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3 Ways to Fund Early Retirement


3 Ways to Fund Early RetirementI’m sure most readers are familiar with the old “3 legged stool” of retirement. This term stems from an earlier era where you could count on 3 sources of income in your retirement.

  1. Social Security Benefit
  2. Pension
  3. Personal Saving

The 3 legged stool might work for the current generation of retirees, but it won’t work for later generations. Generation Xers and Millenials will need to figure out different ways to fund our retirement. Pensions are rare and companies are methodically phasing them out. The average American personal saving rate is very low at around 5%. And who knows if Social Security Benefits will still be around when we’re 65. Retirement is looking pretty shaky for Gen X and later. However, all this doesn’t really matter if you plan to retire early.

A Pension and Social Security Benefits only become available when you’re near the traditional retirement age of 65. You could draw on personal saving, but it’s pretty difficult to build up a substantial amount before you’re 40 years old. If your goal is to retire early, then you will need to figure out a different way to fund it.

3 Ways to Fund Early Retirement

My plan for early retirement is somewhat ambitious. I want to leave our retirement accounts alone until we’re in our 60s. This will give them plenty of time to accumulate via compounding (compound interest.) Currently, we have about $900,000 in our retirement accounts. That’s not enough to fund 40+ years of retirement, but if we can keep our hands off them for 20 years, we should be able to have a financially secure retirement.

Anyway, how do we fund 20 years of early retirement? Here are my 3 ways to fund early retirement.

  1. Dividend Income
  2. Rental Property
  3. Part time work

Actually, we are in a transition phase right now. Mrs. RB40 is still working full time, but she plans to retire in 2020. At this point, our non-job incomes aren’t enough to fund our lifestyle yet. Hopefully, we’ll get there by 2020 and Mrs. RB40 can retire without worrying about money too much.

Currently, we spend about $4,500 per month so it would be ideal if we could generate about $1,500 from each source. Life isn’t ideal, though. We’ll just have to shoot for the $4,500 total. The 3 sources don’t have to be exactly equal. Let’s see where we are and how we can meet our goal in 5 years.

2015Projected 2020
Dividend Income$850$1,200
Rental Property$400 on a good month$1,200
Part time work$3,000$3,000


First of all, we’ll adjust for inflation. Assuming inflation is 3%, we’ll need $5,200 per month in 2020. Can we grow our non-job income that much in 5 years?

Dividend Income: I think this one is doable. We need to grow about $100/month each year. I invest with dividend growth in mind and these companies should help us by growing their dividend payout every year. We’ll also need to add more money every year to be able to reach our goal. We probably need to add about $10,000 each year to our dividend portfolio so we can reach $1,200/month dividend income by 2020.

Rental Property: I’m not sure about our rental property. I was planning to convert our rental duplex into our primary residence. However, if we can generate $1,200 per month from the duplex, then it might make more sense to keep it as a rental. I’ll renovate and keep raising the rent over the next 5 years. If it becomes a steady money maker, then we might keep it as a rental. The rental income should increase to $700/month in 2016. On the other hand, if we move into the duplex, our expense would drop drastically so either way will work.

Part time work: This is a tough one. Blogging has been a great way to generate part time income for the last few years, but I don’t know if this will last. I hope to keep it steady until 2020. Mrs. RB40 probably will work part time also since she can’t remain idle for long.

Those are the 3 main ways that will help fund our first 20 years of retirement. I’m also invested in Peer to Peer lending and other crowd funding projects, but they are not a significant source of income at this point. Once I have more time, I’d probably increase my side hustle effort, too. I’ve been passing up paid consumer focus groups because I don’t have time to go.

So that’s how we will fund our early retirement. Once we reach our 60s, then we’ll downshift again and start withdrawing from our retirement accounts. Rental properties are a great way to generate income and build long term wealth, but they can be a lot of work. If I haven’t found a good property manager by the time we’re in our 60s, then I’d probably just sell and take profit at that point.

How about you? Do you have a plan to fund your early retirement? I think having 3 main sources of income is ideal for early retirement. If one dries up, then you have time to adjust.

If you need help keeping track of your finances, try using Personal Capital to manage your accounts. It’s so easy to get the complete picture of your finance and I log on almost every day.  Also check out their fantastic retirement calculator. You can read my review here – The Best Free Retirement Calculator.

