I have been retired for over 7 years and I still love it. The low key lifestyle suits me perfectly. I don’t have to deal with deadlines, managers, coworkers, mindless meetings, or rush hour traffic anymore. Life has been great and I don’t regret leaving my engineering career at all. I haven’t stopped working completely, though. These days, I spend 20-30 hours per week on Retire by 40. (In the summer, I cut back further to just about 10 hours per week.) This is the perfect amount of work for me. Blogging keeps me busy and generates a little income to help pay the bills. It’s a great little side gig that helps our cash flow tremendously.
The key to early retirement is passive income, but it is extremely difficult to cover your bills only with passive income. That’s why my early retirement withdrawal plan has always included some active income. Early retirement can last 50+ years. It’s best to minimize withdrawal in the early years while you can still work. While I’m young, I’ll work a bit and earn a little income. Even a little active income goes a long way in early retirement.
Passive income is tough
Why is it so difficult to build your passive income streams for early retirement? Basically, the world is against you. Here are some of the reasons.
- Time is not on your side – Early retirement means less time in the workforce and more time in retirement. If you want to retire before 40, you’d have fewer than 20 years to work, save, and invest. That’s not a lot of time. Also, the earlier you retire, the more years you spend in retirement. Most people work 40+ years to support about 20 years of retirement. Early retirees aim for the reverse. Time is not on our side.
- Lifestyle inflation – It is inevitable to spend more money every year. The cost of goods increases every year and there are always new services and products. Most families are so caught up with lifestyle inflation that they can’t even save 10% of their income. Saving 10% per year will barely be enough for a regular retirement at 65. Lifestyle inflation is why early retirement is out of reach for most people.
- Low rate of return – Another problem with passive income is the low ROI. I’ll be conservative and estimate we can generate about 3% of passive income from our investments. Our annual expense is about $55,000 so our portfolio needs to be almost 2 million dollars to cover our cost of living. That’s not easy to do within 20 years.
- Accessibility – Okay, we have over $2 million invested, but they are not very accessible. Most of our investments are in tax-advantaged accounts and we need to build a Roth IRA ladder to access them without paying the 10% early withdrawal penalty. This means we need to accumulate even more than 2 million dollars and keep working to improve our ROI.
See, passive income isn’t easy. That’s why I think working part-time is a more realistic way to retire early. It’s way easier to retire with the combination of passive income and part-time income.
Early retirement doesn’t have to mean full retirement
Passive income is simply income from sources other than work. Active income is income that you have to trade time for i.e. a job. Most families rely on active income to pay the bills, but we all have to retire eventually. At that point, you will have to rely on passive income to fund your lifestyle. However, it doesn’t have to be an abrupt switch from full-time work to full-time retirement. My brand of early retirement is the middle ground and it is much more accessible to everyone.
In 2012, I quit working full-time to become a stay-at-home dad/blogger. With blogging, I’m doing something I enjoy and I make a little money to help pay the bills. Passive income is very helpful because it offsets the amount of active income I’d have to make. When I retired from my engineering career, I needed to make about $500/month to make our cash flow work. That’s not too difficult to achieve. Even if I failed at blogging, I could work part-time at Home Depot and make that much. Luckily, the situation improved since then.
By 2015, our passive income covered about 55% of our cost of living. I call this the FI ratio. Once our FI ratio reaches 100% consistently, then we’ll be truly financially independent. At that point, my wife and I could stop working completely without having to worry about money. I’d probably continue blogging, though. I like working part-time. It helps me feel productive and connected to the world. Part-time self employment is the ideal situation for me and my family.
*The last few years have been fantastic for us. Now, our passive income is higher than our expense. You can see our progress at my Passive Income page.
I originally wrote this post in 2012 and things have changed since then. When I first retired, my goal was for our passive income to cover about 50% of our expenses. My blog income and my wife’s income would cover the rest. We thought Mrs. RB40 would continue to work for at least 15 years so my passive income goal was very modest.
In 2012, Mrs. RB40 liked her job and enjoyed being a productive part of society. She wasn’t ready to retire yet because she recently started her new career. This was a great situation for us because having one spouse working really solves a lot of problems.
Now it’s 2019 and she doesn’t enjoy her job quite as much as she did in 2012. Some days are good, but some days she doesn’t want to go to work. This is a natural progression. Currently, she still isn’t sure if she wants to retire early. I thought her target early retirement date should be 2020, but I don’t know if it’s going to happen. It’d be better if she can transition to part-time somehow. We’ll see how it goes. Anyway, our new goal is to cover 100% of our expenses with passive income. We achieved that already so she can retire anytime she’d like.
