Convergence, when passive income surpasses active income

[rob in cal]

         I'm currently obsessed with the idea of what I call convergence, when passive income surpasses active income.  Right now I think passive income is somewhere in the high 2,000 a month (applying historical rate of return for the stock portions of my passive income stream) and active in the high 3,000's a month.  Of course I raised my active income recently by working an extra night, and with minimum wage going up next year that will bump things up a little as well.  Still, my passive income may hit convergence point in another five years or so, at which point my arguments for  FIRE or partial FIRE may take on more credibility with my wife.  BTW, I count my restaurant ownership income as passive, as I really don't have too many extra responsibilities due to it.  Anyone else closing in on this convergence.

[sol]

Yes, I'm multiple ways.

The obvious one is investment returns exceeding expenses, which is relatively easy in a year like 2013 when the market does >30% but it's normally calculated using your long term expected SWR.

I'm also enthused these days about the income from rental properties exceeding the costs of my primary home.  Even though I have less rental equity than outstanding debt on my primary mortgage, the total return on the rentals just about covers my total out-of-pocket for my own house.  It feels kind of like living for free.

In your case, I'm not sure this convergence means much if your expenses are still much higher than either your active or passive income.  Earning half of your money passively doesn't help you much if you're still going into debt each month.

[ender]

I think Your Money Or Your Life recommended graphing both these to see this happen, too.

[rob in cal]

    In my case monthly expenses are somewhere around passive income, so basically most of the money I make working goes to new investing.

[Apocalyptica602]

My wife and I are relatively high earners so if I achieve convergence in terms of active income I either dramatically deviated from my investment policy of index funds and found a 1980s Apple long shot, or have had such serious OMY syndrome that I forgot to retire early!

That being said, I definitely do look at passive income as a function of SWR. Right now we're young and our 'stache is much smaller than most, but at 4% would generate approximately 11k per year.

Although if all goes well that should change and get easier year on year, I'm antsy for that snowball to really start rolling!

[forummm]

In actual practice I think my passive income exceeded my active income in 2013 when the market returned over 30% and I was somewhat leveraged from refi'ing the house and the house value grew. But I will probably never get to the point during my active full-time pre-FI career where on average my expectation of investment returns would exceed my work earnings. Because then I would have worked WAY too long. My savings rate is really high. I don't need to come close to being able to replace my entire income.

[zephyr911]

In actual practice I think my passive income exceeded my active income in 2013 when the market returned over 30% and I was somewhat leveraged from refi'ing the house and the house value grew. But I will probably never get to the point during my active full-time pre-FI career where on average my expectation of investment returns would exceed my work earnings. Because then I would have worked WAY too long. My savings rate is really high. I don't need to come close to being able to replace my entire income.

Yup... this.
We'll probably quit FT work with passive income in the 40-50k range, but the idea is to make (and live on) about that much in PT work and let the stash compound another 5-10 years.

[partgypsy]

For me what is more important is when passive income surpasses monthly or yearly expenses, aka what your money or your life wants you to graph. That is a more meaningful metric.

[Retired To Win]

For me what is more important is when passive income surpasses monthly or yearly expenses, aka what your money or your life wants you to graph. That is a more meaningful metric.

That's the ticket.  I can't see much point in getting hung up on seeing when/whether one's passive income surpasses one's active income.  What counts is when/whether passive income surpasses expenses.  That's when you get your green flag to FIRE.

However, the OP apparently has a skeptical spouse for whom the attainment of income convergence might make it easier to let go of the job security blanket and start a FIREd life.  Still, even in that case I say again that the most persuasive argument should/would be that the passive income surpasses the expenses.

IMHO...

[starguru]

Interesting.  Shouldn't it not matter what one's income is to reach convergence?

CaseA:  Someone makes 50k a year, and saves 25k a year. 
CaseB:  Someone makes 500k a year, and saves 250k a year. 

To generate 25K a year at 4% SWR, A needs 25k*25 = 625000.
To generate 250k a year at 4% SWR, B needs 250k*25 = 6250000.

Assuming no investments, or that both made exactly the same investments (proportionally), they would both replace their pretax spending in exactly the same amount of time.  If they didn't FIRE, they would both converge at exactly the same time.

[arebelspy]

I agree with those saying passive income passing expenses (i.e. FI) being way more important than passive income passing active income (a pretty meaningless number), but it was kinda cool (in a completely egotistical way) the last few years to say "I made more in real estate this year than from teaching"--definitely made a few people turn heads/believe our FIRE plans were possible.

[Rezdent]

For me what is more important is when passive income surpasses monthly or yearly expenses, aka what your money or your life wants you to graph. That is a more meaningful metric.

