Not exactly. Typical retirement planning is a zero-sum game. It plans to essentially run out of money at death. The crossover point means that one can retire and live forever, assuming same investment return, without working.

[...] we reached our crossover point (the average annual return from our investment portfolio exceeded our annual expenses, plus [...]

[...] An Introduction to the Crossover Point, Get Rich Slowly [...]

[...] An Introduction to the Crossover Point, Get Rich Slowly [...]

[...] Money or Your Life: Step Nine Revisited Last Friday, I mentioned the Crossover Point, that point in time at which your investment income exceeds your monthly expenses. I learned about [...]

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[...] An Introduction to the Crossover Point – J.D. over at Get Rich Slowly presents the classic crossover point. I’m quite familiar with this since it was one of the presentations I used to give in order to scare encourage people to become clients with one of the sleazy financial (I use that term lightly) firms I used to work for. Bonus points if you can guess what firm that is. [...]

[...] The Simple Dollar wrote a good article describing the basic concept of the crossover point and Get Rich Slowly followed it up with another great guide. [...]

[...] Get Rich Slowly provides an Introduction to the Crossover Point [...]

Good points. I do like that form of the equation better…
savings * (rate of return – inflation rate) = gross income

You can look at it several ways… perhaps at your “crossover point”, you don’t quit your job, but rather take a lower-paying, more fulfilling job, your change in gross income would be smaller, and your savings requirement smaller. Also, as @brad pointed out, you’d want to move your investments into safer, lower return choices, which also affects your savings requirement.

Another version of the equation that takes both into consideration, including a notion of your “personal” inflation rate, which may be lower than 5% would be:

savings * (safe rate of return – personal inflation rate) = change in gross income.

So you can see that if you wanted to go from a job that payed $75k to one that paid $30k, including benefits, etc, you plan to invest your money conservatively at 5% from now on, and your personal expected inflation rate is 2%, you would need to have $1.5M in savings.

Interesting discussion…

[...] at Get Rich Slowly has a very good introduction to the “crossover point” as found in Your Money or Your Life. My guess is that this is the goal we’d all like [...]

Brilliant follow-on to a great post.

sdub, I’d like to do some algebra on the left-hand side of your equation, nothing heavy, here we go:

Original

investment income – inflation rate * savings

Make Substitution

savings * rate of return – inflation rate * savings

Combine like terms:

savings * (rate of return – inflation rate)

Now we can see how ‘sensitive’ this expression is to small changes in the inflation rate. For example, a small increase in the inflation rate may require tens of thousands of extra dollars saved to maintian the same purchasing power from the passive income stream.

Enter Brad’s comments, and this as a follow-on: We often use the blanket average of 4% for the inflation rate quantity, but what is the inflation rate really? And can we limit our exposure to it? Some say yes. The inflation rate is based on the Consumer Price Index. I believe it is a summary statistic published by our government, but if this is not the case, someone will post a correction. Regardless of it’s origins, you and I are unlikely to experience a degradation in purchasing power at exactly the same, and for that matter, the published rate. Why? Because goods and services aren’t affected by inflation in lock-step with respect to one another and we don’t all consume the same blend of goods and services. If we pick our consumables such that we maximize their utility per unit of money, then the effect of inflation is minimized. (This is a long winded way to repeat the, ‘be frugal’ message.) In any case, the numbers geek can easily estimate the degradation of the dollar’s value that they personally experience. It won’t even require a complete accounting of purchases. A decent estimate can be hammered out fairly quickly. This may be preferable to using 4% as a rule, especially since the savings goal is so dramatically affected by small changes in the inflation rate.

We can’t eliminate our exposure. Also, the inflation rate varies outside of our control, to be sure. Still, if we study inflation and it’s true effects on our lifestyles as individuals, we have much better data against which to plan our independence.

For more on inflation including historical data, see http://www.inflationdata.com

But agree with Elissa- the closer that goal gets, the less I can imagine not working. (even though I’m not “doing what I love”, I love what I’m doing). I’d hoped to transfer to the voluntary sector but my experience is that they don’t know what to do with skilled (professional middle management) volunteers- is there any resources out there for people like us?

