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My 5 Year Plan to Grow Our Passive Income

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My 5 Year Plan to Grow Our Passive Income

Earlier this week, I had an interview with Eric at the Personal Profitability Podcast. One great question that came up was how I plan to grow our passive income so Mrs. RB40 can retire by 2020. We are living a modest and comfortable lifestyle right now, but we are still dependent on Mrs. RB40’s job. If she quits working today, we would have to make some drastic changes to accommodate the loss of her income. Our other income streams aren’t quite enough to support the same lifestyle we live now. We’d probably have to move to a lower cost of living location. Portland is nice, but it is getting quite expensive to live here.

This is why we are working hard to increase our passive income until it exceeds our expenses. Let’s take a look at what our passive income is like now and see how I can grow it over the next 5 years.

Passive Income 2020

Dividend Income

Taxable portfolio – Our dividend portfolio is in our taxable brokerage account and it’s doing well. The dividend has been steadily growing and I expect the growth to continue over the next 5 years. The strategy here is pretty simple. We need to reinvest the dividend and also add some new money to grow that dividend income. I think this one should be relatively easy to accomplish.

Joe’s Pre-Tax portfolio – I have been contribution over $25,000 per year to my i401k and Roth IRA since I left my engineering career in 2012. I channeled most of my online income toward my retirement account and the dividend income should slowly increase over the next 5 years. The 2020 estimate might be a little high here.

Mrs. RB40’s Pre-Tax portfolio – Mrs. RB40 also has been contributing the max to her 401k and Roth IRA for years. Her 401k isn’t focused on dividends so the income from her portfolio seems low. Once she retires, we can move some of her investment to dividend stocks and that should beef up the dividend from this portfolio (if needed).

Rental Income

Duplex – The rental income from the duplex was dismal in 2015 because I did some costly renovations when a tenant moved out. On a regular month, we net about $400 from the duplex. In 2016, we should get about $700 per month. I will keep improving the property and increasing the rent over the next 5 years. In the short term, we probably won’t generate much income, but we should be good in the long haul. If the Portland rental market continues to be the hottest in the U.S., we won’t have any trouble making $15,000 per year by 2020.

Condo – I haven’t written about this condo much because I co-own this unit with my brother. It’s cash flow neutral so it doesn’t affect us much. We picked up this place in 2010, near the bottom of the real estate crash. I’m planning to sell and redeploy the investment at some point. My goal is to net around $50,000 from this sale.

Miscellaneous Income

P2P Lending – I have about $10,000 invested at Prosper. It seems to be doing okay, but I’m not planning to invest more at this point.

Interest and I-Bond– These two are pretty boring. I don’t plan to increase our investment here much.

Expenses

Our annual expenses in 2015 were about $52,000. If we assume inflation will be around 2% annually over the next 5 years, then we’d need about $57,500 per year to maintain our current lifestyle. Our 2020 passive income goal is a bit higher than our expense and should give us a little breathing room. Of course, we probably will have added expenses after Mrs. RB40 retires. We’d have to pay for our own health insurance for one. I’ll analyze the situation more closely as we near 2020. I think we will be in a good position, though, because I’d still have some income from blogging or another venture by then.

Keep at it

Overall, I have a good feeling about this. To grow our passive income, we just need to add more money and keep at it. We will continue to save and invest over $50,000 per year over the next 5 years. We also need to keep a lid our lifestyle. We’re pretty comfortable now and I think we can maintain this level of spending. Actually, I think our spending should decrease a bit over the next few years because RB40Jr will start public school. We won’t have to pay for preschool anymore. It’s hard to see 5 years out. I’ll check in annually and see how it goes.

So that’s our plan for the next 5 years. Hopefully we will beat this challenge before 2020. Do you have a 5 year plan to increase your passive income?

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{ 39 comments… add one }

  • Ernie Zelinski December 18, 2015, 1:10 am

    I don’t have a 5-year plan to increase my passive income. In fact, given that I will have had a great year in 2015 (my best year ever), I will be happy if my passive income in 2020 will be half of what it will be in 2015. I will still be doing very well.

