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.
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 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.
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.
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?