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Can My Wife Retire?

January 20, 2021 by Lazy Man 1 Comment

The very simple answer to this question is yes. It will become clear why as you read this post.

The real question is “Can We Live the Same Life if My Retires?” There are a couple of questions that go along with this, but we’ll get to those later.

Can My Wife Retire?
My dog says that my wife can definitely retire.

When I started this blog in 2006 it was with the idea that I’d explore ideas on how I could retire early. My main motivation was that my wife would be eligible for her military pension at age 43. I didn’t want to have to work another 22 years after her.

Life takes a lot of turns in 15 years. I switched over to self-employment a dozen years ago. Our entire financial dynamic has changed greatly, we were only dating back when I started this blog. We’re now at the natural finish line of that original goal, but added liabilities, otherwise known as kids, have required some changes along the way. I like my side hustles enough that I don’t want to retire from them. My wife is eligible for her pension.

So it’s time to ask…

Can My Wife Retire?

The biggest indicator of being able to retire early in my opinion is cashflow. It’s true you could have a big nest egg (and you may need it), but hate having a “burn rate.” When I started my career as a software engineer around 2000, that term was used to describe a lot of internet companies. It didn’t end well for almost all of them (RIP: Pets.com sock puppet).

We have a big nest egg, but unfortunately, it’s mostly locked-in retirement accounts that we can’t easily access for another 15 years when we are 59.5. There are some ways we can get at the money, which is worth exploring, but for now, we’d like to put a pin in that idea and come back to it later.

Ideally, we’d have more income than expenses. If that works out then we can mostly say “My Wife Can Retire! (and we can live the same life!)” It’s almost impossible to guarantee either income or expenses, so we’ll have to go with what appears to be the most likely scenario. We can overestimate expenses and underestimate income to create a margin of safety.

Expenses

Last week I explored our expenses for the next five years and teased that it was going to be part of a bigger article. Surprise!

Our expenses look like:

Housing$40,000
Schooling$25,000
Transportation$3,000
Food$16,000
Healthcare$1,000
Misc$15,000
Total$100,000

These expenses are averages, but fortunately, they are fairly consistent. After around 6-7 years, the expenses change completely. Our mortgage would be paid off and our school costs would drop to zero if our kids go to public high school.* (We also will have a boost to our income around this time, but that’s for another section.)

School Expenses

When my wife retires, we will not get the military discount for the kids’ school. The cost of tuition would double to $50,000 per year for both kids. That’s crazy!

However, we would be eligible for tuition assistance. The problem is that we have no way to plan ahead for it. The calculation is a secret algorithm by a third party company. We can’t get a sample of the results or even an estimate without uploading all our financial information. Even then, the results are sent directly to the school and not through us first. I’m not very comfortable sending our financial information to the school just to get an estimate for financial planning.

The fact that the school isn’t an easy decision should indicate how much we love the school and value our kids’ education.

I was hoping this wouldn’t be a big unknown, but here we are. The enrollment coordinator said that the financial aid is all over the map. Some people get more of a discount than we are getting now. That’s possible with the drop of income and having two kids at the school. This means that our expenses could drop $25,000 (if we opt for public school), stay the same (similar financial aid), or expand $25,000 (no aid). I don’t think the last option of spending $50,000 is feasible… if we have that kind of money, I’d rather invest it.

For lack of a better alternative, I’ll continue to go with the middle option of where we are now. It’s probably the most accurate of the three as it represents some financial aid.

Transportation Expenses

The transportation number above includes only maintenance, insurance, gas for our already paid-off cars. That’s good for 6-7 years, which is my goal here.

For completeness, I thought it is worth addressing the need new cars. We spent around $23,000 on a Subaru Forester (beach/dog/kid car for me) and $44,000 on an Acura MDX (luxury car for the wife). That’s a combined $67,000, which will last us for 13 years or more. On average that comes out to about $5,000 a year for our physical car expense. Thus we should reasonably budget $8,000 a year in retirement going forward.

While this expense does go up in the future, I’m going to keep it at the same $3,000 number for this exercise. Our housing expense drops a huge amount when the mortgage is paid off. I’ll happily trade $35,000 in mortgage payments a year for $5,000 in car payments on average.

Income

Just like our expenses drop a lot in 6-7 years, our income has a jump at about the same time. Two of our investment properties will have their mortgages paid off, which means we can likely expect another $25,000 of income. As great as that is, we have to get there first.

Because of the drastic drop in expenses and the increase in income, it feels like there’s a definitive finish line – just get to year 6.

