The Ideal Financial Scenario In Retirement: Conservative Returns, Steady Income

The ideal financial scenario in retirement is steady income and conservative returns. Financial loss creates stress. And given stress kills, your goal as a retiree should be to remove as much stress from your life as possible.

The older and wealthier you get, the more you want to move your money into the background of your life. This way, you can focus more of your time doing the things you really love with your remaining time.

Think about how stressful and distracting the 1997 Asian Crisis, the 2000 Dotcom bubble, the 2008-2009 Global Financial Crisis, the March 2020 meltdown, and the 2022 bear market were. Not fun!

I've been thinking about being OK with no longer making a lot of money from investments. With solid returns in the S&P 500 and the real estate market since leaving work in 2012, I kind of feel like Anthony Bourdain when he said,

“I should’ve died in my 20s. I became successful in my 40s. I became a dad in my 50s. I feel like I’ve stolen a car — a really nice car — and I keep looking in the rearview mirror for flashing lights. But there’s been nothing yet.”

Lots Of Lucky Breaks So Far Making Money

Accumulating wealth beyond average is mostly due to luck. As a result, it's important to recognize your luck so you don't confuse skill with good fortune. As soon as you start getting delusional is when you start losing a lot of money!

I got in trouble the summer before starting college and could have easily given up on my future. But in college, I met my wife and landed a hard-to-get job for someone with my lack of pedigree.

Two months before likely being terminated at my first job as the internet bubble burst in 2000, I was able to find a new job in San Francisco for a raise and a promotion.

Instead of selling a home close to the bottom of the market in 2012, I was blessed that nobody took advantage of my uncertainty.

Rather than flaming out with Financial Samurai and having to go back to work a couple of years later, after 13+ years, this site is still standing. It has become a viable source of income to support my family.

Setbacks Are A Part Of Life

Sure, there have been plenty of setbacks as well. Life is one big grind! However, as an optimist, I've chosen to focus on the positives because life is better this way.

With conservative returns and stable income, life becomes magnificent in retirement. All the worry about running out of money or having to go back to work full-time starts to fade away. 

But to be OK with this type of financial scenario in retirement, you've also got to fight investing FOMO when times are really good. And investing FOMO is the hardest FOMO to fight off!

The Ideal Financial Scenario In Retirement

Anybody who has been reading Financial Samurai since 2009 should be much wealthier today.

Thus, when I think of de-risking, I don't see it as quite the atrocious move that some make it out to be. My goal is to get back to the early retirement lifestyle under the new administration.

2020 and 2021 were surprisingly strong years in the stock market. Who would have thought the gains would be so huge during a pandemic?

All I did was predict a stock market bottom, but not a ferocious rally that wildly surpassed my expectations. Therefore, it feels like so much of our gains since March 2020 are free money.

Everybody is at a different financial stage in life. For those who are looking for ways to de-risk or profit during before next downturn, I've presented some logical ideas to consider.

With so much wealth built so far, we can create the ideal financial scenario in retirement by locking in some profits. Interests rates have crept up on higher inflation expectations. As a result, retirees can now earn higher risk-free or low-risk income as well.

The Future Of Stocks And Real Estate

In 30 years, stocks and real estate will likely be much higher than it is today. Just by the Fed having a target 2% inflation rate tells you that assets will continue to go up by at least 2% a year on average over the long run.

In 30 years, I'll be in my 70s, wistfully reflecting on all the years gone by. Sure, if I had stayed the course and continued to aggressively invest in risk-assets and never spent a dollar of my gains I'd be much wealthier.

But would I be happier? Probably not because I'm already happy with what I have now. I say it's OK to sell stocks on occasion and enjoy the gains. Otherwise, what's the point of saving and investing in stocks for so long?

Would I be disappointed if I lost 30% – 50% of my investable assets at some point in the second half of my life when I could have conservatively made 3% – 5% a year, forever? Probably.

After a correction, sometimes it takes a decade or more to get back to even. We saw a lost decade for stocks from 2000 – 2012. As a result, I highly recommend folks quantify their risk tolerance by following my FS SEER formula.

Bear markets will come, as it has in 2022. Bear markets are just part of the investing cycle. Thankfully, a good think about a bear market with high interest rates is that it's easier to generate more passive income.

Hard To Change Financial Habits

I'm stuck with a frugal mindset. It makes it difficult to spend more than 50% of our income or ever draw down retirement principal. It's hard to change one's ways over more than two decades of saving and investing for a future that may never come.

As a result, I've proposed revenge spending to ensure that at least some of our investment gains are enjoyed. Round-tripping our investments or dying with way too much would be such a shame.

In addition, I've entered decumulation mode at age 45. I definitely don't want to die with millions in the bank. That would be a waste of time, energy, and stress.

When my wife and I pass, we know we'll be donating or passing down the majority of our wealth to our children and charitable organizations. We subscribe to the Legacy retirement philosophy of leaving a perpetual giving machine.

Therefore, inviting unnecessary money stress due to excess risk-taking at this point in our lives is illogical. It's illogical for anybody who is already happy with enough.

Low-Stress Wealth Creation Feels Great

To calculate a base case net worth growth rate, I'd like everyone to calculate their annual gross income, net income, and absolute savings amount. Then divide these figures by your current net worth.

By doing these calculations, you now have a good idea of your minimal annual net worth growth rate assuming a 0% investment return. You must do the math to create your ideal financial scenario in retirement.

For example:

$100,000 gross income

$80,000 net income

$30,000 absolute savings amount

$1,000,000 net worth (investable assets)

The results are 10%, 8%, 3%. In such a scenario, you are able to grow your net worth by 3% a year by saving 37.5% of your after-tax income.

So long as you maintain your income and savings rate, you are growing your net worth by 3% a year risk-free. We've now calculated the baseline.

