The most money you’ll ever make

Peak earning years, Long Tails, and Passive Income

written by oz chen

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I now make money than I ever have before.

That’s not an impressive statement, because generally, people’s earnings go up as they age, gain more experience, and work longer.

But as someone who’s interested in early retirement, sometimes these questions crop up in my mind:

  1. Is this the most money I’ll ever make?
  2. If this the most I’ll ever make, then would it be risky to retire early?

Dive in with me and explore different angles of these questions.

Your peak earning years

People experience the biggest jumps in earnings between 20 to 24, and then 25-34 (Forbes).

  • 20 to 24: Graduate from college and enter the workforce. Of course your salary is going to jump from no career to starting a career!
  • 25-34: This is the next biggest jump, which also makes sense. You now qualify for jobs that ask for 5-10 years of experience, which are likely mid-level or senior roles.

Bigger jumps in income happen during the early stages of one’s career. Then, American earnings peak in their late 40s and 50s.

Interesting aside: the average age of successful entrepreneurs is 45 and not in your 20s (study).

Typically, we might think of the most money we’ll ever make as finally landing that promotion or career break.

But that’s a picture relying on 1 source of income. The most money you’ll ever make can come from a variety of income sources.

The most money you’ll ever make—without working

Let’s say someone has made $50,000/year at most working. They’ve been diligently saving for years, and have built up a portfolio of $500,000. A 10% increase in their portfolio – without doing any work – is equal to their annual salary. All without working 40 hours a week.

There’s a phrase in real estate investing: “You Make Your Money on the Buy.” This means how much money you can make on a deal is determined before you close on the property, not after you buy it.

The same applies to any other appreciating asset.

If the stock market generally goes up – which it does – that means it’s generally cheaper now than it will be later. So the decision to buy into the stock market now (using low-cost indexes) means you’ll making money from the appreciation that comes later.

This is why the decision to frontload your finances and start investing early is so incredibly powerful.

Windfalls and Long Tails

It’s common to measure how much we make on an annual basis. Most people earn a salary and we all have to do taxes (at least) once a year.

But the most money you’ll ever make can come from a long accumulation (long tail) or happen all at once (windfall).

Long tails happen when a small number of events account for the majority of outcomes.

  • The key to long tails is a LOT of attempts over a long period of time.
  • This is how venture capital works: out of 100 deals that lose money, 1 deal is an incredible home run that far exceeds all the other losses.
  • Long tails examples: investing for a long time (compound interest), a long-time project finally taking off, or your skills getting to a level of recognition.

Diversification also helps with long tails. If you spend all your energy building a business with no good prospects, it’s better to try different ventures than take the risk of putting all your eggs in on basket.

This is also why index fund investing makes so much sense: you’re betting on hundreds or thousands of companies at once, and that the winners will more than make up for the losers.

I heard this quote from the startup world that “What looks like overnight success is really 10 years of invisible work.”

But what if you don’t work?

Suddenly getting a lot of money

Windfalls are sudden “gift” type events that increases wealth.

The most obvious and least likely is winning the lottery or through gambling. I’d be surprised if any Powerball winners continued their day jobs because they just got the most money they’ve ever experienced in one fell swoop.

The less obvious and more likely windfalls occur through inheritance.

More than 20% of Americans receive some form of an inheritance, which averages $266,000. The older the beneficiary, the higher the inheritance (Washington Post). People in their 70s are twice as likely to get an inheritance, which averages $344,000.

(By the way, read Die With Zero for ideas on how to avoid doing this. Getting a windfall in your 70s is less useful than in your 30s).

For some, such windfalls may be the most money they ever make/receive in one year.

Takeaways from this musing

I started out with the question of “what’s the most money I’ll ever make?” Hopefully you left with some mental models that feel motivating.

The time to aggressively grow your career and/or earnings is 20s-30s. That doesn’t surprise most people.

But here’s my prescriptive take: the more money you earn, the more you should save. The chances of earning more money gets statistically less likely over time, so you’ll want to put your dollars to work as early as possible. That’s especially if you’re interested in early retirement.

Investing is the easiest “stream of income” to create besides working a job. If you invest to a large enough portfolio, your portfolio’s growth can match or outgrow your salary!

Frontload your finances. Investing in indexes for a long time is the best way to get long tail results and diversification in one go.

Long tails in investing and your creative efforts can lead to “overnight” success. Diversification helps.

Windfalls do happen. We avoid talking about inheritance because it’s morbid. But a little bit of estate planning – if it’s relevant for your family – can go a long way.

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