Here’s what our income looks like:

Income from my Work

I have this blog, dog sitting, some regular freelance work, and equity ownership in a small company that pays out monthly profit-sharing checks. The combination of these is about $65,000 a year.

However, the blogging income has been trending down. The dog sitting income hasn’t been a lot less due to COVID. The other two parts are consistent, but the income isn’t guaranteed either. On one hand, there’s a lot of uncertainly that I’ll continue to make $65,000 from these sources. On the other hand, it’s unlikely that they all go away. I feel there’s a high likelihood that I’ll make at least $40,000 through a combination of them.

Income from my Wife

Pension: $62,000. It’s a fairly straightforward calculation of a military pension given her rank and years of service. This may be a little on the high side because the pension is the average of your highest 3 years. It’s a very, very good estimate though, especially in comparison to my hodgepodge of income.

My wife could do other things to make an income. I think the first year it might be limited to selling our excess stuff on Ebay. I’d be very, very happy with that because we have a lot to sell or get rid of. I’ll go into more income ideas later on. The goal of this exercise is to explore if a scenario where she brings in no income.

Combined my wife and I would make $127,000 a year. With the uncertainty of my income, it could reasonably be as low as $100,000 a year.

Final Cashflow Analysis

My wife can retire and we’d have $2000 left-over each year. Of course, we wouldn’t really have $2000 left-over because I did a lot of rounding and estimating. However, for a rough analysis, it is extremely encouraging.

To be honest, I was completely shocked that it was close. I was expecting a big shortfall.

If the financial aid calculation for the kids’ school doesn’t go well, we may have a bigger shortfall. Alternatively, we could go to public school and live a more lush retirement while cruising towards the glory of no mortgages and rental income.

The Big Nest Egg

At the beginning of this article, I mentioned that ideally our income would cover our expenses and we could stay cashflow even.

That ideal scenario is close and encouraging, but we’ll still need a big nest egg. The goal is to have $100,000 in spare cash as an emergency fund. It’s an aggressive savings goal considering that we’ve put so much into maxing out our retirement accounts for years. The best way to reach that is to stop our retirement contributions, except for maybe our Roth IRAs if we can swing it.

I would like to have some of that nest egg invested safely, such as in Vanguard’s LifeStrategy Income Fund (VASIX). It’s been a fairly stable fund that returns about 5% on average. It even did well during the collapse in March of 2020. (“Well”, in this case, equates to not losing much value). This could provide us with an extra $5,000 of income to fill a gap or two.

If we need to draw down on that nest egg, we could borrow $20,000 a year for five years, which is a nice cushion.

Other Emergency Options

If cash flow and a big nest egg don’t work out for us, we have a few other options.

We have a lot of money in retirement accounts. They aren’t easy to access before age 59.5, but it’s possible. We could probably get $100,000 in our Roth IRA contributions out tax-free.

We could also refinance the house and/or investment properties over a longer time span. This would reduce our payments and help our cash flow. We’d much prefer to retire all the debt and those mortgage payments forever.

We could cut out the private school, giving us another $25,000 a year of flexibility.

Another obvious solution is that I could go to full-time work with my wife’s time free to do the kid and house management tasks.

There’s a lot to work with and I’m just scratching the surface here.

Challenges of My Wife Retiring Early

What Will My Wife Choose to Do?

For the first year, she wants to have no plans. That makes sense. She’s been working in some capacity since helping her parents clean the windows of the apartment building they managed at age 9.

I don’t think having “no plans” is going to be a long-term fit knowing her personality. I could be wrong, but I think she likes to be busy. I believe that having a purpose in life is important for one’s well-being, so maybe the first year will be able to about exploring that.

As a pharmacist, there’s an option to do that kind of work, but she hates working retail. Also, retail doesn’t usually have part-time hours. She’s thought about giving talks, which is something she does now for her work. She’s also been approached by a couple of universities to teach. She seems interested in that.

She mentioned that she could go work for CVS’ corporate office (based in our Rhode Island area) and bring in a salary of 6-figures that starts with a crooked number. That would be outstanding and I hope she gives it a try for a year to see if it is a good fit.

I’ve suggested working at a wine tasting room or organizing some kind of city scavenger hunt. I think she’d love a second act that is interacting with people in a fun way. Her dream of managing a boy band is still alive as our 7 and 8-year-old are getting more and more musically inclined.

Will I Go Crazy With Her Around All the Time?

Yes, I most certainly will. The only way I’ll get through any of this is if you comment on all my articles. So there you go; you have a role in all this too! You can start with this post.

* Some of the private high schools are ridiculously expensive – $45,000 a year, per kid. We’d need some great grants to make it work and that’s a project for another day – if at all possible. I think a much better financial option would be to work with our high school and a local community college.