Here is how we generate passive income.
Dividend stocks are a great source of passive income because they have the growth potential of stocks and a favorable tax rate. In 2015, we paid no taxes on our dividend income and it felt wonderful. Don’t worry, the IRS isn’t going to throw us in jail. We were in the 15% tax bracket and it’s perfectly legal to pay no tax on our dividend income.
For 2019, we should receive about $15,000 in dividend income. That’s a nice increase from $7,500 in 2012. Our dividend should continue to grow every year because I invest in companies that have good track records of increasing their dividends. This niche is called dividend growth investing. We also add to our dividend portfolio whenever we have a little extra cash.
My tutorial on How to Start Investing in Dividend Stocks.
Currently, we have 2 rental units. A unit in a duplex and a condo. In 2019, we should make about $2,000 in rental income. This is just the income after mortgage, property tax, maintenance, repair, utilities, and other expenses. I’m not counting depreciation, appreciation, or principal reduction. $2,000 isn’t a lot, but anything helps. Eventually, I plan to consolidate down to just the duplex. I can’t be a landlord anymore because I’ll have to spend more time in Thailand to help my mom. She has dementia.
My tutorial on How to Start Investing in Rental Property.
I started investing in real estate crowdfunding in 2016. It’s been going pretty well so far. I started with $5,000 and now I have about $55,000 invested. This year, I’m focusing on increasing my investment with PeerStreet. They have a very good reputation and the minimum investment is just $1,000. I could diversify by investing in other parts of the country. I like living in Portland, but it’s hard to be a real estate investor here. There are too many rules and regulations now.
You can see how I’m doing with our investment at my real estate crowdfunding page.
Okay, this one is not quite passive. Blogging can be a lot of work, but it can lead to numerous opportunities. Many bloggers left their day job to pursue full-time self employment and some of them are very successful. A few elite bloggers are making a lot more money than they ever did from their previous career. I encourage everyone to start a blog. It’s a great way to build your brand and generate a little extra income.
The great thing about blogging is that you don’t need to know how to do all the technical stuff. You don’t even need to be a great writer. I was always better at STEM subjects when I was in school and I never thought I could write. My early articles weren’t great, but I improved a lot since then. Like anything, the more you practice, the better you get. Seriously, if I can write a blog, anyone can.
Here is my tutorial on How to Start a Blog and Why You Should. Eventually, it could become very passive. Some bloggers update their blog once per month and generate a very respectable passive income. I hope to get there someday.
The bulk of our investments are in our tax-advantaged retirement accounts. Once Mrs. RB40 retires, then we can start building a Roth IRA ladder to access those accounts. For 2019, our tax-advantaged accounts should generate about $30,000 in passive income. These are all in passive index funds so the ROI is just around 2%. We’ll focus on more income by investing in dividend stocks when we do the rollover process.
Here is a simple way to track our progress toward financial independence.
FI ratio = passive income / expense
In 2019, we should generate about $50,000 in passive income in 2016. On the denominator side, our expense should be around $50,000 as well. So our FI ratio for 2016 should be just about 100%. My blog income should be around $40,000 this year so things are looking rosy.
Okay, our passive income surpassed our expense since 2017. Hooray! However, there is a minor issue. I counted the income from our tax-advantaged account as passive income. That’s valid, but it’s not immediately accessible. It’ll take 5 years to access that income via the Roth IRA ladder. That’s where my blog income can fill in. After 5 years, then the ladder will be in place and I could retire if I get burned out from blogging. (I don’t see that happening, but you never know.) The timing is just about perfect. Mrs. RB40 can retire in 2020 if she’d like. Our finance is in good shape to support that now. Our passive income came a long way since 2012.
Anyway, passive income is the right way to pay for early retirement. You don’t need to cover 100% of your bills if you’re willing to work a little bit. A little part-time work is actually good in retirement. It helps you pass the time and make you feel productive. I’m planning to keep working part-time for at least 10 more years. This will enable our investment to grow at a higher rate because we’ll be able to put off withdrawal and invest a little more.
In conclusion, I encourage everyone to figure out a way to generate a little active income after early retirement. A full retirement can wait until you really don’t want to work at all. That point will probably be 55 for me. Once our son graduates from high school, then I’ll probably wound it down and travel a lot more. Meanwhile, I will continue to work part-time on something I enjoy. I hope you can find something fun to do and make a little money along the way too.
What about you?
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Image by Giorgio Montersino
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