I’ve been focused on building passive income since 1999, back when I had to be in the office by 5:30 a.m. and worked past 7 p.m. often. Weekends were another eight hours or so. I knew I couldn’t sustain a traditional 40-year career working those kinds of hours, so I began saving and investing aggressively to break free by 40.
Now I’m focused again on building enough passive income to fully cover our family’s desired living expenses by December 31, 2027. And I’ve been reminded of an ongoing battle: the trade-off between generating risk-free passive income versus taking risk to earn higher potential returns.
As I’ve gotten older, I’ve become more risk-averse, partly because the dollar amounts at stake have grown.
Losing $20,000 on a $100,000 portfolio feels like a kick in the shins. But watching $1 million evaporate from a $5 million portfolio? That hits like you like a truck crossing the sidewalk. Without any day job income—as is the case for me and my wife—losses of that magnitude can feel unbearable.
This post will cover the following important topics:
- The trade-off between earning risk-free passive income and taking more risk for potentially greater returns
- How focusing too much on risk-free passive income can lead to increased fear and potentially lower wealth
- The distinction between risk-free passive income and risk-required passive income and why it matters
- The importance of sticking to your financial goals and risk tolerance no matter how much greed and fear take hold
Earning Risk-Free Passive Income Can Make You More Fearful
One important takeaway from building a rich Bank of Mom and Dad is that it gives your adult children the option to take more risks. The more risks they can afford to take, the higher their potential for financial success.
It’s like shooting 100 three-pointers at a pitiful 10% accuracy versus just 10 shots at an incredible 60%. Although you may be a far more talented shooter, you’ll still lose to the volume shooter. This is why a lot of rich people from rich families have an unfair advantage and keep getting richer.
But before you can be a supportive bank for your kids, you need to be a strong bank for yourself.
Ironically, the more risk-free passive income I earn, the less motivated I feel to take on risk. And with less desire to take risk comes less potential wealth in the future.
Fear, complacency, and diminished wealth are the hidden dangers of relying too heavily on risk-free passive income.
Let me explain further.
From Taking A Lot Of Risk To Throttling Back Risk
In May 2025, I began trimming some of the stock positions I bought during the March–April dip. I had just sold a property in March and begun reinvesting most of the proceeds in the stock market. At first, I was losing my shirt as the stock market kept dipping through the first half of April. Then, my portfolio began to recover and profit.
I’m in the process of moving from a 100% equities portfolio to around a 60/40 split between equities and Treasuries/cash. I had invested over $1.35 million in stocks during the downturn and it was stressful. In retrospect, going all-in on my public investment portfolio that I rely on to provide for my wife and me to stay unemployed felt reckless. I was relieved to have a second chance to de-risk and rebalance.
That month, my Fidelity money market fund (SPAXX) paid me $1,847.62. Annualized, that’s $22,171 in risk-free income just for keeping a chunk of cash parked. That return, at 4%, required no stress, no tenant calls, no market-timing anxiety, and no risk. It felt amazing! I want to earn more risk-free passive income.
However, as the S&P 500 continues to climb, that amazing feeling gradually fades. This is a fundamental struggle every investor must face—the tension between feeling secure and still wanting more. After all, roughly 75% of the time, the S&P 500 delivers a positive return in any given year.
Thanks to the rise in interest rates, we all now have the opportunity to earn more risk-free passive income. As a result, we not only have to weigh how we feel about earning different types of risk-required passive income, but also how we feel about earning risk-free income versus taking on more risk for potentially higher returns.
As an investor, we must always think about opportunity cost.
For example, comparing risk-required passive income from a dividend aristocrat ETF like NOBL, which yields about 2.15%, with income from an S&P 500 ETF like SPY, which yields around 1.25%, isn’t a huge leap. NOBL may be slightly less volatile since it holds cash-rich, large-cap names.