If you can regularly get your investment returns to surpass your day job income, you can really take things easy in retirement.

A Super Conservative Retirement Investment Scenario

For the sake of illustration, let's say the entire $1 million is dumped into a 20-year treasury bond yielding 4.5%. Now, you are growing your net worth by 4.4% risk-free each year. Not bad buying Treasury bonds after the Fed has aggressively hiked rates.

At a 4.5% growth rate, in 16 years, you will have doubled your net worth with no stress. The only stress will be seeing peers potentially grow wealthier at a faster pace.

However, if you are already happy with a $1 million and making $100,000 gross a year, then perhaps you will continue to be happy no matter how much more your peers make.

Of course, your income might decline or go away over time. But most likely your income will grow as you gain more experience. In addition, you will have built passive income streams that will supplement your active income.

Further, by the time you reach the traditional retirement age, you will at least earn some social security so that there's always some form of income coming in.

Conservative Stock And Bond Allocation Suggestions

I've written about the proper asset allocation of stocks and bonds by age. Below is a suggested stock and bond allocation by “retirement status” to consider. Retirement status could very well be the more meaningful parameter to consider since we all have different situations at different ages.

Suggested Asset Allocation Of Stocks And Bonds In Retirement

Examples Of Being OK With Conservative Returns

Here are three examples of retirees with steady incomes and conservative investment returns.

They've all decided to take less investment risk in retirement because their annual expenses are fully covered without needing to work full-time. They have paid off homes and never have to draw down principal to fund their respective retirements either.

Ideal Financial Scenario In Retirement Example #1:

A 63-year-old couple who lives in Des Moines with a paid-off house and an annual budget of $34,000.

Net worth excluding primary residence (investable assets): $500,000

Social Security income: $18,000 (3.6% of net worth)

Dividend income: $10,000 (2% of net worth)

Investment returns: $15,000 (3% appreciation)

Total available gross income + investment returns: $43,000 (8.6% of net worth or 8.6% annual net worth growth).

Although having a $500,000 – $700,000 net worth for a couple is not huge, this couple lives a comfortable life. They don't fear running out of money. Worst case, they can live off their social security and dividend income of $28,000 and tap $6,000 worth of principal during down years.

Ideal Financial Scenario In Retirement Example #2:

A 45-year-old couple with two children who lives in Honolulu. They have a paid-off house and an annual budget of $200,000. Both couples worked and saved for 20 consecutive years post-college and then retired at 43.

Net worth excluding primary residence (investable assets): $5,000,000

Passive income: $150,000 (3% of investable assets)

Part-time consulting: $50,000 (1% of investable assets)

Investment returns: $150,000 (3% appreciation)

Total available gross income + investment returns: $350,000 (7% of net worth or 7% annual net worth growth). Perhaps retiring early with a family on $5 million is pretty good after all.

Part-time consulting from home is enjoyable income that keeps both couples intellectually stimulated. They could ramp up their consulting income to over $100,000 a year without a problem. However, that would mean taking away from family and leisure time.

Ideal Financial Scenario Example #3:

A 65-year-old couple who lives in Manhattan with a paid-off condominium and an annual budget of $300,000. They have the ideal net worth retirement amount of at least $10,000,000 to live fabulously.

Investable assets (net worth excluding condominium): $10,000,000

Passive income: $250,000 (2.5% of investable assets)

Pension income: $120,000 (1.2% of investable assets)

Investment gains: $250,000 (2.5% capital appreciation)

Total available gross income/capital: $620,000 (6.2% of investable assets)

With at least $370,000 a year in passive income plus pension income, this couple has just the right amount after tax to live it up in retirement. Add on another 2.5% a year in capital appreciation ad there's likely never a need to touch principal.

As a result, these grandparents are steadily donating at least $15,000 a year to each of their four grandchildren. Further, they plan to pay for one big family vacation once herd immunity is achieved.

Net Worth Growth Targets By Age

I hope the above three examples show how easy it is to live a comfortable retirement lifestyle with very conservative investment returns. The key is having passive income and earning supplemental retirement income.

If you can't get over investing FOMO, then allocate 10% of your investable assets into the riskiest growth stocks and speculative assets. This way, you'll get your fix and avoid debilitating losses that derail your retirement.

Below is a recommended net worth growth targets by age chart to consider. I use a multiple of income instead of expenses to keep one honest.

With income, you can't lower your income to help you achieve financial freedom sooner. Further, using income helps keep you disciplined as you make more money. For some, it's easier to spend more money the more you make.

Here is a post I wrote highlight several net worth benchmarks to shoot for if you can't decide. The S&P 500 is a good one. So is a multiple of the 10-year bond yield.

Recommended net worth targets by age

Net Worth Growth Progression

When you're just starting out with nobody to care for but yourself, you should be experiencing tremendous net worth growth each year. Swing for the fences. You've got plenty of time to make up for errors or investment losses in your 20s.

Even though your earnings power grows in your 30s and 40s, your net worth growth rate will likely slow as your net worth and expenses grow. This is the sandwich age where you may be providing for children and taking care of your parents.

Hopefully, by the time you reach 50, your net worth will reach 20X your annual average income. As soon as you get to 20X income, you can start downshifting or leaving an undesirable job altogether. If you can get to 20X your annual income at an earlier age, all the better.

By the time you have your “enough money,” there's really no need to shoot for greater than a 5% annual return. If your net worth is indeed 20X your annual income or more, you should be good to go for the remainder of your life with conservative returns and passive income.

Related: Retirement Goals By Age To Live Your Best Life

If The Direction Is Correct

My favorite Chinese proverb is, “If the direction is correct, sooner or later you will get there.” You are welcome to take more risks to expedite reaching financial freedom. In fact, I encourage you to take all the risks in the world in your 20s. Before you have a family, be more bold.