I think I’m one of the very few who isn’t looking forward to retirement. I work in an industry that I absolutely love and one that is constantly growing and changing, you never get the same thing twice. Not working just doesn’t appeal to me so long as I can continue to do what I do.
Although according to Ryan’s calculator, I should reach my crossover point by the time I’m 55. Not too bad.

i’ve watched our investment income (it recently finally got to be over $100 per month), but i don’t think it will ever be enough for us to live on month to month. we’ll just have to keep working. it’s nice to be able to eat out once in a while. my wife is constantly pushing for me to buy organic produce. vacations are nice and culturally expanding, getting to really see how a different culture lives, getting to see national museums that belong to each of us. some hobbies cost some money whereas others do not. c’est la vie.

What I find works for me is to do the “pay yourself first” thing. My 20% savings comes out of my bank account the same day my paycheck goes in, so it never really feels like my money. Granted, I’m a family of one so my expenses are a lot lower. Maybe 20% is unrealistic for your situation and you should aim for 10%.

What really worked for me was that I started doing this shortly after I got a big raise. I was able to go back to my previous level of spending fairly painlessly because I hadn’t gotten used to having more money. If a raise isn’t likely in the short term, maybe you can ease into it. Start with $50 a month and increase the amount slowly so it doesn’t feel like a drastic change.

After a while, you would probably have a fluke month where your investment earnings reached your spending level. Then you would have more and more of these months. Then most months would be like that.

You could also plot twelve-month averages or something to get smoother lines and get a better idea of your typical spending, earning, and investment proceeds.

There’s an article addressing this at the YMoYL site:

http://www.yourmoneyoryourlife.org/gh-step9revisited.asp

Halfway down the page there’s a table laying out various investment options.

As for tax, inflation, and health insurance concerns, I’m planning on working part time to cover all of my expenses. My whole idea is to stop working full-time, not stop working entirely.

Fifteen or so years on, with the way life looks now…I look at that graph and it’s hard not to laugh! If only it were so simple. Or maybe I should say: it was that simple when I was single and childless, with a relatively steady (though small!) income. And no sense of the kind of curveballs life can throw, I might add!

Now there are just too many variables to even think about trying to “draw the dotted line” of projections. I’m a contract employee and my husband’s job is grant-funded, so income is likely to be variable in the long-term (there’s a nice euphemism for you!)

We have two young kids and that introduces huge “wild cards” for essentially the next 20 years. Day care, after-school care, extracurriculars, maybe braces, college savings, college spending? Assuming the youngest will be financially independent of us when she’s 23, my husband and I will be pushing 60 when the kids are “off our books”.

Projecting returns on investment income in the market is a fool’s game, and even returns on really safe places to park money are surely going to ebb and flow over the next N years. And I’ve been a homeowner long enough now to know that projections about our rental income can be thrown for a loop by any number of incidentals.

I still love number and may start toting up our “monthly investment income”. (It’s one of the only ways to track our money that I don’t currently examine.) But the idea of projecting to a crossover point? I don’t think so. Not that it wouldn’t be an entertaining exercise, but it’d be more or less worthless. For our family, anyway.

At some point I’ll write a detailed review of YMoYL. Before I do, I’m going to spend time at the Simple Living Forums, the book’s official discussion spot. I’m sure that this problem is well-known there and has been discussed a lot. In fact, a quick glance at the forums reveals a current discussion on this subject.

2. Even if you re-invest a portion of the interest to keep up with inflation, you will need to pay capital gains taxes on the investments you’re now living off of, not to mention the cost of benefits that you’d need to pay out of pocket.

Your REAL break even point is when:
investment income – inflation rate * savings = gross job compensation (including benefits).

At that point, you could afford to quit, spend ~96% of your investment income, and reinvest ~4% to account for inflation.

That’s the only way to become truly independently wealthy.