Free Ebook.

Enter your email address:

Delivered by FeedBurner

« Final Advice from a Dying Investor | Main | Buyer Beware—Are You Really Getting a Good Deal? »

January 06, 2011


Feed You can follow this conversation by subscribing to the comment feed for this post.

If it were 10 years ago when CD rates were higher, you'd be confident that at 1.5 M you'd reached the crossover point--but you'd be wrong.

Even CDs, which are "safe" investments, aren't safe long-term because you can't guarantee their rates long-term (ie beyond about 10 years).

And by crossover point I assume you mean a time when you can just stop thinking about ever having to produce income now or ever again? Because if you stop working and let your skills and contacts die, good luck starting up in 10 years when you may need to.

I think the answer to your question is then, that you will never reach the crossover point--unless perhaps you've gotten old enough where you feel pretty sure you won't be around in 10 years. Or unless you have around 10 or 20 million--ie enough of a cushion where if you get even 1/10 of the interest you can get today you're still OK.

Otherwise, you can't ever "bow out" and forget about ever producing an income again.

I think this concept was covered (and maybe introduced) in "Your Money or Your Life". The lack of a decent, safe return is discouraging as we near our hoped retirement ages.

If anyone knows any place where I can earn 5% or more reliably on my money with little to no risk (equivalent to a CD-level of risk), I'm outta here!!!

I absolutely believe that you can do this, FMF.

I'm sure you know that stocks earn an average long-term return of 6.5 percent real. If you just count on the average return, you would be set. So the only rub is being able to count on the 6.5 percent real return.

There is of course no way to actually get 6.5 percent each and every year. But does that matter? If you take out 6.5 percent one year in which you earn 1 percent and then take out 6.5 percent another year in which you earn 12 percent, it's the same thing, isn't it? You obviously have a big enough stash that you can "lend" yourself the money to cover the year where the return comes in low and pay it back to yourself when the return comes in high. Now the only thing you need to be concerned about is whether the average return of 6.5 percent real kicks in soon enough or not.

With Buy-and-Hold, it does not. If you buy at high prices, it can take 30 years or longer to achieve that 6.5 percent average. But if you follow a valuation-informed strategy, you can be sure of having that 6.5 percent average return kick in within about 10 years. That's soon enough for most plans (especially since you actually need only a return of 5 percent). The key is that you need to lower your stock allocation at times when the return is likely to be super-low (these are the times of high valuations, like today).

It is not my intent to be a pest in pushing this. I developed this approach because I was going through the exercise you are going through here, trying to achieve a crossover point. If you are not interested, I understand (perhaps someone else will gain something from reading these words). If you have any interest at all in exploring the idea, either for your own potential benefit or for the potential benefit of your readers, please just let me know and I will do whatever I can to address any concerns. There have been lots of tests run on this and the concept has passed every test with flying colors. It's hard not to let someone know of this wonderful option when he is bringing up the precise problem that it solves.

Anyway, I do wish you the best of luck in reaching your crossover point quickly regardless of which approach you elect to use getting there. You'll find what's right for you and it will work out.


The crossover point sounds like a wonderful thing, off in the distance where the sun shines through the trees and birds are singing.

Back in my reality though, it is snowing and I spend a heck of a lot more than 60k a year with 3 teenagers in the house.

You are very right that low interest rates are killer on the savings plan. I don't know that I would recommend living off 50k instead though, unless you had to. Money is great and all, but you gotta live some too.

You need to add the expected inflation rate to each of the interest rates in your table, and reinvest that part of the return in the principal. Otherwise, your purchasing power drops by the inflation rate each year of retirement.

Out of curiosity, does that $60k figure include paying income taxes, and purchasing health insurance without employer subsidy? If so, it's impressively frugal for a family of four.

08graduate --

The $60k was actually an estimation. I'm working on a new post to review my finances from last year. We actually spent LESS than that if you don't count taxes.

I first heard of the crossover point while reading Your Money or Your Life. Mine is actually very low ($300,000 @ 3%) because my potential minimum expenses are about $750 per month. Of course, I spend a lot more than that now, but once our house is paid off that will be doable. (Our goal is to pay off the house this year.) I still plan to continue as a doer-of-miscellaneous things while retired, but it's nice to know how low that point can be.

Jackie, you are saying you can live on $750 a month for the rest of your life? I doubt that includes inflation, increased taxes, etc.

I need to know how you can live on that low of an amount and where you live, rents and property taxes would eat up majority of that for me and I don't even live in a ritzy area.


I started to think about what you wrote and I realized that you cannot live comfortably off of $750 a month even with your house paid off. What happens when your car breaks down and you need a new one or need yours fixed, you get old and need healthcare or you need to fix a major issue that comes up with your house that costs $5,000?

$9,000 a year is not much so I would love to see how you could live off of that, I assume you are not living off the grid since your online so how will you be able to do that?

As someone else pointed out this doesn't take into account inflation. And the other thing I wonder about is why would it be important to leave the inital investment money when you die. I mean... why not include the original investment money as part of the 60K also. To me a more realistic senario would be -Earning 4% on investments during retirement. Inflation @3.5% For 60k a year you would need slightly less then 2 million to last 35 years. And that would be with giving yourself a 3.5% raise each year. Even if you were earning only 2% you would only need 2.7 million... But that would also give you a 3.5% raise each year. In 35 years you would be getting 193k to spend that year.

