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Home » Early Retirement

The Crossover Point & Financial Independence

Last updated by on 6 Comments

If you’ve read Your Money or Your Life, you know what the “Crossover Point” is.

And once that seed has been planted, it’s hard to forget about it.

If you don’t know what it is, I’ll give you an overview and some tools.

I recently read and reviewed the personal finance classic Your Money or Your Life (YMOYL), and the Crossover Point was one of the key concepts that really stood out to me.

I am not sure if the YMOYL authors originally came up with this concept or coined it, but they are often credited with the concept.

If you’re kind of aimlessly saving without any hope for financial independence, it can be a pretty profound concept.

So what is this “Crossover Point”?

The Crossover Point Definition

The Crossover Point is simply the point in time when your income from investments surpasses your expenses.

For a graphical representation, here is the example given in YMOYL:

crossover point

Your trend of monthly income, expenses, and investment income may vary, but what’s important is that your investment income intersect and surpass your monthly expenses.

Where does income come in? Well, you need income to generate investment income, of course.

Does the Crossover Point Equal Financial Independence?

In our recent discussion of financial independence, we spent a lot of time discussing the “qualitative” definition of financial independence. I described my qualitative definition as:

“Living comfortably and doing what I want with my time without concern about how much income I earn.”

The YMOYL authors describe the Crossover Point as the point when you:

“will have a safe, steady income for life from a source other than a job.”

Wikipedia describes financial independence as:

“a term generally used to describe the state of having sufficient personal wealth to live indefinitely without having to work actively for basic necessities”

Do you see a pattern?

I’ve found the Crossover Point to be the best quantitative definition of reaching financial independence. When you reach it, you are no longer dependent on others to meet your costs of living.

The Crossover Point Reality

The Crossover Point is a beautiful concept, but does it hold up in the real world?

It could, so long as your investment income returns outpace inflation. The reality is that is not easy to do. Even supposed “fixed income” investments these days have down years. And the truly fixed income investments like treasury bonds and CD’s are not even keeping up with inflation at the present time.

The other part of the equation is how long you plan on adding zero additional income. Without income, you’re cutting in to your investment base through withdrawals to cover your expenses.

It is possible you could achieve returns that cover inflation AND your withdrawal rate. Is it likely? Probably not.

Crossover Point Calculator

Ryan Stewart created a nifty Crossover Point calculator at his website whatsmycrossover.com.

It’s a fun little tool to play around with and factors in all of the variables I would have factored in had I designed it.

Here is what it looks like for a 27 year old with:

  • $60K in income
  • 3% annual raise
  • $100K in savings
  • 50% spend rate
  • 3% inflation
  • 6% return on investment
  • life expectancy of 80

crossover_point_calculator

Looks like this hypothetical individual’s Crossover Point will be reached at about age 38. Not bad for an income of $60k!

Play around with the tool to see what some hypothetical Crossover Points are for you.

What can we Take from this Concept?

The Crossover Point is something for everyone to strive for. It’s a great concept, and one we’d all be wise to set out to achieve.

There are, however, so many variables out of our control (inflation, withdrawal rates, unforeseen high cost events, lifestyle changes, investment returns, etc.). It is not a be-all, end-all solution to financial independence. In other words, don’t just quit your job at age 35 because you have hit the Crossover Point.

We’d all benefit from using the Crossover Point as motivation. There are certain things that we can all do to influence and tilt the numbers in our favor when it comes to financial independence:

  • increase your income when you have the opportunity
  • cut your expenses to a minimum
  • be wary of lifestyle inflation – your cost of living does not have to match the CPI
  • increase your personal savings rate to a maximum
  • invest wisely so that inflation does not eat in to your savings – don’t let the fear of investing paralyze you

Do those things and you will have a very successful financial future ahead.

Crossover Point Discussion:

  • Is the Crossover Point your quantitative definition of financial independence?
  • When do you anticipate hitting the Crossover Point, if at all?
  • How do you envision your life changing when you hit the Crossover Point?

