at it but in my mind, this should allow for obtaining some higher returns yet not losing sleep about daily gyrations.
I totally get where you’re coming from. I’ve been working on building some passive income myself and it’s easy to fall into a comfort zone. At first, it feels amazing to have less risk, but then over time my risk appetite has really decreased. And I’ve found myself scared to make certain moves that I probably would’ve done before without any hesitation.
The part you mentioned about risk-required income resonated with me. It’s such a good reminder that playing it safe all the time can hold us back in the long run. It’s a delicate balance that is going to be different for each of us. Thanks for sharing this because it’s helped me reflect on how I’ve been approaching my investment allocations lately.
I also used to worry about missing stock market returns. But I am now satisfied with allocating a portion to the stock market for growth and not touch it. It is so different since now interest rates have risen. Whole different ball game than it was from 2009-2020. I just keep my annual expenses covered through treasury interest returns. Sure the principal is not growing, but overall I still have enough in stocks so if that portion meets the average annual stock return, overall my portfolio is still growing over time.
Say you have a 10mill portfolio. 5 million is treasuries at 4% covers your 200k annual expenses. 5 million in stocks gives you an annual average return of 400k, so overall you are +200k if you are concerned about spending down your money. Good chance my wife and I never touch the stock portion of portfolio.
I think part of our difficulty buying boring like treasuries is we still have a hard time believing it is real. Its a whole new world opened up for those who have accumulated enough and are more into preservation like you and me.
The $10 million in investable assets is an interesting mark.
On the one hand, earning $400,000 – $450,000 a year doing nothing is amazing. But miss out on 2024’s 23% return of $2.3 million might feel like a gut punch!
Hence why those who have a lot continue to invest.
but the gut punch isn’t real unless your 20-40 years old when you should be 100% invested. 60 and 1 year from retirement 100% isn’t realistic. i will still gain 1 mill in the stock part with 5 mill invested. i wont bemoan losing out cause it just as easily could have dropped 30%. seeing my portfolio going from 10 mill to 7mill is the real gut punch at my age.
Agree with Ash 100% as want in future maybe 20-25% growth stocks and the rest muscling out large passive income. Yes, you might miss 1+ million returns on that 80% of your portfolio but 5 million portfolio with 4 M working on 8-10% passive income is wonderful. Chances are you don’t need the whole 335 to 400k a year to live on and you just toss it right back into more growth. Come on Sam, 350k a year for passive plus 65k in SS and part time work for another 30-40k is just “stupid” money for a 68 year old(s) couple.
Love your timely article as my hobby every morning!!
For sure if you’re 68! However, have a 68-year-old couple only needs to live off of $100,000, for example, they can afford to take more investment risk and make even more money if they want. Have plenty of people do that just that.
What’s Social Security? :)