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The Passive Income Earner’s 7 Phases To Retirement

by retirebyforty on August 30, 2013 · 17 comments

in dividend, early retirement, goals and milestones, retirement

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The following is a guest post from one of my favorite blogger – The Passive Income Earner. He aims to achieve financial independence and retire through dividend investing. I have been following The Passive Income Earner for a couple of years now and it’s great to see the progress he made on his dividend portfolio. Check out his plan and tell him what you think.

I found the 7 phases of retirement series very inspiring and it had me reflect on the changes I made and why I made them. We all make mistakes and it’s important we learn from them. Above all, I believe its important to define ourselves and our goals. It makes it much easier to focus on what’s important and gives us opportunities to achieve our goals.

I am on autopilot now when it comes to investing. All I need is to save as much as I can to benefit from ‘time’ effect. Time is your biggest ally in investing and retirement in my opinion.

1. Wake Up Call

The layoffs at my company were a wake up call. At any point, I could now lose my job and have financial challenges. The company did 3 years of layoffs which I survived but the last one in 2010 was when I realized I needed a strong plan. I always saved money and had savings but our spending had increased following my pay raises. It needed to change for a one income family of 4 with 2 growing kids.

2. Define an Investing Strategy

As I mentioned, I was saving but my investing trials weren’t so good. I made money on Apple with the iPhone release but I also lost money on Crox. I had no strategy and it was not working out. My parents were already retired and living from investment income. I knew it was a plan and even though I had some mutual funds for dividend income, it was not the case for my stock investments and it was time to change that. I read The Lazy Investor during the Wake Up Call phase and started focusing on dividend investing and DRIP for accelerated compound growth.

3. Pay Off my Mortgage

I don’t want to have any debt that requires me to ‘have to’ work. I am fine with good debt against appreciating assets but not against other assets. You can argue that a house is on the good side but then again, I think it’s in between good and bad … You obviously need a place to stay but I don’t want to be tied down and be house poor either.

It goes back to my first point though. If I lose my job, as a one income family, I don’t want to be in the corner and stuck. It’s not about emergency fund either … It’s about having the flexibility of adjusting my amortization to match the realities of the next income. The more I have paid on my home, the easier it is if something happens. As such, since 2010, any extra income from raises goes right on the mortgage and not towards new toys or fancy trips.

4. Save Before Spending

Before 2010, I have to admit that we fell into the keeping up with Joneses trap … I was so disappointed when I realized that. I thought I had all the proper upbringing as a young adult and I always was good with money. I had to put a stop to that. Any trips we decided to do, we had to save the money first. The same goes for all the renovations on the house.

5. Always Invest

Invest small amounts with Computershare or any other transfer agent. While I was putting in place the regiment outlined above, I had to save weekly and monthly with $50 or $100. I was always investing through the company plan but I wanted to accelerate that. At the end of the year, I probably invest 18% of my gross and I still feel it’s not enough.

Since my automated savings are in percentages, any raises automatically increase my core investments. For those that follow me, I am big on dividend investing but my automated investments are all index funds through the company plan. I can’t do anything else otherwise I lose the matching contribution so I have to work hard to have money invested in my dividend accounts.

6. Findependence Day

This term was coined by Jonathan Chevreau in his book Findependence Day which represent the day that you reach your financial freedom. It doesn’t mean retirement. It means that you do not have to work to make ends meet. I have set my Financial Freedom at 45 but it’s going to be tough. I mean really tough as I have 7 years left on the mortgage. I think 50 will be more realistic. I had chosen 45 since that’s when my parents retired. I was 10 at the time and played golf with my dad all summer.

Dividend income is all about reaching my Findependence day. I currently generate just over $6K per year in income and I need much more. Blogging has provided extra income but it’s nowhere near as passive as dividend investing. Don’t let anyone fool you …

7. Retirement

The big day. By this time, I should not have any kids at home anymore and hopefully it’s before the grand kids :) All education should be covered for my kids as well.

I am 39 now and would like to reach financial independence by 45. It’s really a stretch goal. What I know I can achieve is being done with our mortgage by 45 and then see what the gap is for my financial independence. I probably would not stop working but I would take more vacation :)

RB40’s comment

Thank you for sharing your plan with us. It was really timely because I need some help this week. I have been so busy with RB40 Jr. that I didn’t have much time to write. Wow, I didn’t know your parents retired at 45. That must have been very unusual back then.

I really like The Passive Income Investor’s 7 phases because it is so personal. Everyone has a unique experience and you have to craft your own plan. I do have a couple of questions though.

1. What’s your target for dividend income before reaching Findependence Day?

2. Would you consider combining dividend income and online income to reach that day faster?

RB40’s 7 Phases to Retirement

Rich’s 7 Phases to Retirement

Ben’s 7 Phases to Retirement

I would love more guest posts on this subject. Please make your own 7 phases to retirement and send it to me for publication.

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{ 17 comments… read them below or add one }

Romanian August 30, 2013 at 12:38 am

This looks like a really good plan, but of course it’s very personal too and probably couldn’t be applied as is to us all out there. But it’s always a pleasure, at least for me, to see these phases put on paper and hopefully that will help me shape my own phases and also encourage me to achieve them.

I can only hope that several years from now we’ll get to meet and say: “well, we did it!”

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Rory September 3, 2013 at 3:38 am

Its nice to see someone else speak of paying off a mortgage early in the FI journey. I’ve recently started a blog where that was my first step, and I’m taking a bunch of flak for it.