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Joe started Retire by 40 in 2010 to figure out how to retire early. He spent 16 years working in computer design and enjoyed the technical work immensely. However, the job became too stressful and Joe retired from his engineering career to become a stay-at-home dad/blogger at 38. Today, he blogs about financial independence, early retirement, investing, and living a frugal lifestyle.

Passive income is the key to early retirement. This year, Joe is increasing his investment in real estate with CrowdStreet. He can invest in projects across the U.S. and diversify his real estate portfolio. There are many interesting projects available so sign up and check them out.

Joe also highly recommends Personal Capital for DIY investors. He logs on to Personal Capital almost daily to check his cash flow and net worth. They have many useful tools that will help DIY investors analyze their portfolio and plan for retirement.

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{ 41 comments… add one }
  • Gina December 8, 2015, 5:19 am

    We have a centipede approach instead of a stool.
    Rental Property 1
    Rental Property 2 in future..primary home now
    Dividend Income
    Cd Ladder
    Roth Ira’s
    Saving Bonds
    Social Security

    • retirebyforty December 8, 2015, 10:17 am

      That’s pretty neat. It’s like a ladder. Is that in any particular order? We have many of the same items.

  • Mucho Invertir November 8, 2015, 11:02 am

    Qué gracioso, funny, stay at home dad!
    That’s what I’m seeking also, but in Spain!

  • Aaron Smykowski November 6, 2015, 9:34 am

    Don’t you think it’s a misnomer to talk about your current state as retired? 71% of your income right now is coming from work and in 2020 it will still be 56%. I would not describe someone that MUST work in order to get income to live as retired. Yes, you changed careers and essential work for yourself now but lots of other people do that too.

    Sounds like you have a great plan in place so that by 50 or 55 you could choose to truly retire, but that’s certainly not the case today.

    Sorry to nitpick but it’s one thing that has bothered me. You have a great site and I like the ideas for passive income that are posted.

    • retirebyforty November 6, 2015, 10:57 am

      Yes… You can say that. I could draw down my retirement account to pay our monthly bills as well. I like working part time, though. The traditional definition of retirement doesn’t work anymore. 🙂
      Have a great weekend.

  • Stockbeard November 5, 2015, 2:18 pm

    My plan is basically side gig (blogging too) and 4% withdrawal off my brokerage account. I’m also worried the blogging won’t always be as good. Right now I’m still working full time, so I am hoping that freeing some time on my end will help me increase the time and opportunities on my site, but who knows for sure, right… ?

  • Abigail @ipickuppennies November 5, 2015, 10:52 am

    Way to go on the savings! For reasons of various life circumstances, we’ll be lucky to fund retirement at all. Although, having been on disability, I can say that sitting around all day can get old. (That’s assuming that you don’t have kids to spend time with, of course.)

    But I am hoping that, eventually, we can get some rental property going to help ease finances in our later years. Maybe then retirement will be a little more feasible. Maybe.

  • DP @ Someday Extraordinary November 5, 2015, 10:13 am

    I like it. Hopefully, the part time work is something you seriously enjoy or else it completely defeats the purpose or early retirement! Dividends are huge right now . . . some great values to be had by the keen investor. Some sectors are so beaten down that even the best-of-class stocks in those sectors are selling at a discount. That’s what I’d focus my energy on! Good luck!


    • retirebyforty November 6, 2015, 10:41 am

      I like dividends as well. It’s hard to find extra money, though. I’ll have to wait until the dividend payments are out and then I’ll see if I can pick up more shares.

  • James Pollard November 5, 2015, 9:56 am

    Rental property is amazing, as long as it’s commercial property. Since buyers and lenders alike will look at the cold, hard numbers, it’s somewhat easier to increase the value of the property. Because people value the property based on the rental income it can generate, you can increase your net worth simply by increasing the rents. Not bad! That’s why it’s called “value-add investing”. 🙂

  • Smart Money MD November 4, 2015, 2:48 pm

    I think that you are in great shape. Your situation is helpful to remind us that the younger you get into the job market the more time you have to contribute in and allow the nest egg to grow. I have many friends who didn’t start their 401k’s until after 12 years in the job force! Assuming roughy an $18,000 annual contribution for 12 years, that’s $216,000 in lost contributions! That doesn’t even include any potential employer match and compounding of time.

