Does passive income = Retirement Income?

[Bree]

My question to other young dreamers as well as experienced retirees is if I should pull the trigger and go into early retirement at 27 using passive income to support, or if I should put it off in order to secure more money?

It's always been my goal to 'quit working' so that I can take the time to do the things that I want to do, at the pace that I want to do them.

I failed many, many times but in the last 2 years have hit on a success which is now generating about $2,000 in passive income per month. I think that it's realistic to see that number grow to $4,000 /mo. by the end of the year.

I have very little savings, and very little in the market - all of my money is tied up in a single rental property which I will likely hold on to.

My heart is telling me to 'just do it' but there's always that nagging 'you need more, more more' in the back of my mind saying I should have more of a safety net financially. As I will realistically live out another 50+ years until death, there is a lot of time for markets and business models to change etc, and perhaps it's better to squirrel away as much as possible while I can right now and go back to work and earn as much money as possible until I am 30-35.

Based on my research and the words of others on this forum it seems like $4,000USD/mo. should be enough to support a modest 2 person home in Central America where I plan to live out the next 3-5 years or longer.

I look forward to your advice, questions, comments etc.

cheers.

 

[fisherman]

I have owned rental property for over fifteen years and have learned a few thinks but by far not every thing! Here are some of my thoughts on the subject and how it played into our 22 year FIRE plan.

1. You cannot assume that the rent will be paid every month without fail. I personally assume I will lose one month of rent per house each year and I also assume I will spend one months rent on repairs each year. Out of the other ten months I pay the taxes and insurance on the property and what is left I assume 75% of will be profit. This is in my opinion a best case scenario. It is quite possible to have a property vacant for several month in a row or a tenant that will not pay and has to be evicted.

2. If you carry a payment on the properties item one may be to optimistic of a way to plan for profit. Our rentals are paid for and that helps to smooth out the hard times.

3. If you do all your own maintenance you will be able to save additional $ and it keeps you in the house more so that you know what is going on in it.

4. Long distance rentals are not a good idea so if you have a rental in the States and live in Central America you are asking for trouble.

5. You should definitely have some additional money saved. Check out Dave Ramsey for age appropriate ideas for savings goals.

6. A positive note, good paid for rentals can definitely be a part of FIRE if you have the personality to handle them. It can take a few bad situations to know for sure if you can be a landlord. The average return on our paid for rentals following the above steps is 8-9% each year so it is a nice diversification method but there are other way if you have the cash to get similar returns without being a landlord but you also do not get some of the tax advantages.

You really need to look at the rentals as just a part of your FIRE plan. This forum is full of good information on how to achieve FIRE so be sure to review the older posts. They were a big help to us.

 

[Bree]

Thanks for the great post fisherman. Let me clarify a few things.

I make my money online, and I consider the rental more of a nest egg and fall back plan (if everything blows up and I need to relocate back to Canada, I like the idea of at least having a house to fall back to).

The rental was split 50/50 with my younger brother who lives in the house and acts as landlord. We each pay half of the mortgage and own half of the house. He's got a really sweet deal in that he collects 100% of the rents to use as his portion of the mortgage. I pay my half of the mortgage from my passive income.

The plan for the house is to see it paid off where we will eventually sell or one of us will buy the other out of his 1/2.

thanks again! I'm off to search Dave Ramsey

EDIT: Just found this post: HERE about knowing when is the right time to retire... reading up.

 

[fisherman]

Dave is good for budgeting and initial savings, think emergency fund to use his words. He also has some good life planning ideas. Be careful with his retirement advice. It is riskier than most would agree with.

 

[FIREd]

I guess I don't understand where your passive income comes from. It doesn't come from your savings, it doesn't come from your rental, you make your money "online"... For me passive income is income generated by my assets (RE, stocks, bonds, business run by somebody else...). Could you tell us how you make $4000 a month in passive income on the internet? Do you own an online business?

 

[Zipper]

At 27 have you paid back even a fraction of the benefits your country has given you?

