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Passive Income Made Easier

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passive income made easy early retirementLast time, we talked about how difficult it is to retire early via passive income. In fact, it is probably impossible for regular people who regularly save 10-15% of their salary. That’s not nearly enough to generate the passive income to sustain their lifestyle. The comments on the previous articles are also great and help distilled why it is so difficult to retire with passive income.  Let’s do a quick recap on the most important points.

  1. The return on investment is low. Dividend stocks, bonds, CDs, and other financial instruments return 1% to 5% on investment. You’d need a huge amount of saving to generate enough passive income to fund your lifestyle.
  2. Some investments take longer to pay off. Renting properties are a great way to generate passive income, but being a landlord can be stressful and time consuming. Social security benefits and pensions are great passive income options, but you need to put in many years before they start paying out.
  3. Passive income can drop off. Businesses can fail. Companies can cut their dividend payout. Rent might decrease while expenses increase. If you don’t pay attention to your passive income, you might get a nasty surprise.
  4. Tax advantaged retirement account can get in the way of passive income generation. The 401k and Roth IRA are great, but they have a 10% early withdrawal penalty. If you want to retire early, then you need to invest in your taxable accounts as well. For most people, that’s difficult because after there is not a lot of money left after saving in their 401k and Roth IRA.

However, it is not hopeless. It is difficult to retire with passive income, but there are ways to make it easier. The good thing about retiring with passive income is that you have a lot of control. The main goal is to generate enough passive income to cover your monthly bills and you control those variables. Let’s see how to facilitate early retirement with passive income.

1) Live way below your means.

Saving 10-15% of your income is great if you plan to retire at 65. However, if you want to retire early, then you need to ramp up your saving a lot more. I’d shoot for 50%. Saving a large amount of your income kills two birds with one stone because it lowers your cost of living AND increases your saving. I think this is the #1 thing you can do to retire early.

2) Start investing as early as you can

This one is pretty well known. The earlier you start investing, the more your investment will compound. Time is the secret ingredient and everyone should start investing in their early 20s. Also important is to reinvest your passive income and keep adding new money to your investment. Passive income takes time to build.

3) Try different ways to generate passive income.

Everyone is different. Some of us are good at real estate investing. Some of us have the right temperament to invest in the stock market. Some of us are good at building a business. One nice thing about passive income is that it’s only limited by your imagination. There are countless ways to make passive income, so try different things and find out what you’re good at. Rent out your old home when you move. If you can’t deal with being a landlord, then sell it. Try writing a blog and see if you can make money with advertising. Invest in dividend stocks and see if you can resist selling when the market crashes. Once you find out what you’re good at, then you can put more effort into it and really ramp up that passive income stream.

4) Plan on some active income

Here is Bryan’s comment from the last article.

I think most of us LIKE to work and be productive so needing 100% passive income to pay all expenses seems extreme.“

I agree completely. The problem with work is that it’s 10% fun and 90% drudgery (insert your own ratio here). If you can increase the fun part of work and get rid of the drudgery, then work will be much more enjoyable. For me, that’s becoming my own boss and working part time. Everyone is talented at something and enjoys some type of activity. The key is to make some money from doing something you like without overworking. Not working completely when you’re young will probably lead to restlessness and depression.

5) Marry someone who likes working

We’re extremely lucky that Mrs. RB40 likes to work. She enjoys the work environment and she isn’t going to quit anytime soon. She was really stressed out during various periods of unemployment in her life and she drove everyone around her crazy. I say let her work and I can enjoy being a trophy hubby. Good luck with this one. 😉

6) Chunk your goal

If you start out with the goal of paying your monthly expense with your passive income, then you’ll get discouraged pretty quickly. You’d need to invest $700,000 in dividend stocks to generate about $2,000 of income per month. Most families don’t have $700,000 lying around and that number can seem impossible when you’re starting out. What you can do is chunk your goal and shoot for 10% when you start investing for passive income. Once you hit 10%, then you can shoot for 20%, then 25%, 33%, etc… This works pretty well for me because those intermediate goals are much more reachable.

Some readers suggest using passive income to cover each particular bill. You can start off with the utilities and then work up to paying your mortgage with passive income. That sounds pretty good too.

Keep at it

I must confess, our passive income doesn’t cover out cost of living right now. We spend about $4,000/month, but our passive income is only about $1,000/month.