I've always had a minimum net worth growth target rate of 10%. Thanks to a bull market, according to my free net worth tracking app, my net worth growth rate has been higher since I left full-time work in 2012. You may find the same happen to you if the bull market continues.

However, after not seeing any police lights flashing in my rearview mirror for so long, I'd like to keep it that way by dialing down risk. Better to be conservative and end up with too much versus being aggressive and end up with too little!

Invest In Real Estate For More Retirement Income

Build the ideal financial scenario in retirement with real estate. Real estate is my favorite way to achieving financial freedom. It is a tangible asset that is less volatile, provides utility, and generates income.

In 2016, I started diversifying into heartland real estate to take advantage of lower valuations and higher cap rates. I did so by investing $810,000 with real estate crowdfunding platforms. With interest rates down, the value of cash flow is up. Further, the pandemic has made working from home more common.

When you are retired, you want a more steady portfolio. Investing in volatile stocks is less appealing. Further, you don't want to deal as much with maintenance and tenant issues. Hence, why real estate crowdfunding and investing in public REITs is more attractive.

Take a look at my two favorite real estate crowdfunding platforms. They are free to sign up and explore.

Fundrise: A way for all investors to invest in residential and industrial private real estate for just $10 minimum. Fundrise has been around since 2012 and primarily invests in the Sunbelt region where valuations are lower and yields are higher. For most people, investing in a diversified eREIT is the easiest way to go. Fundrise is my favorite real estate platform.

CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations and higher rental yields. They also potentially have higher growth due to positive and demographic trends. If you have a lot more capital, you can build you own diversified real estate portfolio. 


Recommend Net Worth Growth Rate Targets By Age

How Does It Feel To Be Financially Independent?

Recommended Active Versus Passive Investing Split

Readers, how much is your net worth getting boosted by your savings each year? What's the point of taking so much risk if you already have enough money to be happy? Is it really wise to just stay the course forever and never spend any of your investment money? If so, what's your purpose of investing?

The Ideal Financial Scenario In Retirement: Conservative Returns, is a FS original post. Join 65,000+ others and sign up for my free newsletter here.

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78 thoughts on “The Ideal Financial Scenario In Retirement: Conservative Returns, Steady Income”

  1. We’re at about half of your #2 example. It should still work because we live in a lower cost of living location. Even $100,000/year is luxurious for us. I still invest in stocks, though. We’re too young to be very conservative. It’ll probably be 10 years before we withdraw from our retirement fund. At this point, we can take on some risks. I’d like our net worth to grow 5-10% every year for the next 10 years. Hopefully, it’ll be doubled by the time we start withdrawing.

  2. Better to be lucky than good…

    I think you are right with the luck factor for wealth accumulation. I have been diligently saving for years, and following all of the tips and tricks I have learned form FS and the comment sections. I have a pretty solid foundation and relatively high salary to get me to FI in another 20 years. Though, I always tend to kick around my ideal retirement number, so I haven’t figured out a date yet. However, all of those efforts pale in comparison to my latest adventure…my Unicorn Stock.

    I was fortunate enough to get in early on an OTC stock in 2019, and yes I know most people think OTC aren’t worth the time. However, like with all alternative investing, you just never know. So, I tossed some funds into the OTC, and the stock blew up big. I mean huge in comparison. I’m now looking at a $2M+ payday at current value, and the stock is likely to triple in the next 18 months I would guess.

    The problem I have now, is keeping a level head with profit taking. If I leave it all there, and it does triple up (or more) we are talking about retired for life money and setting up generational wealth. If I take most off the table now, then we are talking about pretty solid boost to the net worth, and stable retirement in the future. Hard to say what is the right move here. One thing is for sure, this adventure will likely add an instant $2-10M to my net worth in the next 1 to 18 months. Then again, it could all go up in flames tomorrow.

    Since history tends to rhyme (more so than repeat itself), I’m trying to take some profits off. Similar to FS on the previous unicorn where you saw great heights and then it fell to half value before you sold off. I’m in the same crossroads. I’m looking at something close to a 5,000% ROI right now. It would be foolish to watch the paper gains disappear.

    1. Would you consider taking half of your winnings off the table now, and let the other half ride?

  3. Being comfortable and secure the amount of gains you’re getting is a beautiful thing! I’ve also stopped investing in individual stocks for the same reason- too erratic.

    I would be interested in reading a post outlining what I had to do to become that couple in Honolulu!

  4. Hi Sam,
    Thank you so much for this article. Does the 20x target NW for FI include home or only investable assets? If it includes home, how much of the NW should be home to be FI?

  5. Where do you think real estate fits into a conservative asset allocation model if real estate accounts for a bigger chunk of your NW than is typical?

    For example, let’s say you’re under 40, still employed, and about 50% of your NW is in physical real estate that you self manage. The real estate is in a nice location that you know well and feel fairly confident will, at minimum, keep up with inflation, and the cash flow is strong, and your strategy is and has been for many years to reinvest the cash flow into principal paydown, even though your interest rate is now under 3%. Would you still want to hold bonds in your brokerage/retirement accounts, or would you want the other 50% of your NW invested equities to offset the real estate?

    1. Yours is exactly my question. Would love to hear from others as to how to think about factoring in real estate holdings when considering proper retirement allocations.

  6. Ric Ferri says 30/70 is the Center of Gravity in Retirement
    Many later on increase their stock holdings

  7. Ms.Conviviality

    I was at negative $31,000 net worth at the point when I started reading Financial Samurai in 2016.  Debt was from dumb purchase of a real estate course. Seeking answers on how to pay down this debt I found the article on FS DAIR about paying down debt or to invest. This article, along with so many others, set me on track to improving my net worth.