"can earn 5% or more reliably on my money with little to no risk (equivalent to a CD-level of risk"
Look at individual investment grade municipal bonds held to maturity. Sure, there is a little risk, but with carefully selected AAA bonds it's not that much. The interest maybe lower today than 5%, but it's tax free, so you may get closer to what you look for in tax-equivalent yield.

Also, why don't you consider drawing a little of principal starting from a specific age? You want to live all your money to your kids? Your principal is no use to you personally after you are gone.

Instead of focusing on investment return. You should focus on a safe withdrawal rate of 4%. This means that if you withdraw 4% of your capital each year your money should last for 30 years with a 95% confidence. You could get 4.7% right now buy purchasing a 30-year US Treasury Bond (pretty safe).

The ideal retirement solution should be a Bucket approach in which you have three money buckets. A safe bucket (5-year horizon), an intermediate term bucket (10-year), and a long term bucket (>10 years). With this approach you could implement a safe 4% withdrawal rate with an initial principal of $1.5M and reach your $60K/year adjusted for inflation.

I have been a conservative investor since the end of 2007 when I decided that our portfolio was large enough that I no longer needed to invest in equities.
In 2010 the return on our portfolio was 5.05%. That doesn't sound like a lot but it amounted to 3.4 times our gross joint income in 1992 when we both retired at ages 58 and 59. We also started collecting SS at age 62 and also both have company pensions so are in an excellent financial position and saving more than at any time in our lives, because we live far below our income.
Our portfolio is invested in a combination of CDs, Municipal Bonds, and 5 Select Income managed mutual funds so that the majority of the income is either tax exempt or tax deferred. Since we will be holding the CDs and Municipal Bonds to maturity we value them at what we will receive when they mature not at the appreciated values shown on our brokerage statements. Thus the only part of our portfolio that fluctuates daily is the 1/3 which is spread between the 5 select income managed mutual funds.

Unfortunately it is no longer possible to duplicate the CDs and Municipal Bonds that we own because they were purchased in October 2008 when I was able to buy 7 year CDs yielding as high as 5.15%, tax deferred, and 10+ year Municipal Bonds with yields to maturity as high as 5.5%, tax exempt. Since then yields have dropped way down and there is no way that I could put together such a very low volatility portfolio that would generate 5.05%. Several of our high yielding CDs were in banks that were taken over by the FDIC. We received full payment including accrued interest but since interest rates had dropped so much I replaced those CDs with the 5 select income mutual funds.

One other thing I have learned is that there are many types of income funds - don't just think US Treasury bonds, corporate bonds, or government backed mortgage securities, and this is where smart and highly experienced mutual fund managers come in, they have the expertise that I don't possess that is needed to purchase various types of fixed income securities. The other advantage of such funds is that they already own investments that were purchased years ago at attractive rates that are no longer available. None of these funds merely use derivatives to mimic the behavior of a market index, they own the investments they hold in their portfolios, whereas index funds generally do not.

"If anyone knows any place where I can earn 5% or more reliably on my money with little to no risk (equivalent to a CD-level of risk), I'm outta here!!! Otherwise, I have a few years to go to reach the crossover point. ;-)"

While not "earnings" you can have some of your monies, (I prefer the tax deferred $$ like IRA's, etc., since they are ordinary income anyway) in a VARIABLE ANNUITY and have LIFETIME GUARANTEED INCOME at the rate of up to (depending on contract, age, etc) of 6-7% of principal. Even if the markets "implode" and the contract value somehow drops very far, or even to ZERO, that same INCOME in guaranteed! Retiring at 47, I placed about 25%~ of my liquid net worth (about $700K~)into such a VA and will NEVER get less than $4K~ a month forever and can earn INCREASING monthly income FOREVER with lock-in's depending on contract. Those w/o a guaranteed pension should re-look the world of VA's!! As a Financial planner of 16~ years I did myself what I sold to clients and can sleep forever!! Look to diversification of part of yor portfolio (up to 50%~ max though) with an A+ rated , long lived insurance company. When added to investment withdrawls (carying by markets), cash buckets being depleted over time, Social Security (maybe?), a traditional annuity and perhaps real estate income and a pension, a LIVING GUARANTEE VARIABLE ANNUITY CAN BE THE ANSWER!!

I first heard of the "crossover point" about 5-6 years ago. The radio personality who mentioned it called it "critical mass". To this day my dad and I refer to each others investments as a percent of critical mass.

I really like the chart that shows the value of a portfolio that Fidelity had here:

We can live like we do now on $35,000-$40,000 a year. Our net worth is only around $150,000, so we have a while before we are ready, lol. But we expected that since we're only 27 and 28...we have at least 25 more years before hubby gets his full pension from the public school system - we'll be at our crossover point by then...

Why not calculate your crossover point to your bes ability and then work one moore year while adding all you can to your investments? Then when you stop working, you have an extra year of income as your "cushion" for the unexpected things that we all know will come up.

The comments to this entry are closed.

Start a Blog


  • Any information shared on Free Money Finance does not constitute financial advice. The Website is intended to provide general information only and does not attempt to give you advice that relates to your specific circumstances. You are advised to discuss your specific requirements with an independent financial adviser. Per FTC guidelines, this website may be compensated by companies mentioned through advertising, affiliate programs or otherwise. All posts are © 2005-2012, Free Money Finance.