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A Little Active Income Goes A Long Way In Early Retirement

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Generating enough passive income to cover the cost of living is the holy grail of early retirement. However, it’s quite difficult to amass that big lump sum to generate enough passive income to live on. People spend more money as they get raises so they need more and more income every year. Early retirement offers a way out of this cycle by forcing us to examine how we make and spend money. While passive income is good, you’ll most likely have to get creative if you want to retire by 40. Most people won’t be able to generate enough passive income by this age so it’s good to generate some active income to bridge the gap to full retirement.

cross over point passive income

From Your Money Or Your Life.

Passive Income

Over the last few years, I have been focusing on generating passive income so I could quit my corporate job. Mrs. RB40 likes her job and plans to work for at least another 15 years, so I want to be able to cover about 50% of our expenses after I retire from my engineering career. Even 50% is quite difficult because a large portion of our investments are in retirement accounts that we don’t want to touch. This means I’ll have to work with our taxable accounts and rental properties to generate the passive income.

Dividend Stocks

Dividend stocks are a great source of passive income because they have the growth potential of stocks and a favorable tax rate (we’ll see what happens in 2013.) I have converted most of the investments in our taxable brokerage accounts to dividend stocks in order to generate dividend income. Currently we are receiving about $7,500 per year in dividends, but that should grow because I targeted companies that have a track record of increasing their dividends. I’m also adding to these investments whenever we have a surplus. I would like to eventually see $12,000 in dividends per year. This will probably take 5+ years though.

Rental Properties

We have a rental home and a 4 plex. I have high hopes for these properties in the future, but 2012 wasn’t a good year for us. The 4 plex needed a lot of big repairs and we ended the year just about even. 2013 should be much better, but we’ll have to wait until the end of the year to see. I’m projecting $7,500 in positive cash flow for 2013.

*2014 update* I was too optimistic and we only made about $1,100 in 2013. For 2014, I’m shooting for a more modest $2,000 to $3,000 positive cash flow.

Peer To Peer Lending

I invested $10,000 in peer to peer lending at Prosper.com. My ROI is currently about 12% so this account should generate about $1,200 in 2013. I’m seeing much higher default rates recently, though, so we’ll have to see how it actually pans out at the end of 2013. If we can keep the ROI above 10%, I would probably increase our investment here to generate more passive income.

*2014 update* Our current ROI is about 9%. That’s quite a a bit lower than 12%, but I’m hoping we can bring it back up to 10% at some point. I made about $900 in 2013.


We have about $50,000 in our main savings account which generates about $500 per year. I want to keep this amount liquid for now because we lost a big revenue source in 2012 (my job.) If things go well, then we’ll probably reduce this to $20,000 in 2014 and invest the rest.

These are my 4 main passive income generators, but they are not making a huge amount per year. For 2013, I’m only projecting $16,700 before taxes. Our expenses in 2012 came out to nearly $41,000. The passive income can’t cover 50% of our expenses at this point.

*2014 update* We made about $10,000 in passive income in 2013. Hopefully, we can bring it up to $12,000 in 2014. Luckily, my online income more than made up for the shortfall.  I will break down the online income in our monthly newsletter so if you’re curious, sign up with our email list.

Active Income

For early retirees, even a small amount of active income goes a long way. A part time job or other active income will enable you to put off withdrawing from your retirement accounts and let them grow. For me, I’m working on Retire By 40 and my other sites. In 2012, we generated about $13,000 of income. That’s not a lot of money, but when I added it to our passive income, it was enough to cover 50% of our expenses. For 2013, passive and online (active) income should come to about $30,000. If we can keep our expenses around $41,000, then I’m golden. I can stay retired from the corporate world and keep making my own way through life. If I don’t have this small active income source, then I would have to draw on our retirement funds and that will stunt their growth over the next 25 years.


Early retirees should consider a part time job or other self employment avenues to generate a little active income. $1,000 a month doesn’t sound like much, but it goes a long way. I’m planning to keep my active income activities going until I’m 65. Once we both fully retire, then we can shut down the active income activities and draw on our retirement accounts. At that point, the retirement accounts should be able to generate enough passive income for a comfortable retirement.

What about you? Are you thinking about early retirement? Would you consider part time work to put off withdrawal?

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{ 39 comments… add one }

  • Financial Samurai December 27, 2012, 12:19 am

    If you can generate active income that you LIKE during retirement, that’s what matters most.

    I agree, a little active income goes a long way to help subsidize your lifestyle along with passive income.

    It’s one big fun game to play. The FED is making it tough with interest rates so low. We’re on level “Difficult” but it is still fun!

    • Dividend Growth Investor December 27, 2012, 1:04 pm

      Active income is great. But also great is optimizing your current assets to deliver for you.

      I think that these $50K sitting in cash are producing nothing for you. If you bought dividend stocks instead, you could easily get $1750 – $2000 in extra dividend income. And you can always sell these stocks if you really needed the money. True, stock prices vary, but in reality, do you really think you will need the whole $50K in a lump sum?

