When your investment returns start to outshine your day job earnings, it really opens your eyes to new possibilities. Initially, you might not rush to quit your job because, hey, it could just be a lucky streak. But after a few years of consistent financial gains from investments, the confidence kicks in. Maybe you start thinking about asking for that raise without worrying about losing your bonus, or even venturing into a new career because why not?
The real magic lies in the compound annual returns, underscoring why it’s smart to save and invest diligently. Take a car you bought a decade ago for $40,000—it could have turned into $150,000 if invested in the S&P 500. Makes you think twice about splurging, right?
Differentiating between investment returns and investment income is crucial. I’ve been navigating the financial world since 1999, aiming to cover my living costs through investment income. After long days in high-pressure roles, I realized this pace wasn’t sustainable. When I stepped back in 2012, I was making about $80,000 a year through investments. The 2008 recession was still fresh, so I was cautious about relying solely on investment returns, especially since a good chunk of my portfolio was in non-dividend stocks.
Fast forward, and the approach of living off my investment principal is becoming tempting. The markets have been on a 12-year bull run, making significant gains seem harder to come by. Vanguard predicts modest growth ahead. So, if you’ve done well, why not enjoy the fruits of your investments? Whether it’s traveling, buying experiences, or even splurging on that dream car—these are the perks of smart investing.
Consider a scenario where you’ve been wisely withdrawing a minimal percentage from a $3 million portfolio, living comfortably at $45,000 a year. Now, with your investments ballooning to $5 million thanks to stellar annual returns, even a modest withdrawal rate would significantly boost your income, letting you live even more comfortably without fearing running out of money soon.
The temptation to fully enjoy life without working hits when the returns from your investments begin covering all your needs and more, leaving you questioning the point of a regular job. The decision to work becomes about passion rather than necessity.
What I’ve learned is that once your investment income can sustain your lifestyle, and your principal continues to grow, you reach a financial crossroad. It’s less about if you can retire, but when and how you choose to live once you do.