 

[maddythebeagle]

I guess I don't understand where your passive income comes from. It doesn't come from your savings, it doesn't come from your rental, you make your money "online"... For me passive income is income generated by my assets (RE, stocks, bonds, business run by somebody else...). Could you tell us how you make $4000 a month in passive income on the internet? Do you own an online business?

I agree, this thread is kinda strange...

 

[clifp]

Bree

Here is the part of the show where the white haired codgers pour buckets of cold water on the hopes and dreams of the youngems.

I have very little savings, and very little in the market - all of my money is tied up in a single rental property which I will likely hold on to.

My heart is telling me to 'just do it' but there's always that nagging 'you need more, more more' in the back of my mind saying I should have more of a safety net financially. As I will realistically live out another 50+ years until death, there is a lot of time for markets and business models to change etc, and perhaps it's better to squirrel away as much as possible while I can right now and go back to work and earn as much money as possible until I am 30-35.

So in my best Suze Orman (God I hate her voice) voice YOU ARE NOT Approved for early retirement.

First start with the basics you don't have saving, a pension, or a trust fund. This makes it really hard to retire even in place like Latin America.

Congratulations on having your own business that is big deal for a 27 year old. Still I am unaware of many business that generate $2,000/month on autopilot without active involvement by the owner. A business which would double to $4,000 in less than a year is quite a gold mine. If it as good as you say it should be worth a nice piece of change- $400-500K. Realistically if you can't find somebody to pay you 1/2 that amount it probably isn't as good as you think.


At a minimum to do an early retirement you'll want a years expense in investment (money markets/stock market) so call it $50K
You'll also want to grow the business to the $4,000 level. Then you need to see if how the business performs on autopilot. Spend a month or so and restrict yourself to checking on it to once a week for no more than a couple of hours. (This simulate being stuck in a remote spot in South America with lousy internet/phone service.)

Finally you'll want to renegotiate your housing deal with your younger brother. As you say he has a sweet deal getting the benefits of free living and future appreciation on the house. If you aren't working you clearly can't afford to be paying 1/2 a mortgage.

All if this being said if what you really want to do is a take a 6 months to a year off and travel in South America. Go for it you are only young once, but don't kid yourself that you in any kind of shape for an early retirement.

 

[Bree]

Thanks for the advice clifp.

Basically I make money by monetizing information online. I take a topic I'm interested in, research the heck out of it and then do my best to package that research into easy-to-digest writeups, videos, dvds etc.

Next month I will start to test the automation part of this and see how that goes until the end of the year. Perhaps this path will never lead to a true 100% early retirement where I never touch work again. It's just too much fun, but I am taking steps to automate almost everything in my business by hiring personal assistants and virtual teams to handle things.

Zipper: I never thought of things in terms of paying back to my country. I've been abroad since I was 21 and at this moment only consider moving back to Canada much, much later, to get a small farm near the mountains... That's a good thought though, but I don't think that I would ever look at this 'problem' from only a financial/tax standpoint. I think there's a lot of things I could do via philanthropy and outreach programs that would easily trump a lifetime of tax payer dollars.

In response to this thread being weird - sorry about that. The more I think about it, a business that requires very little work is not too different from a stock portfolio when you look at it from a very simplified retirement income point of view.

Both provide passive income and both have value that you can realize upon a sale. Stocks are obviously much more liquid. No one knows what the future will hold, and we are all strong enough to react and cope with whatever comes at us.

I think I answered my own question by reading the post (linked above) on whether or not you should wait for 'one more year.' I'm too young in terms of thinking of 'the rest of my life' scenarios, but I can and should pull the trigger on taking 6 months off as clifp has suggested and see how that suits me. If things go well and the lifestyle and income is not a problem, then why not expand that into 1 year, 3 years or even 10.

feel free to pour the cold water Posts like that are where you learn the most

thanks for the insights guys - appreciate it.

 

[chinaco]

Bree.