  • Expense: $4,000
  • Passive income: $1,000
  • Mrs. RB40’s take home: ~$2,500
  • My take home: ~$1,000 to $1,500

As you can see, I’m covering about 50% of our household expense and I’m pretty happy with that. The passive income here is only from the taxable accounts. I’m not counting the passive income from our retirement accounts because we won’t touch them until we’re in our 60s.

Anyway, the plan is to eventually lower our expense by paying off our mortgage. When Mrs. RB40 retires, we’ll also have the option of moving to a more affordable location. I also plan to increase our passive income by adding more investment over the years. Hopefully, our passive income will cover 50% of our living expense within the next 10 years. We’ll see how it goes…

What do you think? What are you doing to shorten the time it takes to build up enough passive income to retire on? 

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{ 37 comments… add one }

  • Joe August 15, 2014, 2:03 am

    What about REITs rather than owning the property in your own name? You still get gearing (just it’s at the company level rather than your own) and your proceeds are net (but still included in your income) of costs and tax deductions, but you end up in the same place. Are REITs not an attractive alternative?
    The only reasons I can see as to why you would prefer being a landlord yourself is:
    1. you don’t like their gearing and want to be more aggressive.
    2. you don’t like to pay management fees that the management company takes running the portfolio and rather get this yourself as a landlord.
    3. the market has increased the price of the REIT shares to such an extent due to its liquid nature that there is a disconnect with non-liquid property purchased yourself.

    Please let me know if I’ve missed something, since it seems to me that REITs give all the benefits of being a landlord, and are likely to be cash-flow positive from day one, without the hassle of managing tenants – particularly if you’re going to outsource to a property letting/management agent in any case? Any further insight/blindingly obvious advantage I’ve missed?

    • The Passive Income Earner August 16, 2014, 9:15 am

      REITs will give you cash flow from your investment with some appreciation in value on your investment. Your own rental unit may appraise more so your equity can increase more over time.

      The rental unit is also a tangible equity that you can leverage for other investments whereas stocks is rarely used by a bank to secure a loan.

      Often times, those in the real estate will leverage their equity in the properties to start buying more. The banks allow it since they have an asset as co-lateral.

    • retirebyforty August 16, 2014, 3:37 pm

      I’m not an expert, but I think REITs can be affected by the stock market much more than your own property. When the financial crisis hit, REITs dropped like a rock. Well, it was a housing crisis too so that’s expected.
      People still need a place to live so if your rental property is in a good location, it won’t be influenced by the stock market. I have some REIT index at Vanguard.

  • Iuri G. August 15, 2014, 6:13 am

    “Marry someone who likes working.” I laughed at this.
    I would never marry a lazy slob, anyways.
    No disagreeing with you, but IMHO more (maybe most?) important is marry someone who is humble, sensive, and reasonable.

    Even people who like to work could be selfish and irresponsible with money. Worst, don’t care about the spouse opinions. It may be nosense imagine a spouse that don’t value his/her relationship proper, but i see this often. Very often.
    Someone who give up in minor things and consider the spouse opinions is more able to set and WORK on mutual goals. Family goals like manage retirement, where to live, how look after the children, etc.

    “A bowl of vegetables with someone you love is better than steak with someone you hate”- Pro 15:17
    I’ve seen it in this blog as well: Unhappy marriage is a path to disaster. Emotional and financial disaster.
    People who care about their family will have a better, modest, and happy life.

    “The plans of the diligent lead surely to advantage”- Pro 21:5
    A healthy budget is a bonus.

    • tuscany August 15, 2014, 10:48 am

      I totally agree ” a bowl of vegetable with someone you love is better than a steak with someone you hate ”
      It deteriorates mind & soul

  • Kenny August 15, 2014, 7:29 am

    Young minds are best to be put to work with an employer for ‘creating wealth’. It is only after years of doing that with a VERY high savings rate, that one can think of ‘passive income’. A lot of mental dreams about generating passive income does not come when you have $100K in savings, and a rental property needs $50K down. That is 50% of your wealth, and it is very hard to risk 50% of the savings without experience of renting, or knowing how to deal with tenants. This is why we see older people owning properties galore, since they started in their 40’s like RB40 and then multiplying from there. Unfortunately, I got started even later than that in my late 40’s but, then 2008 recession hit, and I was able to get to multiple buildings quickly. At this point, I feel that I did not buy enough properties, but what I have generates 200% of my annual expenses (measured with Net-After-Tax-ROI vs Net-After-Tax-Expenses), so it far sufficient for living. And, yet, what I started when I was young i.e. a Technical cum Sales Career is still going to ‘create’ wealth using my mind and therefore it is a double benefit. Not everyone will have this and others have it earlier than me, but by sharing this, I am giving an example of how one can do it with a career > save loads of money > invest in stocks with dividends > reinvest those dividends into stock > cash out partially to buy rental property > build on this concept > retire early.