I understand why ‘in theory’ we should leverage the mortgage and keep money invested instead. But I’ve paid my mortgage off in 41 months instead. I figured that there are a bunch of options to borrow money at less than a 3% rate. 0% credit card offers and convenience check offers come to mind. But besides the lower rates, I really love none of these options will tie debt to my home. As such, I’m far more comfortable using these lines of credit than messing with a mortgage.

It seems like the internet pundits out there disagree with me.

Regardless, now that I don’t have the house payment I can save 60% of my income. My wife and I are pretty proud of that.

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retirebyforty September 3, 2013 at 9:18 am

41 months! That’s great. Saving 60% of your income will help you get to financial independence soon. Good luck!

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[email protected] August 30, 2013 at 1:23 am

It is great to see other’s 7 levels of retirement and early financial independence. Whether it is 45 or 50 it is still 20 years before the average person. I’ve gone over and checked your blog and good work on your progress. To financial freedom!

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The Passive Income Earner August 30, 2013 at 7:53 am

@Charlets

Thanks for your comments! I think the biggest adjustment we made was to avoid a lifestyle inflation after I woke up. Before we take a vacation, I have all the money saved as opposed to put it on a card and then paying it off with future income. (note that my credit cards are ALWAYS paid)

The saving first has really changed how we focus on our spending since we have one income and 2 kids.

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Pretired Nick August 30, 2013 at 6:37 am

I don’t know if I would have thought about paying off the mortgage as a stage, but I’m glad you included it. It’s such a massive shift from debt to freedom that I think it’s pretty insightful to include it that way. I’m sure you’ll hit 45, you’ve got all the pieces in place!

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The Passive Income Earner August 30, 2013 at 7:51 am

I struggle between investing or accelerating our mortgage at times. So far, I have been focused on accelerating our mortgage. Why?

1. Interest reates will go up and once they do, the interest calculation is a reverse compound growth, more money goes to interest rather than the principal. I want to avoid extending the length.

2. Another reason is that it’s my safety cushion. With the mortgage paid or almost paid, losing my job is not as stressful.

3. I could have maid more money by investing but I would have funnelled the money in accounts away from taxes and I could not easily used it later on when interest do raise for making a lump sum payment. Investment returns are hypothetical and estimated whereas the mortgage is really fixed and known. You never know what the markets will do but I am conscious of time.

I also agreed with my wife that we are not changing vehicles until the mortgage is paid off :) By then, both vehicles will have over 200K KM (120K miles). I don’t think we will change both but there is potential for extra maintenance…

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The Passive Income Earner August 30, 2013 at 7:41 am

Thanks all for the comments. To answer Joe’s questions:

1. I did a pass on the require income I need without the mortgage and kids just to cover expenses based on now and it’s about $35K. That’s just the basic needs with 2 cars. Add another $10K for travelling and fun so I would say $45K. There is definitely room to reduce the $35K by having just one car and the fuel consumption is the same as now but insurance is fixed here ($3500 for 2 cars).

2. I am totally including the online income at the moment. Everything the online income generates is invested at the moment. As a single income family, it was a nice addition and it’s a hobby I enjoy. It’s almost like I found what would keep me busy in retirement :) and I can do it from anywhere in the world.

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Tony@WeOnlyDoThisOnce August 30, 2013 at 9:31 am

Just bought FIndependence Day! How cool…I am totally on board with early mortgage payoff. My biggest problem is that my property taxes are so high. I REALLY need to figure this out.

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jim August 30, 2013 at 2:24 pm

Over the years we’ve had a lot of lay offs at my company. Eventually it seems that I might get laid off but I’ve avoided it thus far. This has impacted my financial planning over the years. I always keep in mind that there is a risk I can lose my job.

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Mike August 31, 2013 at 10:36 am

One thing I found was that the earlier you can find ways to earn extra money, the better. You may not get the pay raises to help fund those things like IRAs and savings, but you can control how much money you earn on the side. By planning ahead 10 to 20 years before one plans to retire, one might be able to use these extra funds to get those nice things done like paying off debts and savings.

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FI Pilgrim September 1, 2013 at 11:46 am

I’m with you on paying off the mortgage as part of my FI plan. It’s not for everyone, but I want the psychological freedom that comes with having no mortgage payment every month. Especially in a 1-income household!

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retirebyforty September 2, 2013 at 12:17 am

I guess being a 1 income household has a big psychological impact. For us, we are planning to pay off the mortgage before both of us fully retire.

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EL @ MoneyWatch101 September 4, 2013 at 7:33 am

Great plan pasive income, I have a similar plan to depend on dividend income in retirement. It is motivating for me to see others like Joe and yourself be closer to retirement or Findependence. We will all get there one day hoepfully.

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Mike September 10, 2013 at 11:55 am

Our last debt step is getting our rental home mortgage paid off early, which we’re working hard to do! Like I just said over at another site, I wish I had the debt-free mindset much earlier in life!

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Andrew September 30, 2013 at 1:40 pm

Speaking of passive income: Have you, RB40 or Passive Income Earner, considered buying a rental property in Detroit? As a natural born contrarian I would think that it would be a great opportunity to get into a specific market while there are firesales. I am wondering if anyone has invested in the area and if they have had any early success? Potentially a Section 8 play..

-Young and never been a landlord.

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retirebyforty September 30, 2013 at 3:46 pm

I’m afraid of long distance real estate investing. It’s already hard enough in town.
Sounds like a good play if you live nearby though.

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