Unless you have considerable assets... you will not be able to afford to FIRE at 27.

If you expect to live up into your 90s... that means 60 years of support. You will not have SS when your retire.

I would not count on your passive income (at least the one you have now) to be workable over such a long period of time. Plus, the developing nation could change dramatically in the next 40 years and require more money to live.

Consider health coverage also. It looks much different at 55 instead of 27. You need to work on your planning and do a reality check.

Stopping work for 6 months.... It is fine to take a hiatus from work.

But why is the question... If it is in conjunction with desiring to FIRE...
Considering your state of finances... you are likely to be working for quite some time. You had better believe that if you want to retire now... when you reach 50, you will really want to retire. If it were me, I would keep working now unless there was some real reason to take off work.

Maybe you should consider a different line of work if you are tired of your current job or career.

 

[rogersteciak]

I am taking steps to automate almost everything in my business by hiring personal assistants and virtual teams to handle things.

I happen to be a fiftysomething geezer who likes to have big margins of safety before I do anything. But I also enjoy learning new things, especially when they are thought provoking and force me to think beyond the paycheck (as the Work Less, Live More book has done).

One book I've read and need to reread until I really understand it is The 4-Hour Workweek by Timothy Ferriss. He has an online forum at: The 4-Hour Work Week and Timothy Ferriss - Powered by vBulletin


The Internet and globalization has changed everything and Ferriss' book is consistent with other materials I've read on the subject:

• Go It Alone by Bruce Judson (read it free online): The New Entrepreneur: Bruce Judson's Go It Alone! The Secret to Building A Successful Business on Your Own
• STOP Working! by Rohan Hall.

Although these materials make sense to me, I haven't tried to implement any of the approaches they describe to start and run a business (which is why I can't vouch for them yet).

 

[eridanus]

A passive income is where someone else cuts you a check and you just spend it. You may have a lucrative, part-time, job, but it's not passive. It does sound worthy of a 6 month attempt in Central America, though.

Ignore the old codgers who talk about paying back your country/society. Western style capitalism has a point system. If you earn enough points, you can choose not to work. It's sometimes a stupid system but it's the one we follow.

 

[Milton]

A passive income is where someone else cuts you a check and you just spend it. You may have a lucrative, part-time, job, but it's not passive.

I agree. You are describing a method of earning money for not much work (a form of free-lance journalism, apparently) ... but some work is still more than no work.

I have concerns regarding the medium and long-term viability of your present self-employment scheme; but you know the details and are better qualified than any of us to make up your own mind about that. However, I suggest that you wait until you have seen at least four months of income averaging $4,000 (as opposed to the current $2,000) before making any assumptions that $4,000 is "realistic" and sustainable.

Considering your state of finances... you are likely to be working for quite some time. You had better believe that if you want to retire now... when you reach 50, you will really want to retire. If it were me, I would keep working now unless there was some real reason to take off work. Maybe you should consider a different line of work if you are tired of your current job or career.

Very good advice.

 

[Bree]

Thanks again for the great info. I didn't give much thought to changing career - but maybe this is the answer.

rogersteciak: actually, in May is when I'll be trying the 4 hour work week experiment with my current business. I think it'll be hard to hit just those 4 hours - this being my first attempt at full automation but I hope that by the end of the month to have ironed out the majority of the bugs and be down to 4 hours per week or less.

Mliton: Thanks for the advice also.

Eridanus: I guess it will never be truly passive - even if I got it down to 1 hour per month it would still be classified as a 'job'

I'll just have to see what I can do. I decided to go back to work full time with a 7 month contract to finish off the year and then do a 2 month experiment.

Thanks again.

 

[laurinsane]

Bree.

Unless you have considerable assets... you will not be able to afford to FIRE at 27.

If you expect to live up into your 90s... that means 60 years of support. You will not have SS when your retire.

Ha ha. I think most 20 yo won't have social security to retire by. I NEVER include SS in my retirement plans or goals.