      If I had $50K in a lump sum, I would probably invest $2K-$4K/month for 24 – 12 months… That way you will ease slowly into building the portfolio, and still have some cash left (since cash is so important to you).

      • retirebyforty December 27, 2012, 9:48 pm

        I’m planning to buy more dividend stocks eventually if things goes well. We probably don’t need $50k at once, but the Mrs. would loose a lot of sleep if we don’t have cash.
        For these next few years, I’d rather have cash than the extra dividend income. Once we are more settled in our new situation, I would invest these.

        • Chris December 28, 2012, 8:31 pm

          I’m wondering what kind of effect having a taxable brokerage account would have on your finances.
          Like Dividend Growth Investor said, that would provide you with a mechanism that would allow you to scrape off some or all of the dividends and thus allow you to offset a good amount.
          Or for that matter, perhaps a combination of the two (say 80/20 Brokerage/Savings accounts).
          Nice to have such a problem, and we’re working towards such potential problems as soon as we can, but may not see any fruition of it until I’m close to normal retirement age and the house is paid off.

    • Jane Savers December 30, 2012, 6:41 pm

      I love my job Financial Samurai and I will continue to rely on active income until my retirement. I am not handy enough to risk the purchase of anything involving tenants so I invest. I want to make a stock purchase during the first week of 2013 but I have to wait and see what the Americans are going to do about their ceiling and cliff issues.

      Low interest rates are great for me right now because I am trying to pay off debt.

  • Glen @ Monster Piggy Bank December 27, 2012, 1:46 am

    I have about 3 different irons in the fire in regards to passive income, although I only really started about half way through this year.

    So far I have made less than $1,000. So it is going pretty slowly so far.

    • retirebyforty December 27, 2012, 9:49 pm

      That’s the thing about passive income. They take a long time to build up. Good luck!

  • Sean @ One Smart Dollar December 27, 2012, 6:42 am

    I would definitely get a part time job to subsidize retirement. I live in Colorado and have always said it would be fun to work part time on a ski resort. Just like Sam said above, you have to enjoy the job or what’s the point.

    • retirebyforty December 27, 2012, 9:51 pm

      I liked snowboarding when I was younger, but now I’d rather be warm and cozy. 🙂

  • krantcents December 27, 2012, 8:47 am

    I like the concept of multiple income streams. I will have Social Security and a pension to cover my all my needs. My IRAs will supplement my income. I used the same concept when I achieved financial freedom. My income property covered all my necessities and my businesses provided income for the wants.

    • retirebyforty December 27, 2012, 9:51 pm

      You’ll have a very comfortable retirement. Enjoy!

  • Justin December 27, 2012, 10:16 am

    Don’t forget about downsizing your lifestyle either. I am going to be forced into an early retirement from the fire dept due to an on the job injury which leaves me with a pension but not enough to live at our current level. We are going to move to Nicaragua for a few years (cost of living is 25% of the States), start a business, and go from there !

    • retirebyforty December 27, 2012, 9:53 pm

      Good luck! One of my buddy is from Nicaragua. It’s not easy to do business there.
      Once Mrs. RB40 retire, I would push for something like that too. The cost of living is so much more affordable in south America.

  • Kurt @ Money Counselor December 27, 2012, 10:50 am

    To me active income is a sort of insurance policy. Maybe it’s just me, but I’d feel better with even a little earned income coming in than with none, even if my passive income were enough to cover my living expenses. The unexpected always happens. And as we’ve witnessed the past few years, a big nest egg’s cash generating capacity can be slashed if, say, interest rates fall to near zero for several years!

    • retirebyforty December 27, 2012, 9:56 pm

      That’s a great way to look at it. I think working part time will also keep you active and give you something to do in retirement. When people are idle they tend to spend money. 🙂

  • Lance @ Money Life and More December 27, 2012, 3:27 pm

    I would like to consider early retirement at some point but I’m not there yet. We have other goals we have to take care of first. I wouldn’t mind working part time or having some source of active income at all. In fact, I think I’d prefer it as long as I could take time off when I want to.

    • retirebyforty December 27, 2012, 9:56 pm

      I haven’t thought much about taking time off. The blog is quite time consuming. Hopefully, I can find a better balance in the future.

  • Kraig @ Young Cheap Living December 27, 2012, 4:28 pm

    Agreed. Even as little as $300 per month in income is equivalent to having $90,000 invested and withdrawing at 4% per year. I don’t know about you, but it takes quite a while to amass $90,000.

    And $300 per month seems to be fairly straight forward and easy to earn.

    • retirebyforty December 27, 2012, 9:57 pm

      Exactly! Most of us should be able to generate $300/month doing something we enjoy.

  • SavvyFinancialLatina December 27, 2012, 8:48 pm

    How much do you have invested in order to generate $7500 in dividends?

    • retirebyforty December 27, 2012, 9:59 pm

      The value is a little over 200k, but it built up over time.

      • SavvyFinancialLatina December 28, 2012, 9:56 am

        Dang, so in order to make a decent income on dividend stocks you need almost a million $ in your taxable account.

        Good to know.

