Once you’ve accumulated enough wealth to live off your unearned income (eg. retire) it’s fine to spend all the first-order REAL (ie. above inflation) interest or dividend income, as you don’t really need to be accumulating any more wealth at that stage.

It’s only in the intermediate stages where people might consider using second-order investment earnings to supplement their earned income, but I still don’t think that’s a good plan, as you are sacrificing earlier retirement date for some extra consumption during your working years.

Anyhow, the question of living off first-order or second-order investment returns is less important that what level of investment return you attain. For example, someone who invests a million in a bank account with an after-tax return that barely keeps pace with inflation would not achieve any increase in real net worth over time, as there wouldn’t BE any second-order real income. On the other hand, someone who invested the million in a diversified high-growth mix of assets that returned, say, 2% above inflation could spend part of this first-order investment income (up to 2%pa) and still maintain or slightly increase their real net worth over time.

Finally, the chances of a significant number of people actually sticking to a plan of living off second-order (or even first-order) investment income is pretty low based on historical results. Otherwise there would be a lot bigger proportion of the population living the lifestyle of the idle rich — sitting back and living off the second-order income of investments made by their forebears. A more realistic plan for most people would be to consume all first-order income and some of their investment capital during retirement, aiming to only leave a small inheritance for the descendents to enjoy.

@ debbie m - So if you get $1000 think of it as $40 a year until the end of time. I got a post called the true cost of coffee addiction that explains it in more detail. I have calculated it in terms of lifestyles too. I like to add a multiplier, since I gather that I can get 3-4 times more for my money than a person who does not shop for specials, etc. There are actually quite a few people who find a job in a high cost of living place (like Vegas) and live in their car. They can earn and save tremendous amounts of money.

This reminds me of a friend who likes to calculate how much he earns like this and then theorize on how he could be financially independent with that income. For example, at a fairly young age, he could have been financially independent as a desperately poor person in a third-world country. Nowadays he could afford to live a typical lifestyle in one of the better off third-world countries!

Even in the US, you could first achieve the ability to be a financially independent street person and work your way up from there.

Traciatim, I read 1 or 2 of Kiyosaki’s books, and I don’t recall the second-order earnings point that Jacob makes. I do recall Kiyosaki emphasizing income-stream producing assets.