But compare either of those to earning 4% risk-free in a money market fund, and the difference in feeling can be stark. After a 20% market dip, trying to claw back to a 10% historical annual return feels exhausting. Earning 4% with no drama felt peaceful.
At the same time, I didn’t have to manage tenants or respond to maintenance issues like I do as a landlord. Even though I’m bullish on San Francisco single-family homes over the long term—thanks to the AI boom—I still preferred the risk-free income at this high rate.
This easy, risk-free passive income has made me less motivated to chase bigger returns, which is a problem if I want to hit my $380,000 passive income goal by December 31, 2027.
This is the curse of the rising risk-free rate of return. When the risk-free rate was under 1%, it was much easier to invest aggressively in risk assets.
Too Much Focus On Earning Risk-Free Income Can Make You Less Wealthy Over Time
I still have a $60,000 shortfall in gross passive income. To close that gap, I’d need to accumulate another $1.5 million in capital in under three years, no small feat without a high-paying job or a financial windfall.
Authors don’t make much money. A typical book advance is around $10,000. Even a top 1% advance—starting at $250,000—is paid out over several years. Meanwhile, AI is eroding search engine traffic and attribution, weakening online income for independent publishers who write all their work like me.
Treasury bonds and money market funds likely won’t get me there in time. The main way to achieve my goal of accumulating $1.5 million or more is to take more risk by investing in risk assets.
Imagine entirely sitting out the 2023 and 2024 bull market with back-to-back 20%+ gains given you found risk-free Treasuries yielding over 4% too enticing. Sure, you’d still be up, but you’d lag far behind those who went all-in on stocks. Over time, focusing too much on risk-free passive income could, ironically, make you poorer.
It’s the dividend vs. growth stock dilemma: dividend-paying companies are considered safer and often return cash because they’ve run out of better investment opportunities, while growth companies reinvest 100% of earnings to capture potentially higher returns. In this case of risk-free passive income, the dividend-paying company is the U.S. government.
For over 25 years, I’ve invested almost entirely in growth stocks. This is now changing thanks to age, wealth, and higher risk-free rates.
Principal Growth Versus Income Dilemma
Let’s say you have a $5 million stock portfolio. To generate an additional $1.5 million in capital, you’d need a 30% return—possible over three years. But stocks could just as easily go nowhere or even decline, especially with valuations already stretched.
Remember, if stocks stagnate for three years, you’re effectively losing money compared to what you could have earned in a risk-free investment over the same period.
Given today’s high valuations, many analysts are forecasting low single-digit returns going forward. Below is a chart showing Vanguard’s 10-year forecast for equities, fixed income, commodities, and inflation from 2025 to 2035. So far, it’s actually quite prescient with U.S. equities struggling while global equities outpetforming.
A 3%–5% annual return in U.S. equities isn’t exactly exciting given the risks involved.
The Guaranteed Path Can Lull You Into Complacency
Now imagine putting that $5 million into 10-year Treasuries yielding 4.5%. That generates $225,000 a year—guaranteed. So compelling! It would take six years to grow from $5 million to $6.5 million, but it’s essentially a sure thing. If you believe Vanguard’s U.S. equities forecast of 3%–5% annual returns over the next 10 years, why not lock in a 4.5% risk-free return today?
Would you risk allocating 100% of your portfolio in equities just to maybe get there in three years? After two strong years (2023 and 2024), another three years of 9%+ annual returns to get to $6.5 million would be extraordinary, but that outcome is far from guaranteed.
Yet most of us still take some risk, driven by hope and greed. We hope that AI will permanently boost productivity and reset stock valuations higher. We also greedily want even more returns than the historical average.
Higher Risk-Free Passive Income Should Result In A More Balanced Portfolio
I’m no longer as greedy as I was in my 20s and 30s, partly because I’m more financially comfortable today. The other reason is the much higher risk-free rate of return.
As a result, it makes sense to increase the bond or cash portion of your portfolio if it’s offering higher returns.