    In regards to your plan, I think you will do well. You sure do have the ability to pay close attention to details, which I don’t have.

    • retirebyforty December 18, 2015, 11:08 am

      That’s great to hear. Congratulation on a great year.
      I’m actually not that great with details, but when it comes to money, I force myself to do it.

  • Money Beagle December 18, 2015, 5:25 am

    That’s some impressive amounts now and some very good goals to grow towards. Best of luck and hope you update regularly along the way over the next five years!

    • retirebyforty December 18, 2015, 11:08 am

      Thanks! Good luck to you as well. I will probably update this every year or so.

  • Michael @ Financially Alert December 18, 2015, 7:25 am

    Hi Joe, we’re in the similar boat. Without my wife’s income we’d also have to drastically reduce our current lifestyle.

    I like that you have a 5 year plan to move into a better position for your family.

    My 5 year plan to increase passive income is to purchase more income properties (most likely out of CA), increase our investments in P2P, and create an online biz that can generate some revenue passively.

    • retirebyforty December 18, 2015, 11:09 am

      I’m sure you can maintain your lifestyle by withdrawing some of your fund. 🙂
      Good luck with your passive income plan. Is it a good time to purchase income properties? I guess there are some location that have good ROI. Portland is getting expensive.

  • freebird December 18, 2015, 7:41 am

    I expect that would mostly involve reallocation in my case. Right now I lean away from anything that pays dividends or interest for tax reasons. Once my W2 income is gone I’d have less motivation to avoid yields (i.e. investments as opposed to speculations). Rothifications may complicate this decision, though.

    Now if we count capital gains as passive income, then I definitely do NOT have a plan to increase this because I think I’m doing the best I can right now and I’m not expecting tailwinds over the next five years. I’m not saying it’s impossible to do better, just that I think it’s too late for me to start experimenting with different methods. So any increases would have to come from the people who inherit what’s left.

    • retirebyforty December 18, 2015, 11:11 am

      In our taxable account, I sold most of our growth stocks and purchased dividend stocks. That worked out pretty well. Our retirement fund remain in index funds, though.
      I agree with you on capital gain. I’m sure we’ll see a slowdown soon. I’ll just keep up with the DCA.

  • Sam Dogen December 18, 2015, 8:01 am

    Sounds like a good plan! I made a 3 year plan in 2012 to get to $200,000, but I came up short. That said, the plan helped me get farther than I would have otherwise.

    The good thing is that inflation will help you get there, even if you do nothing.

    Everybody needs to plan!

    Sam

    • retirebyforty December 18, 2015, 11:12 am

      You’re in such a great position with your passive income. Your properties are doing so well. I think our rental income will increase, but will never reach Bay Area level.

  • Justin December 18, 2015, 8:09 am

    No plans to speak of. Since we’re pulling such a small amount from our portfolio, it will probably grow. Over 5 years, that might be 20% growth in real terms (after inflation). We’ll see how the next 5 years play out!

    • retirebyforty December 18, 2015, 11:13 am

      No Plan? You should make one. It will be a good blogging topic. Your withdrawal rate is so low. It’s ridiculous!

  • Tawcan December 18, 2015, 9:14 am

    We don’t have any set numbers written down for our 5 years plan but perhaps this is a good time to sit down and write it down.

    • retirebyforty December 18, 2015, 11:13 am

      Yes, you should write it down. It will be a good blogging topic.

  • middle class revolution December 18, 2015, 9:18 am

    May I ask where your blog (income) fits into your 5-year plan? Also, what is your adjusted annualized returns for Prosper? It seems like you could make much more than $700 – $1,000 with $25,000 invested in it.

    You’ve inspired me to come up with goals and a 5-year plan!

    • retirebyforty December 18, 2015, 11:15 am

      The online income will fund my i401k. We’ll use what’s left to increase our dividend portfolio. I’m not sure what I’ll do after Mrs. RB40 retires. I hope to keep blogging, but who knows what will happen.
      My ROI for Prosper is around 8%. We have about $10,000 invested.
      Good luck with your 5 year plan.