Filed Under: Retirement Tagged With: early retirement

What Does Your (Reasonable) Dream Home Look Like?

January 20, 2021 by Lazy Man 9 Comments

A few months ago, one of my neighbors started some new construction on his house. My wife and I was curious about what pandemic feature they were adding. Was it an indoor pool? Was it a chess room? (I’ve always joked about having a chess room.)

Dream HomeMy wife knows the husband better than I do as they shared some military work talk. She found him one day and asked what about the expansion. Unfortunately, it wasn’t a pool or a chess room. His wife was diagnosed with something (Parkinson’s, I think) that makes stairs difficult. The expansion allows living on one floor a lot easier. It took a while to recover from that gut punch, she definitely seems too young for her body to start to go.

It naturally made me think that this house we are in may not be our “forever house” like I had imagined. I can definitely see the advantage of one-floor living as I get older.

That opened up Pandora’s Box. If this house isn’t the one we are in forever, what would that “forever house” look like?

Designing My Dream House

If you are a regular reader, you have probably read me mention that I need some hobbies, things I like to do, and/or a bucket list. I have a long list of things that I don’t like to do such as travel. Teleportation technology can’t come fast enough for me. My challenge is finding things that I do like.

One of the things that gets me excited though is looking at houses on Zillow. I think it’s because I’m naturally a “grass is greener on the other side” person.

It seems that once or twice a month, Zillow reminds me of this house I saved a couple of years ago. I don’t know why it sends me these emails as it isn’t for sale. I also don’t have a spare $7M lying around to make a bid on it.

It does make me smile though.

I started thinking about what I would want in a house. It doesn’t need to be that big, so maybe I could get by with a cheaper place. It also doesn’t need to be here in Newport, Rhode Island. In fact, someplace warmer would be better.

Rather than work backward from a $7 million dollar house, I thought it might make sense to move forward from our current house (we paid $400K for back in 2011). Here’s a short wishlist of things that I’d add to what we have:

  • I want a bigger closet – it’s very tiny now. My wife has a walk-in closet.
  • I would like an indoor swimming pool (necessary in Rhode Island) or live in a place where outdoor swimming is easy (Florida for example).
  • I want a big spa tub. I’m secure enough in my manhood to admit that I like baths. Hopefully, I won’t be upset by the costs of heating it.
  • I want my own space – call it a man-cave if you want. It has to be big enough for a deluxe massage chair. The house should also have a she-shed for my wife.

What are some of the things that you would want in your dream home? Maybe there’s a master list out there somewhere to inspire us?

While I’m still figuring out what that ideal place may look like I’ve got the perfect transition house:

HGTV’s Dream Home

No, this isn’t a surprise advertisement for HGTV’s Dream Home. I wouldn’t take money, because then I’d probably be ineligible to win it. Yes, this year’s HGTV’s Dream Home is a couple of miles away from where I live now. It would mean driving the kids an extra 10 minutes to school each day, but I think I could manage it. Yes, it is also missing some things on the list above.

As beautiful as the HGTV house is, it might not solve my dream home goal. It turns out that almost no one keeps their HGTV Dream Home. Everyone has had to uproot their lives to move there. Fortunately, we don’t have to do that. HGTV should jump save everyone else’s time and just give us the house, right?

Moving to the house is only a small part of the problem. The much bigger problem is paying taxes on the windfall. The winner has to come up with $700,000 in cash to give to the IRS.

While the house comes with some prize money, it’s not nearly enough to pay the taxes. If we sold our house now, we could probably pay off all the taxes. It would be a stretch and we’d be “house rich, cash poor”, but not any poorer than we are today. It would be hard to dissuade my wife from taking the house.

Personally, I’d like to take the cash prize. It would mean instant retirement for my wife and the opportunity to move to a house that is more middle of the road than their dream house… just like my dream house that I described before.

Final Thoughts

Have you thought about your dream home? Joe from Retire by 40 has a Hawaiian paradise as his goal. I like the idea, but we’d have to settle for buying an ownership share in that. I’d have to win the lottery to afford to do it. That’s particularly difficult for me to do since I don’t play the lottery.

Filed Under: Spending Tagged With: dream house, dreams

Our Next 5 Years of Expenses

January 19, 2021 by Lazy Man 2 Comments

expenses

Today I wanted to look at our next several years of expenses. Most people are probably fine with looking at one year of expenses. However, we have two Big Financial Events (BFEs) colliding that will drastically change our financial picture. In 6-7 years, we’ll finish paying off our primary mortgage and two investment property mortgages. Around the same time, the kids will be graduating from their expensive private school. That may translate to ditching $50,000 in investment expenses while adding $25,000 in income.