    Here’s how my savings have contributed to my net worth each year.  I don’t include paid off primary home in net worth since we plan to live in it forever.

    2016, -$31,000 (paid down debt but also purchased my very first stock)

    2017, -$2,600 (bought a used boat on credit and rented it out for 40% net returns annually)

    2018, 0% (positive net worth at this point)

    2019, 6.5% (started an Airbnb)

    2020, 39% (bought more stocks)

    2021, 302% (Most of this net worth is in investment real estate. Equities are currently 9% of net worth but I will increase to 25% which coincidentally aligns with the chart above. I will be deploying cash into equities next week since so many stocks are on sale)

    The net worth info above does not include a pension fund which will allow me to retire at age 52. I haven’t spent investment earnings because I’m trying to build up enough money to retire early.  This isn’t to say that we aren’t enjoying life now.  Prior to COVID, we allowed ourselves 4 vacations a year and the only times we ate out was with friends, which was the only frivolous spending we did.  These activities made up for other sacrifices.

    1. Ms.Conviviality

      A couple of clarifications. Two rental units were purchased in 2020 and I should have only included half the value in my net worth for 2021 since the other half belongs to my husband. My Personal Capital account includes just my earnings but I forgot that the app pulls in the full property value and I should only claim half of it. So the net worth increase for 2021 was only up 58%.

  8. I have most of my savings in index funds.

    In retirement how would you recommend withdrawing?

    Would you sell 2 or 3 % or whatever your withdrawal rate is from principal or stop reinvesting dividends and take it off that?

    Have you analysed which strategy is best?

    1. I would first try to live off dividends and not touch principal for as long as you can. Make it a challenge. Make it a game. If you can’t live off just the dividends to avoid any tax implications, then I would try earning supplemental retirement income.

      You’ll find that once you don’t HAVE to work for money, work becomes much more fun. Find something you love to do and enjoy that winning feeling.

      An example I can give you is me writing on Financial Samurai. It’s fun. It’s rewarding. And the site generates supplemental income that I reinvest back into real assets like rental properties.

  9. Dunning freaking Kruger

    I have one answer – Powerball!

    Or buy single stock and Bitcoin after a cash out refinance. What could go wrong.

    I attempted to talk a person out of the latter. Didnt work. They expect millions.

  10. You are definitely much more conservative than I am.

    I understand playing defense, but I also feel confident that investing in mostly Index Funds I am going to solidly earn average market returns. So even if the bottom drops out and I was to lose 30% of my portfolio this year, I am confident that I would gain that back in the next 3-5 years. In a ten year time horizon, it is no big deal at all.

    I still try to set it and forget. 2021 really has been the only year I have been more active and once I finish dealing with some odds and ends, I am going to try to get back to that mentality even in this early retirement. Because I do agree, that money stress is not worth it. I don’t want to be trading work stress for early retirement stress, no matter where my allocations end up.

    1. It also depends on what percentage of your net worth is in stocks to be comfortable losing 30% in stocks.

      For me, I’m at a comfortable max at 30% of my net worth in stocks. So if there is ANOTHER 30% collapse, my net worth gets hit by 9%. But of course, my other risk assets may also get hit.

      I don’t know why, but I just don’t have this hunger to make lots more money. It takes a certain personality to keep trying to make excess returns after you have all your desired living expenses covered by passive income. What drives you to take more risk if you find yourself in the same position?

  11. We should all just hire Dunny and make an “EASY” 15 -20 pct every year. People taking too much risk now with interest rates rising and valuations at all-time highs are in for a painful reality check.

  12. Makes a lot of sense! I have been gradually lowering the riskiness of my portfolio over time. Helps me sleep better at night. That’s a great proverb you included at the end. I tell my self often that every bit counts whether it’s doing a little bit at a time on something on my to do list or income thats coming in.

  13. Wonderful work here.

    Personal financial pundits, in the main, overplay the amount of wealth needed to retire.

    They seize on our fear of running-out-of-$$$. The Samurai has illustrated, without debt, you don’t need a 7 figure portfolio to retire. Remember, it is in the personal self-interest of financial advisors to keep your “wealth under management”.

    A gazillion dollar nest egg will eliminate 100% of your risk — at the expense of enjoying 100% of what life offers.

    The far bigger risk is not enjoying life to the fullest while healthy and

  14. There’s no one size fits all, but in your case, with expenses being half of income, I’d do the same and stay low risk. The pivotal factor for me would be that you have one child. In my case, I have three and with investments equaling x45 expenses my returns would be only 35% over expenses with a conservative 3% return. Of course that would have to be 3% REAL return (unless I want to erode my capital) so government bonds would not cut it. I would need 5% nominal return to get 3% real return and still that would give me just 35% over expenses. That would be enough if I only had one child, but as I said, I have three, so I’m staying aggressive in my investments acting as if my virtual age were the age of my kids. I have a holistic family approach.

    But in your case, with one child, you are set, so I too would ramp down on risk, worry, …and productivity. The marginal utility of money decreases with income — and that is why it is so difficult to keep competent people employed. Add to that progressive taxation and you see why the continued full utilization of the most competent brains in society has traditionally faced an uphill battle. In California with state tax and loss of deductions and exemptions you probably face a roughly fifty percent marginal tax on the Arnel income. For every prominent successful billionaire or centi-millionaire in the news there are dozens who never achieved prominence (and hence we’ve never heard of them) because the ramped down once they earned a handful of millions. The extra stress, work and taxes made them quit and join the unproductive side. I personally don’t think I have the capacity to be a billionaire, but I certainly gave up way before I became all that I could be, …and all that I could contribute.