    • retirebyforty August 16, 2014, 3:40 pm

      Great job with the rentals. We picked up 2 properties during the period and that’s the max the banks would lend us. 200% of your annual expense is great. You have a choice to keep working or not.

  • mike August 15, 2014, 7:50 am

    hi Joe:

    I’ve been reading your blog for a little while. And I’ve always wondered in the back of my mind why you count contribution to your 401k and your son’s savings as deductions to your take home pay. Thus making it lower than it should be.

    My point is, I think if you don’t count the above deductions, the income you bring home before taxes is really on par OR ABOVE what a lot of people make working a full time job.

    ie. if you take last month’s online income of 4444, subtract expenses, you gross 47448 annually.

    And I think the day Mrs RB40 is truly able to leave her job is a lot closer than you think AND still enjoy your currently lifestyle. It seems like your family can make it with none or less of her income as is, even currently. But let me know if I am wrong. It just means no more retirement savings. But why do you need it if you have enough through the business and dividend income to break even?

    You already have what seems like a huge 401k, dividend portfolio, and real estate investments as an emergency back up for the unexpected expense that will come up from time to time.

    I think this is phenominal and kudos to you for being able to build this business up to this point. (it took 4 years from when you first cashed your first check on this??) And it also seems like its continue to grow. Not sure what your secret sauce is , but please share with us all!


    • retirebyforty August 16, 2014, 3:44 pm

      Well, I don’t know how long the online income would last. It could slow down or stop completely next year. We’re too dependent on Google and they can change their algorithm at anytime. Secret sauce? I guess I’m lucky. Actually, many people make a lot more money than I do. I think they are a lot more serious about their business though.
      Retirement saving – I guess it’s a habit that’s hard to break. We get tax deduction and more security for the future.

  • kammi August 15, 2014, 9:07 am

    This is a great list. Yes, marry someone who likes working! I love it! Totally agree. I think also marry someone who lives simply. It’s not worth it to have a ‘bucket with a hole’ financial situation with your partner!

    • retirebyforty August 16, 2014, 3:44 pm

      Definitely. You need a partner with similar financial goals. It’d be extremely difficult to make progress otherwise.

  • Even Steven August 15, 2014, 9:23 am

    I like the idea of one bill at a time with passive income, especially if it pertains to dividend investing. I would like knowing that my dividends would cover my grocery bill for the month or a haircut even.

  • ted August 15, 2014, 9:37 am

    The correct advice to people should be not to just cut back expenses, but to focus and work hard to figure out what you’re very good at. Eventually, when someone becomes very good at something, they’ll learn to enjoy it and make a good living at it. Then there’s no need to retire ever.

    • retirebyforty August 16, 2014, 3:46 pm

      That’s a good point. The problem is I don’t think you can enjoy doing the same profession forever. I think most people get bored after 10-15 years. Never retire is good if you like what you’re doing. It’s even better if you can go half time. 🙂

  • Dividend Mantra August 15, 2014, 9:48 am


    Great post. And I agree with you on how a little active income goes a long way. The key is to find work you enjoy, so that it’s no longer “work” at all.

    However, investing in dividend stocks don’t require “$700,000 just lying around” all at once. That kind of portfolio is built up over many years, and it’s highly likely that a significant chunk of that balance won’t be your money at all, but rather the power of compounding working for you. I hope to have a $500k or so balance by the time I’m 40, but it’s not like I would have just saved and invested $500k all by myself. Your points about starting early and living way below your means go a long way! 🙂

    Best regards.

    • retirebyforty August 16, 2014, 3:47 pm

      You’re right. We all got started at some point. You just have to have smaller goals when you first started.

  • Tawcan August 15, 2014, 10:05 am

    LOL at your tip #5, marrying someone who likes to work. 😉

    While living off passive income is great, I think if you could generate a few active income streams that’d greatly help. For example if you like photography as a hobby and use that to earn some side income. Also the key is to do something that you enjoy. When you’re enjoying something it’s not work anymore. Sometimes I envy these professional athletes. Not only they get paid lots of money they are doing something they enjoy. A win win situation.