That’s a great BFE down the line, but we have to get there first. So let’s look at where our money goes until the BFE.

[Note: You might be asking, “Why did you choose 5 years in the title?” Well, choosing 6-7 years just looks weird. I think there’s more value in people looking at 5-year chunks anyway.]

Expense 1: Kids’ School

Currently the kids go to private school. It’s an exceptional school. In one of my kids’ classes, two of the ten kids’ parents are public figures with an estimated net worth of hundreds of millions of dollars. You could call it the best education that money can buy.

We are lucky to get a large military discount. We think it’s a good value even though it is clearly still very expensive at $25,000 a year for the two kids.

I realize it is a great privilege to send your kids to a private school. We’re very frugal in a lot of other areas, so we’re okay with investing in our kids’ education.

School Annual Expense: $25,000

Expense 2: Housing (and Rental Properties)

We have our primary residence and 2 other rental properties on 15-year fixed mortgages. The idea was to front-load the expenses while we were making good money, pay less interest, and not have to worry about mortgages in retirement.

We recently sold one investment property (via a 1031 exchange to limit taxes) and bought another one closer to where we live since it would be easier to manage. The good news is that process reset the mortgage for 20 years so now it is cashflow positive as opposed to the other two slightly negative, cashflow properties. Between maintenance and such, we can probably consider the three investment properties – all in an LLC to be cashflow neutral. In around 6 years, we should be able to bring in around $25,000 in additional income. In the meantime, we don’t have to plan any significant annual expenses due to the income from the tenants. (This could change, so we need to keep an emergency fund for it.)

Our primary house though is a big expense. We have about another 6 years on that mortgage. I’ll round it up to $3000 a month to make it $36,000 a year. In fact, I’ll bump it up a little more to include some maintenance. (I’ll be adding some extra money to pad all the expenses at the end, so let’s not quibble about whether this enough padding for now.)

Housing Annual Expense: $40,000

Expense 3: Transportation

I haven’t looked at our transportation costs in a long, long time. I typically don’t worry about breaking it out, because we do the best we can – there’s no fat to trim. We’ve paid off our cars, but they are 7-8 years old now. We are the type of people to drive our cars into the ground. The timing of paid-off cars is good because we can probably get by without a car payment until the mortgages (noted above are all paid off)

Of course, there’s more to transportation than just the car. I’ll budget another $3,000 for gas, maintenance, insurance, etc.

Transportation Annual Expense: $3,000

Expense 4: Food

Food is like transportation. I don’t typically look at the numbers because I’m frugal with our shopping. Fortunately, we have an American Express card that gives us 6% cashback on groceries. Since we use that card for food religiously, I can look up our annual spending on the card and use that number.

In 2020, we spent $6,253.28 on groceries. In 2019 we spent $5,585.16. So on average, we can expect to spend $6,000 on groceries. However, our 7 and 8-year-old boys will probably eat more, so I better boost this up to $8,000 to be a 6-year average.

Our restaurant spending is a little more difficult. We do have a credit card for that, but for some reason, Chase disables the year-end reports for that one particular card. I added up each month’s statement from 2019 (restaurant spending in 2020 was off due to the pandemic) and found that we spent about $8000 there as well. As we found out in 2020, this is an area we can cut back on if we ever need to.

Food Annual Expense: $16,000

Expense 5: Healthcare

Healthcare is provided by my wife’s work. It comes out of her paycheck, so I don’t notice it. It’s great for now, but my wife will likely retire within the next 6-7 years. It’s a good idea to include this category to plan for that scenario.

We can get Tricare for Life, which is relatively cheap military healthcare. My wife is an expert in healthcare and it’s her main business to know the economics of this stuff. It looks like the deductible is $300 per family with a catastrophic cap of $3000. It seems like most other things are covered in some way.

I have to admit that I don’t understand any of these things. Maybe I should read “Healthcare Plans Explained for Dummies”, but I know this is our best option, it’s cheap, and my wife knows all this.

Healthcare Annual Expense: $1000 (but no more than $3,000 – I think?)

Expense 6: Miscellaneous

I’m adding $15,000 to the final number for things that I’m just too lazy to add up. That can include the kids’ extracurriculars, kids’ camps, house cleaning service, utilities (lowered by our solar power), landscaping, emergencies, entertainment, vacations.

We’re fairly frugal with some of these items. We can stretch our vacation dollar with our Aruba timeshare and stored up airline miles. We can also use numerous military perks in retirement. We can skip some kids’ camps if we have two adults around all day.