    One caveat in ramping down would be if you get bored and start having the urge to compete with multimillionaires on stuff you now consider nonsensical, for example fancy houses, cars, art etc. I have not had that urge yet, but people do change, and so may you.

    One final (dark) point. If you get a serious illness, you could spend a heck of a lot of money in a desperate search for cure/treatment. Most people say they don’t. But that is like people who say their risk tolerance is high without having experienced a 10-20-50% decrease in assets.

  15. Hey Sam-

    You often hear young people should take risks and older should be more protective. While I understand the concept (when you’re young you have time to make it up…), I think you can argue the other side as well. I’m young, have saved some money, and really would hate to see any losses to it. I have so many expenses coming up in the next decade and I feel I really need to invest this money wisely. I don’t want to take excessive risk to try and hit a home run. My parents on the other hand have saved enough to retire comfortable. They take about 15% of their NW and reserve it for extremely risky investments. They can be comfortable with the 85 being more traditional/safe but feel they have room for swinging for the fences.

  16. Hi,
    What do you think of the old rule or reducing your allocation to stocks as you age? For example allocating 100-age to stocks? At the age of fifty if the stock market halfes its value you would loose 25% of your portfolio but if you have other sources of income that should not be a massive hit for your passove income.
    Ideally I am aiming for 4 different income streams with the stock-bond porfolio being less than 30% of my passive income.

  17. Great article about perspective once you achieve your goals. The typical finance books always talk about the need, willingness and ability to take risk. You clearly have the ability to take risk in your investments but really don’t have the need anymore. As i have followed your blog, it seems like you have less and less willingness to take risk, which makes total sense.

    Logically you should take more risk, since you are still not old and have time to recover and historically over long periods, you should come out ahead. We both have (hopefully) over 40 year time horizons so should be rewarded for risk. For me at 27, a 5% decline in net worth is only ~13k which i can earn back a ~month, so i don’t care and take more risk. For you at 40 and a large net worth a 5% decline in net worth is a loss several hundred thousand dollars. Psychologically, a 5% decline for you is very different than for me.

    We grow our net worth in percentage terms but feel losses in absolute terms. There is nothing wrong with de-risking once you are financially free and secure.

    Sam – this internet stranger endorses you taking as little risk as you want. You have made it, kick back and enjoy the fruits of your labours with zero stress.

    PS – your last few articles have been excellent, thank you!


    1. “We grow our net worth in percentage terms but feel losses in absolute terms. ” – this is absolutely correct.

      And still, a doubling of net worth in nine years based on an 8% growth rate With savings plus investment returns is still really nice.

      Good luck on your much faster journey!

  18. I’m feeling really dumb here Sam. I don’t understand your calculation of annual growth rate. It seems to me that you have to reduce the total available (which is your numerator) by the annual budget. E.G, in example 3, the couple will generate $770,000 but spend $350,000 of it. leaving $420,000 in growth to the portfolio, which represents 4.2% growth. (not that 4.2% growth is bad). What am I missing in your thought process?

    1. Recovering Engineer

      His final isn’t the growth rate, it’s the total available income for the year. So his point is that if they are earning $770,000 in returns on capital and only need $350,000 to maintain their lifestyle they are already earning more than 2x what they need and therefore they can de-risk their portfolio.

      However I think his numbers don’t match up with his theme. If they earn 2.5% dividend yield + 4% capital appreciation that is a 6.5% total return. To generate that type of return they must still be at least 60% weighted to stocks. That would seem like an aggressive equity allocation if the idea is to be a low-risk/low-return portfolio to sustain your retirement.

      1. Check out this post. A 6.5% total return, including dividends, would be a 20% stock / 80% bond portfolio average between 1926 – 2016 based on history.

        Where are you getting the need to have at least 60% weighting in stocks? Bonds have performed very well over the past three decades at least.

          1. Recovering Engineer

            It is much more of an observation than a forecast. Interest rates have come down from over 18% in the 80’s to 0% before recently being increased. You simply cannot have an 1,800 bps decline in interest rates over the next 30 years.

            I’m still in my early 30’s and expect to work another 15 years so I can afford to be relatively aggressive. I’m maybe a little ahead of the schedule proposed in the chart at the end of your post. So I still need savings and market gains to hit the 20x-25x range. I recently levered up quite significantly to buy a house because in 15 years I’m sure my son will say, you could borrow at 3.75% for 30 years why didn’t you borrow every dollar you could? But I’m getting more conservative on my equity exposure. I’m selling stocks that have appreciated and leaving the proceeds in cash. My only additions to the market have been my on-going 401k contributions+match, no after-tax savings.

            1. Sounds good to me. It’s great that you have the energy to work 15 more years. I started to burn out in my early 30s and I have no intention to go back to work to try to recover any losses anymore in my 40s.

              Good luck with the house purchase! Was it a competitive situation? What city is it in?

    2. My thought process is that the growth is your growth. You can consume it all, or you can decrease your expenses, or you can consume it all and use up principal as well.

      Since we all have different expense profiles, I’ve left the reader to decide how they want to spend their proceeds.

      1. It’s kind of no-win for you Sam. If you leave something subjective we complain that it’s not exact enough, and if you lay it out precisely we complain that it doesn’t fit each of our precise life profiles!!!

        Great post though. It’s really easy to forget that most of us started the FI journey with the goal of stepping off the treadmill once we reached our goal. The hard part is recognizing when you get there, and then shifting gears. This transition is particularly hard for people with the drive to achieve FI in the first place. That’s the Catch 22.

  19. Earning money is a form of security for a lot of us. Also, keep in mind that we are on our way into a more uncertain future than ever before in all of history. How much is comfortable now as opposed to later? There is always the possibility of major medical problems, if nothing else. But there will probably be other things, too.