        • Chris December 28, 2012, 8:42 pm

          Well, obviously that depends upon the dividend stocks that you invest in.
          For instance, I’ve been successful in growing my portfolio by 24% for 2 years in a row by using good and sometimes lucky dividend stock purchases/sales. Not always getting the dividend but at least 2 times.
          So, if one was able to maintain that level and leave 5% of the increase in the account every year, they could feasibly generate $7,500 of “dividends” out of a brokerage account that only had about $40,000, if they could do exactly that.
          Of course I’m sure that you understand that the ROI is FAR from guaranteed to be 24%/yr forever, although there are stocks that do provide 10%-11% dividends (or more if you get lucky and buy them at a low price of course), which would change the amount needed up to $125,000

          • retirebyforty December 28, 2012, 9:15 pm

            Wow, 24% growth is world class. Of course the big challenge is to maintain the ROI when the whole market goes down like in 2007-2009.

  • Integrator December 28, 2012, 4:57 am

    The dividend income strategy is a great one for producing passive income. My portfolio throws off about $25k annually, but it has taken years (about 10!) to build up. If you are comfortable, consider diversifying to international dividend stocks and possibly smaller stocks that have higher dividend growth. Higher dividend growth is the key. Agree with the comment above that reducing your $50k cash balance and redeploying it toward dividend stocks will throw off additional income for you faster.

    • retirebyforty December 28, 2012, 3:09 pm

      I only have one international dividend stock and I should diversify more. $25k is great for dividend. It will probably take me 10 more years to get anywhere close to that from our taxable account. Our retirement accounts throw off dividend too, but I just reinvest those.

  • My Multiple Incomes December 28, 2012, 8:54 am

    It’ s really good to have an active income to augment your passive ones especially if you have chosen to go on an early retirement which I plan to do in the future. I hope that when my retirement date comes my passive ones will be more than enough to sustain us, but if not then I see no problem in getting an active one to supplement my income.

    • retirebyforty December 28, 2012, 3:10 pm

      Good luck! Active income is so much higher than passive income, but it’s more work. 🙂

  • Steve December 28, 2012, 4:47 pm

    Is the $13,000 all from this blog? How many hours a week do you estimate you spend on this blog (writing, admin, maintenance, responding to comments, etc)? Thanks.

    • retirebyforty December 28, 2012, 9:12 pm

      The income is not all from this blog. I have a couple more sites and I did some freelancing as well.
      I probably spend around 30 hours per week on all my sites together. Blogging is not passive at all.

  • Darwin's Money January 3, 2013, 6:41 pm

    Nice work having $50K liquid. But have you considered some “somewhat safe” alternatives that yield a bit more than the crappy bank savings yields? Perhaps CDs and just eat the withdrawal penalty if necessary or greater part of it in dividend stocks or something?

    • retirebyforty January 4, 2013, 10:04 am

      CD rate is just .1% higher than what I’m getting now so it’s not worth it to me. Next year we’ll invest the money if we didn’t need it this year. I’ll probably go with I bonds and dividend stocks.

  • Mr. 1500 January 5, 2013, 3:34 pm

    I’ve been on Prosper for over 2 years and Lending Club for almost that long. You didn’t mention if you’ve tried Lending Club, but if not, I suggest you have a look. For me, its been a bit safer than Prosper (0 defaults verses 2 very early defaults on Prosper). Also, Lending Club is in much better shape financially with an IPO planned in the next 2 years. Finally, check out lendacademy.com if you’ve haven’t already. Peter Renton has a ton of great information there. In particular, I really liked this recent post: http://www.lendacademy.com/simple-investment-strategy-for-lending-club-and-prosper/

    Thanks for all your great information. We share a common dream!

    • retirebyforty January 6, 2013, 1:34 pm

      Thanks for your input. This year I will invest with Lending Club to see if it’s better than Prosper. Prosper seems to be having technical problems lately and that’s not good for either the lenders or borrowers.

  • My Money Design January 7, 2013, 6:36 pm

    I’d consider a little active income to mix in with my passive income if it meant staying afloat until I could touch my retirement accounts. Unfortunately, I just found out that P2P isn’t offered in my State.

  • Financial Samurai January 12, 2014, 7:10 pm

    Just landed a part time gig which pays a robust salary. Start tomorrow! I’ll write about it the future. Very excited bc the gig is so congruent with everything in doing online.

    • retirebyforty January 13, 2014, 9:31 am

      Looking forward to reading more about it. A part time gig is a great fit for early retirees.

  • theFIREstarter February 2, 2014, 4:17 pm

    All over this stategy!

    There is no way I can save up enough in 5 years to retire only with passive income, and to be honest, I have no real interest in doing that anyway (unless I went travelling, but I am getting a bit too old for all that I think and have done a lot already). So my plan is to try to build some active or semi passive online income, start a few offline side hustles that are interesting and fun to me, get the wife on board and off we sail into the early retirement sunset. If only it were that easy eh 🙂 but we’ll give it our best shot.

    • retirebyforty February 3, 2014, 9:51 am

      Good luck! Traveling is a lot of fun, but you can’t do it all the time. I think we’ll like 2 months out of the year max.

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