Last 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.
- 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.
- 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.
- 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.
- 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?