  • Jim @ Route To Retire November 4, 2015, 12:30 pm

    We’re on a similar path… I have one rental house and we just picked up a duplex this past weekend. If things go well, I may go after one more property because I really think rental income is one of the best passive streams as long as your careful on the what you pick. We use a property manager for the house and still make a little bit of money each month. With the duplex, one tenant alone will pay the mortgage so we’ll be able to get the mortgage paid off a lot quicker and then comes the good monthly stream!

    In addition, we’re building up our dividend stocks. That’s one I’ve been just started going after, but we probably have around $900 a year coming in on that.

    You’re a lot further along than we are on the blogging portion, but I have time to build that up before I retire from the day-to-day in a few years.

    I really wanted to go after the P2P lending, but unfortunately, we’re not allowed to do that in our state.

    — Jim

  • Eric in Sunny Arizona November 4, 2015, 12:26 pm

    My early retirement sources of income will be:

    1. Rental income on 5 single family homes that are paid for which nets around $3500 per month.
    2. Tax free municipal bond funds. Example: Nuveen Arizona municipal closed end bond fund. pays monthly income tax free.
    3. Dividend income from stocks such as Apple.
    4. Small pension from current employer.

  • Mike Drak November 4, 2015, 11:53 am

    Income properties are a non-starter for me as I’m not very good fixing things and the risk of having bad tenants would keep me up at night. For us it will be just the dividend portfolio and what we can make from our part time jobs which we plan on continuing for as long as our health holds out. Why quit something you love doing as long as it is flexible enough to meet your needs. This will allow us to postpone taking CPP and OAS which is an added benefit.

  • Dave in Sunny FL November 4, 2015, 11:40 am

    You could also create, and then sell or license, intellectual property. I have actually sold a domain name for a few thousand dollars before. Joe, I would buy a course from you on how to create an income-producing blogging business, for instance.

    • Ernie Zelinski November 4, 2015, 3:54 pm

      I agree that intellectual property is one of the best ways to fund early retirement. It is not necessarily the easiest thing to pull off. But if you can create intellectual property that provides great residual income, pensions and all other sources of income become secondary to the point of being coffee or play money. Incidentally, I was once offered $15,000 for my Retirement Quotes website ( http://www.retirement-quotes.com/) but I turned down the offer. First, I didn’t need the money because of the great residual income from my books. Second, I like seeing my website in the number 1 or number 2 spot on Google.com (out of over 20 million wepages) for the search term “retirement quotes”. That is why someone offered my $15,000 for the website.

  • Tawcan November 4, 2015, 11:00 am

    I think you got a solid plan Joe. Rental income is something we should probably explore a bit more in the future but the skyrocketing housing price here in Vancouver Canada makes rental property tough to get into. Maybe we need to explore other cities. With rental properties, it might be better to look into a property manager so you don’t have to deal with the day-to-day tasks?

    Do you ever plan to eat into the retirement saving capital?

  • ROI @retireoninvestments.com November 4, 2015, 10:40 am

    You asked a tough question. For your circumstance, I know you plan to move into the duplex when you retire but perhaps, that decision can be changed. Your expenses at 4.5k a month (or 54k a year) can be cut in half if you pay off your mortgage or move to a lower cost area. As long as your family can live on less than 30k a year, the rental property and dividend income alone would theoretically cover everything. Anything else that you make is icing on the cake.

    My plan is somewhat similar to yours. Dividends/coupons make one leg. Rental properties will be the second leg. Part time job will be the third because once I quit my current job as a developer, I’ll do substitute teaching and/or giving music lessons. Retiring in a foreign country is also a very good option.

  • Justin November 4, 2015, 8:41 am

    Our original early retirement plan was a 2 legged stool with one of those legs being very broad. A large enough portfolio to support a ~3% withdrawal rate is that big fat leg. It should easily get us to SS age in another 3 decades and our projected SS is enough to cover about 2/3 of our budget.

    As it turns out, I’ve added a viable third leg to the stool in the form of side hustle income from my blog, freelancing, and consulting. It’s going to completely cover our expenses this year so we’re pretty well set. I’m not counting on that income lasting forever, and don’t really need to since the plan works with just the two legs.

    But 3 legs are better than 2 right? 🙂

    • retirebyforty November 4, 2015, 10:42 am

      Part time work makes a huge difference. You don’t need to work too hard and a little income goes a long way. I know we can’t count on that income forever, but I’m sure we can find other fun ways to make money for the next two decades.