    I’m with Jason on dividend investing. You need to build the dividend portfolio over time. Sure if you have a million dollar lying around you can instantly invest everything and get all the passive income you need. But most of us don’t and you need to add capitals slowly. Of course this requires you start early and live below your means.

  • Justin @ Root of Good August 15, 2014, 12:14 pm

    “Marry someone who likes working”. Nice! That could be the easiest or hardest way to get a good passive income depending on that person’s temperament.

  • Tommy @ Leisure Freak August 15, 2014, 1:38 pm

    You have nailed it with this list especially #4 plan on SOME passive income. As someone who is living off my portfolio I had to give up the notion of living off of the passive income alone soon after my first retirement even with our frugal living. However having enough come in that at least covers my living necessities is a huge relief. My hobbies, travel, gifts, etc. which can be adjusted down in my budget when necessary is where I have to get the money outside of the dividends and interest. Being always open to working at something of interest or that I can be passionate about takes the pressure off. Having the financial freedom to choose to pursue opportunities of interest and passion for pay is still retirement in my eyes.

    • retirebyforty August 16, 2014, 3:48 pm

      That’s great. I’ll aim for having enough passive income to pay the bare minimum cost of living too. Hobbies, travel, and fun can come from other sources. Working a little is good for everyone.

  • Blaine August 15, 2014, 5:59 pm

    Hi Joe,

    Nice article! I think your best points are to live well below your means so that you can save 50% of your earned income, and start saving as early as possible to use the power of compound interest. There’s an additional form of compounding that many people haven’t heard called Dividend Growth it’s the best kept secret on Wall Street.

    Dividend growth is when a company raises their dividend payment each year. There are many great companies that have raised their dividend on average of 10% a year… for over 25 consecutive years! This goes unnoticed to most people as they trade in and out of stock regularly; but, with a long-term horizon if you reinvest dividends that are also growing larger every year, you can create a powerful compounding money machine!

    I couldn’t find a simple way to invest in these great dividend growth companies and track my passive dividend income, so I build the tools myself and made them free to everyone. Feel free to check them out at http://www.DividendGeek.com to see if this method of building a passive income stream of growing dividends works for you and your readers.

    • retirebyforty August 16, 2014, 3:49 pm

      I love dividend growth too. Most of the stocks in my dividend portfolio are dividend growth stocks.

  • Financial Samurai August 16, 2014, 8:09 am

    The older I get, the more I like dividend stocks.

    But the best income of all right now is online. Would you agree?


    • retirebyforty August 16, 2014, 3:51 pm

      Dividend stock is just so much easier than rentals.
      Online income is great right now, but who knows how long it would continue. Can we really keep this up for 5 or 10 more years? I don’t know…

  • Stefanie @ The Broke and Beautiful Life August 16, 2014, 8:12 am

    I hate seeing young people put off their retirement thinking they’ll just “deal with it later”- they miss out on so much opportunity for growth. Time can be much more powerful than money.

  • Ravi August 16, 2014, 11:15 am

    Lol at marrying someone who likes to work. Though it does seem obvious since I don’t think anyone would advise you to marry someone who does not like working…

    Great points on how tough it is to really generate wealth. I think it supports the idea of getting into a line of work where you have the skills to make a decent income, living below your means and saving/investing a lot, and doing it consistently for 10 years will likely generate a very sizable portfolio for most people. I think the key really is to go into a profession that gives you earning power or a good work/life balance.

    • retirebyforty August 16, 2014, 3:53 pm

      Well, you know kids. They marry for love. 🙂
      Getting into a good profession is really the key. The finance guys are way ahead of the pack as long as they live a modest lifestyle. They can save a lot of money in a really short time.
      Physicians have way too much student loans and they get a late start because the training takes so long.
      Engineers are too stressed out and don’t have time to enjoy life…

  • No Nonsense Landlord August 16, 2014, 5:25 pm

    Having just paid off another mortgage, I gained almost another $14K in passive income annually. It is difficult to get a large sum every month, but paying off a mortgage definitely does it. Five buildings paid off, only three more to go!

  • Lyle August 17, 2014, 7:57 am

    Keep an eye on your fees, I have a taxable account, IRA and Roth IRA with FolioFn (www.folioinvesting.com) and pay $300 per year for the three accounts. They do “window” trades twice per day for free, do partial shares and if you do a limit order it runs only $3 per trade. I have been with them for over 6 years and like them.