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About the Author
I am G.E. Miller, & this is my story. My goal is financial independence ASAP. If you share that goal, join me & 7,500+ others by getting FREE email updates. You'll also find every post by category & every post in order.


6 Comments »
  • Kraig @ Young, Cheap Living says:

    Is the Crossover Point your quantitative definition of financial independence?
    When do you anticipate hitting the Crossover Point, if at all?
    How do you envision your life changing when you hit the Crossover Point?

    Yeah, the Crossover Point makes sense as the quantitative definition of this. I love the varying qualitative definitions you provide above. If the numbers you used for calculating your Crossover Point reflect your situation, then I’m in similar shoes. I calculated mine too, and it looks like it’s around age 38. With my goals set and current momentum and motivation, I anticipate hitting the Crossover Point at somewhere between age 40 and 45. My goal is to hit it by 45. I really want to make that happen. Having started so early (I’m 27 now), I see no reason why I can’t be set after working at my goals hard for over 20 years. A person just shouldn’t have to be broke their whole life and/or wait until their 65 (or as rumor has it 66 or 67) to retire. I want to retire whenever I feel like it. If that’s 80, cool. If that’s 45, cool. Once I hit the Crossover Point, I anticipate my life changing in that I will be comfortable and calm about what happens to the economy, my job, my industry and life in general. I’ll be able to relax. Until then, I’m pushing, pushing, pushing forward toward that day.

  • bfarly says:

    So, I’m know very little about investments other than the easy ones you set and forget (401K and IRA). What investments give you a monthly return that you can live on?

    It sounds like this would only work for very active investors?

    • Scott C says:

      VERY generally speaking, investing in stocks and bonds should get you close enough. There are many sources out there to research the subject. I just finished reading “The Four Pillars of Investing” which I would highly recommend as another fellow investing newbie.

      An easy investment vehicle I recently found is Betterment.com which will invest in Stock and Bond ETFs but present a simple and clean interface for you. Obviously you should know EXACTLY what you’re investing in before you invest in it, but go check it out if you want to dip your toes in investing.

  • Bichon Frise says:

    Another interesting exercise is to use a constant savings rate approach. If you assume a WR (say 4%) it is your % of income*25/% of income saved. If you don’t like 4% WR, take the inverse of what WR you do like and replace the 25 with your new number. While this method doesn’t account for compounding interest, it also doesn’t taken into account inflation and pay raises. What it shows you is a general idea of how long it will take to FI using your current savings rate. It’s a quick and dirty rule of thumb.

    What we don’t like about these approaches is the assumption of your current expenses being your retirement expenses. For most people, expenses will decrease. And for others, expenses will increase. We recently did a blug post on this. So, one should really try and understand their FI and retirement expenses then factor in a withdrawal rate and then work backwards to a savings rate.

  • Julie @ Freedom 48 says:

    I guess it all depends on the type of investment. We’ve got a lot of money tied up in real estate… and although we can’t yet live off of the income earned from our investments, I often think about the fact that we could live off of investment income if we sold our real estate and invested the equity.

  • Long-Term Returns says:

    Very good article and nice chart to illustrate. You mentioned it already, but this point needs to be sledge-hammered home. Expenses are REAL (meaning will increase with inflation). Much of investment income stream is NOMINAL (e.g. most bonds and all CDs), though some is REAL as well (e.g. stock dividend, TIPS interest, real estate cashflows). For an apples-to-apples comparison all cashflows, both incoming and outgoing need to be made REAL, which means subtracting ~3% from whatever interest rates you are getting on nominal investments. If you need 4% of your portfolio for living expenses and have it all invested in 4% nominal bonds you have no chance making it last 25+ years because inflation will eat you up alive.

    As another commenter pointed out, the 4% SWR (safe withdrawal rate) is also a good reference point for what’s sustainable, but the 4% figure has a cap of 30 years. If you are retiring early and have, say, 60 year horizon, then counting on 4% SWR is being awfully optimistic. I wouldn’t count on more than 2.5% SWR if you expect your portfolio to last 60+ years. Especially since by all measures today’s stocks and bonds are both on the expensive side of things compared to long-term averages.

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