    For one example, suppose you hit your 70s (should be in the 2040s for you?) and some of these science whizzes are right, and by then medical science really can add fifty (or more) healthy and active years to you and your wife’s lives? It’s a good bet insurance won’t cover it.

    1. I am sure throughout history people have thought that they were entering uncharted times and the past was not good at predicting the future. They were wrong as you are now. Despite daily noise, world keeps turning and opportunities continue to arise.

      1. You could also be wrong in the opposite direction. This could be a fantastic time to be more optimistic than ever with a world growth rate of four percent (first time ever in human history, or life’s entire history for that matter) lifting average worldwide income to 350k/year PLUS all the other fantastical advancements which we cannot even imagine and cannot have at any price right now.

      2. I’m well aware of the Billy Joel song about how we didn’t start the fire. However, with capital-based earned income taking a larger and large slice of the earned income pie (which comes at the expense of the wage-based earnings percentage of that same pie), the future is going to look a lot different from what has gone before. Trying to increase our own capital-based earnings is why we are all reading financial blogs, is it not? And yes, AI and robots are going to accelerate the rise of capital-based earnings over wage-based earnings and it is not clear where that ratio will stabilize, if it does. Asteroid mining and other similar things are likely going to create the world’s first trillionaires. I am not sure even the Pharaohs ever realized anything like that level of income inequality, even between themselves and their slaves and that is a change never seen before. Additionally, longer and longer lifespans are pretty much a given, and what that does to investment, insurance, and wealth accumulation, is difficult to imagine except that, whatever it is, it has never happened before. We are already seeing many huge established firms disappearing overnight and new ones, unheard of only a few years ago, rising to take their places. By all accounts, this is almost certain to continue and accelerate in frequency over the next decade or two. On the other hand, I said “uncertain future” which does not mean that it will necessarily be a bad future. On the contrary it almost certainly will offer us unimaginable opportunities . . . if we don’t get too comfortable and complacent with our ultra-safe investments and so are unable to afford them.

        1. Well said Snazter.

          I too believe that world growth rate will accelerate even beyond the never seen before in human history current level of four percent. And if a mere four percent gets us to a worldwide average per capita income of 350k/year by the end of the century, immagine what an accelerating growth rate will do. Human progress has not only been exponential, but the exponent itself is growing.

          I think that this more than anything else will impact our future lives, and will also have the biggest impact on our finances. Save short term (but sometimes significant) setbacks this growth rate will inevitably feed into financial returns.

          However, such growth rates do not come by merely accumulating more money in the financial institutions. The high growth rates encapsulate future technological advancements that are truly beyond our imagination. The more growth accelerates the harder it becomes to imagine what life will be like in the future, and the shorter our prediction horizon. Most likely our descendants will ridicule our current preoccupations. They will say “Those poor chaps only had an average per capita income of 55k, lived only 80 years on average, and were all fretting about the world warming up. Hahaha, they wasted their short poor lives on miserable preoccupations”.

      1. Well, comfortable as it would be to have it all in rock solid, low risk investments, that I would only need to check once a quarter, or even annually, I would be uncomfortable leaving money on the table, so to speak, that I might desperately need later. But as we all know, better returns involve accepting more risk. The only way to allay (not eliminate) that risk is to keep one hand on the tiller so to speak, and watch the market, the trends, and do a little research on an almost daily basis. Which also should have the effect of making us a little more comfortable with the risk. Sure it’s more work and less comfort in one way, but earning better returns is a comfort, too.

  20. This is great. No other blogger covers stuff like this.

    Trying to wrap my head around annual net worth growth. That would be a big slug of most people’s budgets. Do you use historical projections for that since yearly returns are so volatile?

  21. Sam- question- how do you allocate for private equity investments using personal capital? I use the tool and find it fantastic but can’t decide to enter my committee or funded amount. Ie lets say I have a $100k commitment to a PE fund and only 15K has been called. I have been tracking this as 100k of PE investments with a liability added for 85k. Or would you suggest just putting in the 15k? I like the liability added because then it lets me see my true net cash number. I also realize this will ultimately self correct in 5 years or so when I reach my target PE level. Appreciate your thoughts.

    1. Chris W

      Good morning

      I do not blame you for wanting to get distance from my outlandish postings.

      My sincere apologies for not knowing the rules of the game, I should have out of respect for current readers come up with a different or more detailed moniker for my postings.


      (God blessed me with these initials, although I cannot use them, because I am not a true recipient of this most honored award bestowed upon our greatest warriors!)

      So I just had to go with:


  22. J Wynn & Co

    I’m sorry, but I just can’t get your early math to work out. Can you help me out?

    “For the sake of illustration, if I dump my entire net worth into a 10-year treasury bond yielding 1.5%, I’m now growing my net worth by 6.5% each year.”

    How is this possible? If your net worth is yielding 1.5%, how can it grow at 6.5%? I’m new here, so forgive me if this is just too simple and I’m missing it. Thanks.

  23. You have nailed the dilemna we all have and I like your breakdown and analysis of the numbers. I am almost 70 and still worry about having enough for the next 30 years. What goes through my mind all the time:
    – there has been enormous change in the last 30-40 years in the financial and all other aspects of life of my life, so project that forward and the amount of capital and income just to stay in place is enormous
    – continually growing wants and needs in travel, technology, activities, food, services, and determination to enjoy life
    – so much net worth tied up in a house, but also huge potential appreciation, so best to keep it for now. Too early to downsize to a cheaper area, and the house produces rental income (2 units)
    – I agree at a certain net worth which is growing, why not be satisfied with a lower return and less stress. Certainty of income is worth a lower return, which is why I opted for a defined benefit pension many years ago.
    – for me however, continuing to work (e.g. consulting, lifestyle blog) is more stressful than the few minutes a day I spend on my portfolio to get 15-20%, which I do not find too stressful or time-consuming
    – what will happen to a lifestyle blog or any other kind of income in the next decades. You have to assume it will end or change drastically or you will not want to do it any more
    – taxes are low now but when I start withdrawing from tax sheltered investments, taxes could go as high as 50%.
    – I have perhaps the equivalent of a bond portfolio earning 3% in my pensions, which if valued at 3% are worth $1-1.5 M
    – I need a safety margin big enough so I never have to shrink my lifestyle and do not spend my very old age worrying whether I will run out of money and if necessary whether I can afford private housekeeping and nursing services.