    I have a few higher yielding stocks to boost my returns (SDRL LINE CEFL, PNNT MORL) as I am 59 now. These are not dividend growth stocks, but will keep for a few years and then trade for dividend growth stocks.

  • Kalen Bruce August 18, 2014, 6:12 am

    I think building up your passive income to cover each particular bill is a great way to do it. Having multiple passive income streams is also important for security, as well as total overall income. My wife and I buy homes, live in them for a few years to do repairs and upgrades, then move out and rent them out. We like this method, because we love real estate, but it may not work for everyone. Great article!

  • Mom August 18, 2014, 6:45 pm

    We’re shooting for the dividend income stream as we both hate being landlords, and we’d like to get to a place where neither of us has to work (although we suspect that we’ll continue to work just because we like to). We’ve moved locations to lower our housing costs, and will hopefully be saving close to 50% once things settle down after the move.

    • retirebyforty August 20, 2014, 9:38 am

      Nice job with relocating. I don’t know if we can relocate, we love where we live too much. At least for now.

  • Lisa E. August 19, 2014, 10:22 am

    100% passive income would be pretty sweet. But I would definitely get antsy, so I’d want to start something of my own. I’d like to generate enough passive income to cover expenses, and then any active income would be play money or can go back into investing.

  • Deia August 19, 2014, 2:59 pm

    If you buy right, an ROI of 10% is very possible with real estate, even after accounting for property management fees. I find real estate to be great for passive income (or semi-active); it’s easy to hire other people to do the work for you because there are enough professionals in the field to do practically everything that needs to be done.

  • RE Investor August 22, 2014, 7:34 am

    Good post! Have you looked into something called net lease investments/properties in commercial real estate? I have recently been investing in such opportunities and the returns on these can be higher than dividend, corporate bond and even REIT stocks/funds.

    Net lease investments are very passive investments where the tenant will pay for (depending on the lease) all insurance, property taxes and repairs & maintenance. So essentially you as a landlord just gets to receive a paycheck every month with minimum (or no) hassle. Moreover, similar to physical real estate holdings, you can use debt to purchase these types of investments, which will help increase your overall returns over the long-term.

    I’m a big fan of passive income to allow for financial independence and life flexibility…thus far, net lease investments seem to be one of the better opportunities to generate passive income I have seen.

    • retirebyforty August 22, 2014, 9:36 am

      I haven’t heard of net lease investment before. I’ll check it out. Is it like a REIT? How can I invest?

  • J. Doe August 25, 2014, 8:44 am

    Hi, RB40. I’ve been reading your articles for a while now and finally have decided to leave a comment 🙂 Everything you’ve been saying resonates with me. As soon as I got a job, at 21, I started saving as much as I could. It wasn’t easy, since I came to the U.S from a foreign country on my own and had no foundation to build on, having to start from scratch. I had enough money saved when the real estate market crashed in Las Vegas to buy myself a house with cash. That house is worth double now. 2 years ago I met my now spouse, and we bought another house together. It does help tremendously when you have a spouse who enjoys to work, is responsible with money and you make a great team together. We’ve been living on one paycheck and saving the rest, and I must say, since we married, our finances have improved exponentially. We bought one house that we resold at a profit and have 3 paid off rentals right now. The income from the rentals is not much, but after tax, yearly misc. repairs and a possible period of vacancy calculated, we should have about $12,000/year coming in. We are planning to get back into buying, fixing and reselling property as well as soon as possible. I also invest in the stock market, but not usually buy and hold. I am opportunistic, and buy when I feel a stock is unjustly punished or when there’s temporary market fears that bring stocks down. I haven’t made much money in the market, maybe a total of $4,500 this year and a couple thousands last year, but I’ve been lucky enough to have been right on all of my ‘hunches’ so far. I guess I am addicted to investing too, and am lucky to have a spouse who puts up with me :)) Our long term plan is for my spouse to keep the day job and for me to slowly distance myself from it, since I’m the one with more entrepreneurial spirit in the family. We want to buy and resale a few houses every year, and reinvest the profit back into it. Also, we want to keep buying rentals for cash. At one point, I will either quit my job and manage our real estate investments full time, or start a business or buy a franchise and manage the real estate on the side. This is what freedom means to me, I am not made to clock in and out and leave it at that, but to take control of my finances and make sure that I am not dependent on one company or boss for my livelihood. Keep up the good work and thank you for sharing your life experiences with us.

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