That's the ticket.  I can't see much point in getting hung up on seeing when/whether one's passive income surpasses one's active income.  What counts is when/whether passive income surpasses expenses.  That's when you get your green flag to FIRE.

However, the OP apparently has a skeptical spouse for whom the attainment of income convergence might make it easier to let go of the job security blanket and start a FIREd life.  Still, even in that case I say again that the most persuasive argument should/would be that the passive income surpasses the expenses.

IMHO...

Passing active income would mean that not only have they passed FI, but their trajectory would continue of its own momentum, correct?  Because active income includes the saving?

I could see where some risk adverse people would be interested in that milestone.

[arebelspy]

For me what is more important is when passive income surpasses monthly or yearly expenses, aka what your money or your life wants you to graph. That is a more meaningful metric.

That's the ticket.  I can't see much point in getting hung up on seeing when/whether one's passive income surpasses one's active income.  What counts is when/whether passive income surpasses expenses.  That's when you get your green flag to FIRE.

However, the OP apparently has a skeptical spouse for whom the attainment of income convergence might make it easier to let go of the job security blanket and start a FIREd life.  Still, even in that case I say again that the most persuasive argument should/would be that the passive income surpasses the expenses.

IMHO...

Passing active income would mean that not only have they passed FI, but their trajectory would continue of its own momentum, correct?  Because active income includes the saving?

I could see where some risk adverse people would be interested in that milestone.

Assuming they were LBYM and their passive income is sustainable, that seems like a reasonable assumption.

If that is the case though, you've probably worked way too long, as ForumMM pointed out.

[Jack]

Interesting.  Shouldn't it not matter what one's income is to reach convergence?

That depends greatly on the assumption that expenses are proportional to income, but lots of folks here just use higher income to retire faster:

CaseA:  Someone makes 50k a year, and saves 25k a year. 
CaseB:  Someone makes 500k a year, and saves 475K a year. 

To generate 25K a year at 4% SWR, A needs 25k*25 = 625000.
To generate 25K a year at 4% SWR, B also needs 25k*25 = 625000.

B replaces his spending a Hell of a lot faster than A does.

[arebelspy]

Interesting.  Shouldn't it not matter what one's income is to reach convergence?

That depends greatly on the assumption that expenses are proportional to income, but lots of folks here just use higher income to retire faster:

CaseA:  Someone makes 50k a year, and saves 25k a year. 
CaseB:  Someone makes 500k a year, and saves 475K a year. 

To generate 25K a year at 4% SWR, A needs 25k*25 = 625000.
To generate 25K a year at 4% SWR, B also needs 25k*25 = 625000.

B replaces his spending a Hell of a lot faster than A does.

I think, rather, his assumption was they have the same savings rate, in which case he's correct, that the dollar amount of income is irrelevant. 

[MandyM]

Convergence sounds like great bragging rights, but geez, even "conventional" retirement advice is save enough to replace 70-80% of your income. Convergence is replacing 100%...so more conservative than standard retirement plans.

[dude]

For me what is more important is when passive income surpasses monthly or yearly expenses, aka what your money or your life wants you to graph. That is a more meaningful metric.

Yep, this is the only thing that matters to me.

[Bateaux]

My passive income has certainly surpassed my active take home pay.  My current goal is to have in savings at least an equal amount to every active earned dollar of my life.

[Hotstreak]

In some cases convergence will come before income > expenses.  Take for example someone earning 3k/mo from wages and 3k/mo from passive income (like OP's ownership in a restaurant).  If expenses are 4k/mo, then more needs to be saved before they can be truly FI.  If someone lost their job (lower wages) or had kids or medical problem (higher expenses) they may find themselves in this situation of expenses > wages, and still have passive income, but without FI.

[arebelspy]

In some cases convergence will come before income > expenses.  Take for example someone earning 3k/mo from wages and 3k/mo from passive income (like OP's ownership in a restaurant).  If expenses are 4k/mo, then more needs to be saved before they can be truly FI.  If someone lost their job (lower wages) or had kids or medical problem (higher expenses) they may find themselves in this situation of expenses > wages, and still have passive income, but without FI.

Yes, it's possible, but for it to happen their spending has to be greater than their active income (meaning living beyond their means), so how did they get their passive income in the first place?  There's a few scenarios (like their active income was cut, maybe they are working less hours or something), so it's possible, but very atypical, almost everyone who reaches ER through savings does it by active income being greater than expenses and saving the difference.

[patrickza]

I'm also calling it quits long before my passive exceeds my active. Even my high FIRE total isn't anywhere near where I'll probably hang up the towel.

I just don't like the idea of a draw-down, regardless of how small it is, so I'd like to find a passive income side-stream that I enjoy. For now I think I'd like to work the summer months as a sailing instructor, then go traveling all winter.