  • Our Next Life November 4, 2015, 8:31 am

    Since we’re losing two of the three legs of the retirement stool for Gen X and those who come after us, seems like that stool needs a new name… maybe the Retirement Unicycle? 🙂

    Our income plan varies by age and era of our lives, but rental income will be a constant. For the first ~20 years, we’ll sell shares of our index funds, and when we hit 59 1/2, we’ll shift to our much larger 401k savings, which will give us a mix of dividends and share sales. There could be some part-time work in there, but our hope is not to need that, or at least to be able to limit ourselves to fun work, and never obligatory work.

    • retirebyforty November 4, 2015, 10:40 am

      The one legged peg? That’s pretty sad.
      Your plan sounds good. What’s your rental income like? Do you plan to keep the rental when you hit 59 1/2?

  • freebird November 4, 2015, 8:23 am

    I didn’t have any trouble reaching target by age 40, and I think the primary reason is the difference in carrying costs. My spend (excluding income taxes) is about half yours, and this has a double effect. First, net worth rises faster from the higher savings rate, and second, the depletion rate during the spend down phase is slower. So I wonder whether you can get more mileage out of trimming expenses than by adding income? Minimalist living is being taken as a fad by mainstream media, but I think it has serious benefits in enabling early retirement if you can swing it over the long haul.

    Also are you being overly restrictive on your taxable account by pulling out only the $850/mon dividend? Assuming an average real return rate of ~3.5% per annum your retirement portfolio should double to 1.8M in today’s dollars during the next 20 years, and taking a 3% ‘safe withdrawal rate’ on that balance brings in your current 4500/mon spend. So it should be safe to fully deplete your taxable dividend generating account over the next 20 years. If your dividend yield matches the inflation rate, the math is easy, you can pull out 5% per year for the next 20 years to end at zero. So if that 850/mon comes from a 3% yield, you can up that to 1400/mon and adjust for inflation going forward.

    • retirebyforty November 4, 2015, 10:39 am

      We’re at a comfortable spending rate now. Mrs. RB40 probably wouldn’t like it if we cut back much more. It’s mostly due to housing anyway. Once we pay off our home, our expense should drop way down. It’s harder with a family.

      Yes, I’m pretty restrictive with our taxable account. We’ll be conservative at least until 2020. If we need to pull out more when Mrs. RB40 retires, then we’ll do the math again.

  • Vawt November 4, 2015, 8:05 am

    I have been in p2p lending since about 2007. While there were more losses back then, since 2013 I have seen a steady 10% return. I usually stick to higher rated borrowers without any delinquncies (A, B, and a few C).

    I am not sure if we will deal with rental property, but we may invest in REITs like Rich Uncles that give dividends and some appreciation potential.

    • retirebyforty November 4, 2015, 10:36 am

      That’s great ROI. I’m steady at 8%, but haven’t been able to deploy funds as much as I’d like. I think I have about $400 sitting around at Prosper.com. REIT is a great way to invest in real estate if you don’t want to deal with renters.

  • fehmeen November 4, 2015, 7:52 am

    3 sources of income post-retirment sounds good but I think it’s important to have as many sources as possible. People usually downsize their lifestyle after retiring to match the limited income, and then there’s the factor of inflation to prices keep going up, up, up and finally, there’s the big question market about your own health. We can’t predict what conditions we will suffer from in old age, but the fact is, good medical care is expensive and sometimes can quickly drain your savings.

    Among the ideas you mentioned, I think investing in real estate is a good idea. It may be difficult to manage but it’s a pretty stable investment.

    • retirebyforty November 4, 2015, 10:35 am

      I think more is better too. 3 main sources are good because you can concentrate on these 3 areas. It’s tough to become an expert at something if you have so many balls up in the air. Medical care is a big worry, for sure.

  • Dividend Growth Investor November 4, 2015, 5:32 am

    Hi Joe,

    That’s a pretty cool article about sources of income in early retirement. I expect to fund my early retirement with dividends. If I earn any additional income, I will put it in my retirement accounts.

    In your dividend projection, you need to grow total dividend income by 7%/year to get from $850/month in 2015 to $1,200/month by 2020. If your portfolio yields 3% and dividends grow by 4%, and you reinvest those dividends, you will be able to achieve your dividend income target without adding new capital.

