I’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.
- Social Security Benefit
- 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.
- Dividend Income
- Rental Property
- 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.
|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.
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