  • Michelle December 18, 2015, 9:58 am

    Yes! I definitely want to increase our passive income amount. We are hoping to retire at around 30 or 31 (I still see myself working, but I just want to reach that retirement number), and I would like to have passive income so that I can feel more comfortable “retiring.”

    • retirebyforty December 18, 2015, 11:16 am

      Good luck! What are you going to invest in? I think you have a lot of surplus so it shouldn’t be that difficult to build some passive income, right?

  • Mike H. December 18, 2015, 11:07 am

    Unless I’ve missed something significant, the math doesn’t seem to add up here.

    You currently net $4,100ish per month now in income and spend $4,000ish, right (for a total of about $48k per year)? Part of that income is Mrs. RB40’s salary of $5200ish/month. In 5 years, it isn’t unreasonable to think that Mrs. RB40 could be bringing in $6000/month, especially if she’s in a management training program (those things eventually pay off). You seem to be proposing that you’ll be able to replace at least $5,200/month (I’d use $6000 in my calculations, but I’m super conservative about these things) of active income with about $2,500/month of passive income.

    Factor in inflation, tax increases, children in growth spurts, etc., $63k in passive income seems…a little low for completely forgoing active income. Your projected passive income in 5 years is – was the estimate before taxes? – not much more than Mrs. RB40’s active income by itself today.

    $63,000 per year of passive income is amazing, and I can’t wait until I’m in that position. But you seem pretty confident, so what considerations haven’t I included here?

    • retirebyforty December 18, 2015, 11:30 am

      Short answer is I didn’t consider my online income which is around $3,500/month. Right now, almost everything goes to my i401k and tax. Once Mrs. RB40 quits, then we’ll use that money as needed. I plan to continue working part time. Mrs. RB40 also might work a little bit.

      Mrs. RB40 currently brings home about $5,000 per month after tax, retirement contribution, and deductions. We won’t be able to replace that completely. We don’t need to because we spend less than that per month. We just need enough to cover our cost of living with is around $4,000. I hope this helps clear it up a bit.

      • Sam December 18, 2015, 6:38 pm

        $6,000/month after tax and retirement contributions is over $100,000/year gross. You sure you guys will be able to walk away from that?

        That’s going from like $250,000+ in steady annual gross income to $0!

        • retirebyforty December 18, 2015, 11:30 pm

          Sorry, it was around $5,000 per month. We’ll see if she can really walk away. I’m pretty sure she can, but we’ll see in 5 years.

  • Stockbeard December 18, 2015, 11:58 am

    Joe, why do you only count dividends for your portfolio? Aren’t you expecting to also get increase in value of your portfolio, and being able to sell shares?

    • retirebyforty December 18, 2015, 1:05 pm

      I don’t want to draw down until a little later. Maybe 55? I’d rather work part time and use that to supplement our passive income rather than sell. I’m being conservative, but that could change in the future.

  • Mr. Tako December 19, 2015, 3:15 am

    Hi Joe. I’m amazed you think Portland is so expensive. We live in the next metropolis north of you and real estate is far more costly here. One of our ‘backup’ plans is actually to move to the Portland area! Ha! 🙂

    Our current plan is to just keep the funds invested and let the passive income grow. This year was especially exciting for us because I think we broke $100k in dividend income, which WAY exceeds our regular expenses. But this year is an big anomaly. I’ll write more about it on my blog in the coming weeks (I want to see how the year ends, we still have dividends coming in).

    • retirebyforty December 19, 2015, 12:19 pm

      Well, Seattle is much more expensive, of course. I’m just jealous of Justin from Root of Good. His living cost for a family of 5 is just around $15k per year. There are many locations much more affordable than Portland.
      Congratulation on breaking $100k in dividend income. That’s AMAZING! I don’t think we’ll ever get there.