      1. The portfolio changes over time. Mostly growth/momentum stocks these days. Value and dividend plays have not been generating much in returns for quite a few years now. I learned my lesson with REITs. If you really want to have a private discussion on specifics, email me. Glad to share.

  24. R u really pulling in your horns right now because u have reached your “Zen plateau” of Having Enough…..Or r u just subconsciously realizing that ALL risk assets are extremely highly valued at the moment? (and don’t want to be accused of being a market timer – in case your timing isn’t perfect)

    Just read a CNBC survey this morning that said a record number of people believe its a good time to be invested in stocks right now. The same survey conducted in 2009 said a plurality of people felt at that moment it was terrible time to be invested in stocks.

    Crazy how the cycle just keeps repeating, again and again and again and again……

    Nice job figuring out a reason to not participate in the next inevitable crash.

    1. Subconsciously I think that I think that I can earn 3% in overpriced treasuries; vs 1.8% dividend in overpriced S&P index.

      On balance seems like a really good time to declare I’ve reached my Enough-Number and watch the paint dry until better opportunities come along.

    2. “…Just read a CNBC survey this morning that said a record number of people believe its a good time to be invested in stocks right now. The same survey conducted in 2009 said a plurality of people felt at that moment it was terrible time to be invested in stocks.”

      What’s that Buffett said, “…be fearful when others are greedy and greedy when others are fearful.”
      When all the suckers at buying into the market, it’s time to get out.

  25. Damn Millennial

    Great explanation FS.

    I think this makes a lot of sense. As another reference point for readers I am on the opposite spectrum. Where I am also able to save 50% but if am increasing net worth at 25-40% a year still.

    This gives me the confidence to go for it. I am striving to get to your position. At which time I would lower the risk even before I got there.

    My goal is optional work at 40. 30s might go part time. If I did either of these my investments would reflect the changes in life.

  26. A Millionaire Next Door

    Mark Cuban has an interesting take when it comes to having large sums of money – just put it in the bank. Based on his track record of being an aggressive entrepreneur, this is somewhat surprising. He says if you come into a very large sum of money, just put all of it in the bank. If it’s more than you can spend, why introduce any risk? If you watch “Broke”, the 30 for 30 special on athletes who lose it all, Bernie Kosar says nearly the same thing that he wishes he’d just put all his money in the bank. Being an investor myself, I am not indicating such action but once you reach a certain level of net worth and FI, it’s a tempting action to just bank it and remove all risk.

    1. Financial Gains

      Putting it all in the bank as in -> checkings and savings? And then just live off principal without any interest/income coming in?

      Sounds super dangerous. Unless you literally have like tens of millions $’s coming in. Even then, your lifestyle expenses might hike as you enjoy the high life.

      The best way to go is put $2m-$3m in a stock equity index (vanguard ETF) and high quality dividend funds. Never touch this principal (rather dollar cost average).

      You’ll have quarterly returns (dividend + stock price) that should fund all your living costs.

    2. Hopefully that money is at least spread around since there is only a $250,000 and $500,000 FDIC guarantee.

      But I’ve always wondered about this sub optimal solution as well for all these athletes who go bankrupt. If they just kept it in a savings account, they would have done amazing because they wouldn’t have opened themselves up to so much risk.

      At least today, you can earn about 0.4% in an online savings account. Better than losing money.


      1. Kurt Huffman

        FDIC insurance is essentially unlimited if you use a bank that will broker out your deposits to other financial institutions under a fairly common depository brokerage agreement. Your bank is still your connection to your money but, with your permission, they offload chunks to other banks who bid for deposits up to the FDIC limit.

      2. Not just pro athletes. I think there’s some study (maybe you wrote about it at one point?) that shows most investors greatly underperform the market (even when they are trying to outperform by picking stocks). I think the average return is only 2-3% generally due to people following their emotions and buying at the top, selling at the bottom. So, it’s possible most people wouldn’t be worse off if they just stuck it in a savings account. My wife is like that. She inherited about $200k a few years ago and refuses to invest it cause she can’t bear the thought of losing any of it. So it sits in a savings account. Drives me nuts but so be it.

  27. I’ve noticed that in this, and other articles, you seem to ignore inflation when you talk about growth rates, withdrawal rates, etc. Earning a steady 5% in real terms likely requires a portfolio capable of returning 7-8% nominally – which necessitates an equity heavy portfolio -which leads to increased sequence of returns risk. I’m sure i’ve missed something – can you clarify?

      1. Always interesting to read your post and the subsequent comments. Great learning place to test ideas.

        I agree that not planning for inflation in conservative investment is very risky. Unlike equities that are above inflation returns, bonds are below or at inflation as long as inflation does not go up. In an increasing inflationary environment, bonds don’t work. In the 70’s and 80’s the worst possible investment would be bonds. Further a high level of bonds in retirement is not accounting that portfolios need to last. You or your spouse is likely to live past 90 years old. That is 50 years from now Sam. A “risk free” or low risk government bond is like getting your principal back if one assume the return matches the inflation. Therefore one would have to make sure you could live off a 2% principal withdrawal on your bond for 50 years. At that rate the 2% rate is close to the S&P that pays 1.8% and grows by inflation unlike the bond. Plus as potential upside gain over the long run. Since you are not interested in eating into your principal I still maintain to live of the 1.8% and sell out of the money calls to capture the extra 0.2% needed to match the 2% bond draw you need for a safe 50 year retirement. Finally you are not addressing the fact that social security is a de-facto bond that should be included in the bond to equity ratios. Most retires and financial advisors make that mistake.