With 40% in Treasuries held to maturity, a $5 million portfolio generates $90,000–$112,500 in risk-free income. With 60% in equities, there’s still meaningful upside potential without putting everything on the line.
Historically, a 60/40 stocks and bonds portfolio has returned about 9.1%. A 100% stock portfolio has returned about 10.3%. That 1.2% gap adds up over decades. But if you’re later in your financial journey, the tradeoff may not be worth it. A 100% stock portfolio can suffer much steeper drawdowns—up to 85% more based on history.
The Importance Of Sticking To Your Financial Goals
At this point in my life, I’m content with a steady 5%–8% annual return in my taxable portfolio for survival. Based on history, a 30% stock / 70% bond portfolio would suffice.
Yet, because of my lingering greed, I’m constructing a 60/40 portfolio instead. Further, I’m still 100% invested in public stocks across all my tax-advantaged retirement accounts, my kids’ custodial accounts, and their Roth IRAs.
In other words, I’ve taken a more conservative approach with the portfolio I rely on to support my family today, and a more aggressive approach with the portfolios that won’t be touched for 15+ years. Unfortunately, I feel the job market is bleak for my children, so I want to hedge by investing more for their futures.
If you want to retire early, building a large taxable portfolio beyond your tax-advantaged accounts is essential. This is the portfolio that generates passive income and provides tappable equity—without penalties—to live on. Not building a large taxable portfolio consistently comes up as one of the top regrets for older workers and retirees.
Age and Stage Matter For How You Invest
If you’re under 40, feel free to take more risk. You’ve got time, energy, and decades of work ahead to recover from losses. I wish I had taken more risk in my 20s and 30s for sure. Here’s my suggested asset allocation for stocks and bonds by age.
But when you’re over 40, with family obligations and reduced energy, it’s different. You don’t want to lose the wealth you’ve spent 20+ years building. Reducing your risk exposure as your risk tolerance fades is a wise move.
For me, I’m tired from being a stay-at-home parent and writing my second traditional book, Millionaire Milestones. By 2027, I’ll be 50, holy crap! Where did all the time go?
I plan to publish a third and final book, then transition into a more traditional retirement lifestyle—one with less doing and more being. By then, AI might have rendered Financial Samurai obsolete or automated me out of the process entirely. Who knows? Maybe lived experiences from real human beings will no longer be in demand.
So I’m embracing preservation more today.
I’ll keep saving and investing 50% of any income, splitting a portion of it between stocks and bonds at a 60/40 ratio. I’ll also continue allocating capital to private AI companies through platforms like Fundrise Venture to stay in the game. Frankly, every $1,000 I invest in AI makes me feel a little less worried about my children’s future.
But I won’t be going overweight in public stocks anytime soon with valuations around ~22X forward earnings. Until I sold my house, I never had this much cash available to take advantage of higher interest rates. While climbing the property ladder, I was always saving to buy a nicer home.
Now, I have no more material wants that can’t be covered by cash flow. Tennis shoes don’t cost too much. And the risk-free passive income I can earn today is simply too good to pass up.
The Gift and Risk of a High Risk-Free Rate
A high risk-free rate is a double-edged sword. On the one hand, it offers comfort and stability. But if you lean on it too heavily too early, you might delay reaching financial independence. The longer you delay, the harder it becomes to catch up—often requiring more risk when you’re least comfortable taking it.
On the other hand, if you’re close to financial independence or already retired, today’s elevated rates are a gift. When I left work in 2012, the 10-year Treasury yield was just 1.6%. I had to go risk-on with stocks and real estate. Now, earning 4%–4.5% risk-free feels like a blessing, especially with a family to support.
Sweet, risk-free passive income has never felt so good, but it likely won’t last forever. And that could be a good thing!
Readers, what are your thoughts on becoming more risk-averse as you earn more passive income over time? Has your focus on investing in dividend stocks or earning higher yields/income actually throttled your wealth-building potential? Are you willing to risk more money for greater returns that you don’t need?
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