  • Steven December 19, 2015, 6:55 am

    It’s great to have a 5 year plan and especially one with goals that can reach FI. Currently our plan which is heavy in real estate will have 2 upticks, one when the FL rental will be paid off in late 2016 and when our owner occupied rental will be paid off in 2020. Although as we get closer to the first rental being paid off we are leaning towards creating taxable investment account to even out our overall portfolio. 2016 is a big year, I look forward to it. Merry Christmas and Happy Holidays to you and your family.

    • retirebyforty December 19, 2015, 12:19 pm

      That’s great news with your rentals. Once it’s paid off, you should have much better cash flow. Happy holidays!

  • FerdiS December 20, 2015, 5:25 pm

    I’ve set annual goals since starting DivGro, as well as a rather fuzzy 10-year goal. Your article is inspirational as I haven’t really thought about doing a 5-year plan. I think I’ll work on one soon!

    Thanks and take care!
    FerdiS, DivGro

    • retirebyforty December 21, 2015, 9:10 am

      A 5 years plan is good because it’s more solid than longer term plans. You can work toward it and see actual progress. 🙂 Good luck!

  • dug December 21, 2015, 3:40 pm

    Hi Joe,
    I enjoy your blog. It’s been very informative.
    I had a question about how you are able to access the pre-tax account’s passive income in 5 years so that your wife can retire. Isn’t there a penalty for early 401k withdrawal before age 59 1/2 yo? Or are dividend incomes counted differently?

    Thanks,

    Dug

    • retirebyforty December 21, 2015, 8:16 pm

      It’s just a challenge I’m striving for. I don’t think we will need to withdraw from our retirement fund yet. I have my online income to fill the gap. If we need to, we will probably use rule 72(t) to avoid the 10% penalty.
      Cheers

  • cato December 21, 2015, 5:04 pm

    “If the Portland rental market continues to be the hottest in the U.S…”

    • retirebyforty December 21, 2015, 8:20 pm

      Yeah… That’s a big if.

  • Florence C. Johnson December 23, 2015, 10:40 am

    Rules of earning money in rental business:
    1 Never invest in apartment when tenant is inside.
    2 Always rent empty apartment
    3 Give better deal to tenant of market average around 5%
    4 Make professional agreement in case of damage caused by tenant
    5 Pay insurance for apartment
    On this way you have steady 6% year income on real estate investment included renovation on 10 years basis

  • Gary December 30, 2015, 1:21 am

    Really enjoy your articles. I’m very interested in financial independence and investing, trading, etc. as additional sources of income.

    I noticed you’re thinking about scaling back P2P. I haven’t tried that. One thing I’ve come across recently that you might want to look into is being a liquidity provider on bitfinex (a bitcoin exchange). As you know, usually the broker provides margin loans and benefits from the interest earned. On bitfinex, the customers provide the loans. The broker just manages the risk – i.e. closing out positions and paying back the lenders if the trader’s position moves against them (you the lender are not speculating on bitcoin prices). The daily rates are really pretty attractive – double digits annualized. Here’s a blog post that talks about it: http://mariodian.com/post/93130306601/how-to-make-profit-over-50-percent-per-year

    Take care and good luck.

  • Dan Steig January 6, 2016, 9:21 am

    Why don’t you mention the passive income from your website? Isn’t that something you’d want to factor in?

    • retirebyforty January 6, 2016, 10:03 am

      The problem with the blog income is that it’s not very passive. I’m sure it will drop steeply if I stop blogging. Eventually, I’d probably cut back to once a week or less and then we’ll see how it goes.

  • Rob January 17, 2016, 12:23 pm

    Love your blog- very inspirational.

    Second the comment about Portland being “expensive”. As someone who has lived in NYC and Boston, Portland seems like a steal. In fact, my own early retirement fantasies center around moving there!

    Your withdraw rate seems ultra-conservative..around 2% of net worth. I guess that makes sense given that you a) don’t want to touch the retirement funds b) only use dividends. I’d say Mrs RB40 could retire whenever she wants at this point and if she does hold off for 5 years you’ll be in ridiculously amazing shape financially.

    Personally, I’m targeting 3% overall and hope to retire around 42. There’s a bunch of “fluff” built into my projected expenses though.

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