        So To summarize I would say that if someones ratio is more 2%, bonds are not appropriate. If the ratio is below 2% then it is very safe. That is why HINW ($30m+ net worth) can afford bonds as long as they can live off $500k or less. Anyone else should stay away.

        In your $5M SF example, that person would have to live off $100k or less. For a $300k lifestyle, the minimum safe rate would be $15M.

  28. Simple Money Man

    It’s all about quality of life. And Quality and Stress move in opposite directions. I’m at the risk-taking stage right now. In order to avoid a stressful situation, I avoid constantly looking at the market. I also try to be diversified as much as possible. For me the point of taking risk is, at the end of the day, to be in a stronger financial position than someone that didn’t; i.e., the ability to have more options in life.

  29. Lily | The Frugal Gene

    Really good point, what’s the point of taking on more stress when you have enough of everything you need? I think that’s why frugality is fun but most don’t see it – I get to have everything I need in my mind and that’s all that matters. It would be hard for us to spend 50% of our income too. Where is it going to go? I can’t eat *that* much :)

    I’m not sure what our annual nw growth is but if retirement is early in the plans we still have to be careful.

  30. MrFireby2023

    Another great post Sam and I love the subject matter as I am risk-averse like you.
    All of the examples you provided are sound. Where I am struggling with however, is a net worth of 20x annual expenses really enough? I don’t think so due to one problem: the costs of healthcare for early retirees.
    My net worth is just a tad under 20x my expenses and I have every reason to believe I’ll be above that figure when’s i retire in 4 years (@ age 55). I’ll have 10 years before I’m eligible for Medicare and will the current healthcare situation, I’m scared to death!
    To me, the upward trajectory of ris By health insurance costs really exceed and are far more worrisome than raising cash for fear of a bear market is stocks. Even wealth created by a Bull market can be eaten away when you’re retired at an early age and have to pay for family coverage. Sam, what are you doing about insuring your family’s healthcare needs? That’s an interesting subject of a future article for you.
    I’ve recently written two back-to-back articles on my blog, on this subject. Bottom line, there’s no remedy. We’re screwed and we’re all in this thing together.

      1. Unfortunately, the cost of insurance is unpredictable and therefore very difficult to plan for. My insurance costs have been increasing 30% a year. If you were truly to plan for it, you’d need to significantly up your target retirement net worth, and even then it would only cover the cost for the first year. Guaranteed your portfolio is not going to grow at 30% a year!

  31. Ten Factorial Rocks

    Fantastic post, Sam. Without using terms like “risk tolerance” versus “risk affordability” you clearly laid out the principles behind those two misunderstood terms in personal finance. I applied the same logic when I realized that my investment assets cover over 45X our expenses. So, from a 100% equity allocation, I brought it down early this year in one fell swoop to 60% with short term bonds and cash for the rest. Another driver was the scary CAPE ratios in the market – as you rightly said, when you don’t need the extra return, why take the extra risk? Besides, there will be a time when I may want to dial equites back up to 90-100%. Until then, wait patiently is what I tell myself! Does this make sense to you?

    1. Makes sense to me. But the most important thing is, if it makes sense to you and your financial needs, that’s what’s most important.

      I want people to start thinking about investment purpose and risk more in this stage of the cycle. What’s the point of investing?

  32. Great post Sam as always.

    As Bernstein said, if you already won the game stop playing.

    I think de-risking your life will make the journey in retirement much smoother. My goal is to build a large passive income stream from multiple sources that provides a great floor of yearly income so that whatever happens I will be able to have a decent amount to spend.

    If you are always looking not to leave money on the table you will subject yourself to more volatility which someone in their 70s may not be able to endure (especially if your ticker is already on the fritz).

  33. Re:Stress-free Wealth Creation Feels Great

    You suggest:
    Action item: I’d like everyone to calculate their annual gross income, net income, and absolute savings amount and divide them by your current net worth. You now have a good idea of your minimal annual net worth growth rate assuming a 0% investment return.


    My percentages are roughly 6%, 5%, and 1.6% respectively. In other words, I’ve got a 12% effective tax rate, save half my gross income, [save 70% of my net income;omitted net income because one can’t count savings from both gross and net. It is the same money.] and am able to grow my net worth by about 3% each year from savings alone.

    However, I believe it is wrong to believe my 3% or your 5% from savings can be added to 10-year T-bond rate of 1.5% in order to concluded I am growing my net worth by 4.5%.

    Maybe this shows the danger of using percentages as examples instead of spreadsheet or other type of illustration. But I won’t elaborate why. I just believe this to be true just because.

  34. Accidental FIRE

    Great analysis, I like the numbers. Once I reached FI – especially in this bull market – I’m finding that I have to be deliberate about not letting my stock allocation get out of hand. But like you I’m not too concerned about lower returns. Actually those Treasury Bonds are starting to look attractive, if for nothing more than to give me piece of mind.

  35. Are you sure you haven’t found your enough? You retired years ago because you had enough no? Or are you saying because your wife has been working since you retired and needs to continue working for several more years that you guys haven’t reached truly enough yet?

    1. Enough is a tricky question. We have enough if we take some risk in the stock market. It is built into the equation. It’s not enough to take much less risk and draw down for 50 years at this point. We’ll keep investing for now. The timeline is too long.

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