    If you add $10,000/year for 4 years, then your monthly dividend income will likely increase to $1,400 – $1,500/month by 2020

    Good luck in your financial independence journey!

    Dividend Growth Investor

    • retirebyforty November 4, 2015, 10:34 am

      You’re right. We’ll keep working on it. Sometime I need the dividend to pay for a big bill, though. I’m paying property tax this month and I need all liquidity to do that. I’ll have to save up some cash and use it to buy new stocks in a few months.
      Best wishes

  • Tyler November 4, 2015, 4:52 am

    Joe I think that the rental income is a wonderful way to help support yourself. My wife and I have been talking about it for some time, problem for us is that in retirement we do not want to be tied down to a location we want to be able to go somewhere for months to a year at a time so trying to figure out how to have a rental property and being all over like that is difficult to work, not impossible but difficult. I also love the fact that you plan on working part time, I tell you the weeks when I only work a day or two and have the rest of the week off are some of the best weeks I have and would love to have more of them. Thanks for all the great stuff you talk about.

    • retirebyforty November 4, 2015, 10:32 am

      You can try to find a good property manager. There must be some good ones out there. I like working part time too. It help you feel productive. It’s good to keep a little busy.

  • Pennypincher November 4, 2015, 4:24 am

    Joe, I hope you offer your blog at least until 2020! I have learned so much from you and your readers each week.
    My real estate holdings-Vanguard’s REIT- Real Estate Index Fund. No plumbing repairs to mess with!

    • retirebyforty November 4, 2015, 10:31 am

      I hope so too. 🙂 I have VNQ and VNQI as well. They are much easier, but my duplex seems to be gaining faster.

  • Maria November 4, 2015, 3:02 am

    My retirement on December 2015 @ age 62 and my hubby’s April 2016 @ age 62 will be funded by this 4 legged stool which is applicable for both of us.
    Pension- both of us have one
    Part time job – 20 hrs max – at least one of us or both will
    Personal Saving- both
    Side hustle making beautiful crafts – me
    Social Security @ 65 or 66- both
    After reading You Can Retire Sooner Than You Think, I Think I Can Go!! Our financial planner feels we will be good since our monthly budget needs are about $4,400 also.

    • retirebyforty November 4, 2015, 10:30 am

      Thanks for sharing! It sounds like you are in a great position financially. Do you have a mortgage or have you paid it off? I’m curious.

      • Maria November 5, 2015, 2:25 am

        Nope still paying mortgage payments of $2000 for a 2,500 sq ft home that I love and our 12 year car died so we have a car payment now too . However zero credit card debt and some savings! Your blog has really motivated me to spend less and save more- so thank you . By the way have you begun a positive behavior plan with your little guy? M

        • retirebyforty November 5, 2015, 9:17 am

          I don’t mind mortgage payments, but I really hate making car payments. Hopefully, you’ll pay it off soon.
          We started positive behavior reinforcement with our kid. It’s tough because he still have a lot of trouble controlling himself. It has taken him a long time to accumulate 3 stickers. We’ll talk about a reward today. 🙂

          • Maria November 6, 2015, 3:08 am

            Let him taste success and let him earn a reward with two stickers for the first two weeks . Then go to three ! I am already sending an extra car payment and after Christmas I plan to send extra side hustle money to car payments. Luckily it is financed at 1.9 %. M

  • Michael @ Financially Alert November 4, 2015, 12:46 am

    Joe, I think you’ve got a solid plan in place that will put you and your family in a great position by 60.

    For me I’m a bit partial to real estate investing. However, I’m only interested in property deals that have enough cash flow to easily cover property management fees. It’s too much work for me otherwise… I’m not as handy as you! 🙂

    Lately I’ve also been investing in real estate related notes (i.e. trust deeds) and some equity deals which are nice and passive. There may be a little more risk involved than if it were my own property, but proper due diligence can go a long way towards minimizing risk.

    I also like P2P investments and will likely deploy more capital there in the near future.

    Finally, I think a side hustle will always be great to keep the juices flowing as long as I’m able! 🙂

    • retirebyforty November 4, 2015, 10:29 am

      Real estate related notes sound like a great investment. I might get into that someday. We don’t have much liquidity at this point, though. Maybe when we sell our rental, we’d have some cash to invest.

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