Miscellaneous Annual Expense: $15,000

College Savings

It may seem weird to spend tens of thousands of dollars on a private school for a first grader and save next to nothing for college – yet here we are!

The reality is my wife’s GI bill can effectively cover half of the college expenses for both kids. We have some money already saved for college and a little time for it to double. We’ll ask them to cover some expenses so that they have “skin in the game.” After the BFE in 6-7 years, we’ll have more cash flow for college. Hopefully, they’ll get some grants and scholarships – they better for all we are spending on their education now, right?

In reality, we’ll save more than $0 as we have been doing, but we don’t need to factor this in as a requirement.

College Annual Expense: $0

Final Expenses

Here’s what our expenses look like in a table:

Housing$40,000
Schooling$25,000
Transportation$3,000
Food$16,000
Healthcare$1,000
Misc$15,000
Total$100,000

I’m certainly making that $15,000 Miscellaneous section do a lot of work, but that nice, even $100,000 number is so damn attractive. I definitely let the tail wag the dog to reach that number.

If we presume a 20% effective tax rate we’ll need a pre-tax income of around $125,000 before taxes. That may be a bad assumption of taxes, so it’s a question that I’ll have to ask our tax preparer.

While that $125,000 sounds like a ton of money, after the 6-7 year BFE, it would effectively be closer to $45,000 – with $25,000 of income from the rental properties. That’s a lot more manageable, especially with our other income sources.

Why These Expenses are Important

You may have caught a hint of why I’m going through this analysis. It was originally intended to be part of a bigger article analyzing a bigger question. Expense analysis is a critical factor in determining if you can retire.

Next week, we’ll revisit these numbers in a larger context.

Filed Under: Financial Planning Tagged With: expenses

Passive Income Update: December 2020

January 12, 2021 by Lazy Man 5 Comments

Passive Income Pyramid
My Passive Income Pyramid

We made it through 2020. Too bad 2021 is worse so far. I hope we can get through the next couple of weeks without too many incidents. I look forward to things being boring for a while.

Before I fully switch into 2021, I need to finish off the financials for 2020. As always, I’ll add some personal anecdotes, so you don’t fall asleep with the boring financial writing.

December was filled with birthdays and Christmases. Instead of doing Four Christmases like we usually have to do, we only had to do a couple. It’s hard to find silver linings in the pandemic, but running to a couple of different states and getting back after 1 AM is tough.

(Traditionally, we read a few Christmas books before bed to get nice and tired for Santa.)

To help with the rising cases after Thanksgiving, Rhode Island had a “pause” and scaled back some businesses at the start of December. The kids’ school didn’t shut down and while some other grades were sent home, they continued without an actual case. (They only sent a grade home if there had been a report of a “close contact.”) The pod set-up seems to be working well. So far (through Jan 12th), we’ve only missed a total of 5 in-person days (replaced by 4 at-home days) between both kids. I don’t know if I’d say that there’s a light at the end of the tunnel for them (since vaccinations are far off for 8-year-olds), but as we get to better weather and vaccines things will be better for them as well.

When things opened up, The kids got to eat some Pikachu pancakes, before doing to a Launch trampoline park. It’s hard when a kid can’t do a birthday, so this was a substitute. I think it worked better than the car parades of last year that were so depressing.

Pika! Pika! Don’t Eat Me! Nooo!

We also a staycation at a local hotel. One of the great things about living in a summer resort town like Newport, RI is that everything is built for the influx of people in the summer. So in the winter, restaurants and hotels are empty. We had the whole pool to ourselves for a couple of hours. Later we hid objects around the room and played “Hot or Cold.” It’s good to switch things up if you can do them mostly safely during the pandemic.

This normal-looking nautical lamp amazed this future engineer.

That’s enough lead-in… let’s start the Passive Income report. I used to call this the Alternative Income Report, but everyone loves passive income better. While I transition to the new terminology, there may be some “alternative income” mentions including the FAQ. If you are a new reader, you’re going to want to refer to my Alternative Income FAQ as you’ll likely have a lot of questions.

We didn’t have much snow over the last couple of years but got an 8-inch storm in December.

The way I calculate these numbers requires that long explanation – it isn’t intuitive at all. The reason why I do things a little differently is that this catalogs a journey. For example, we don’t have passive income from our rental properties while we are paying down their mortgages. Instead, I calculate the percentage of equity we have to show where on that journey we are. Each month you see that the bank owns less and we own more. When we get to owning 100% there will be no mortgages and all that rental income can be used for living expenses.

Lazy Man’s Passive Income – December 2020

I categorize our passive income into 3 main sources that are largely represented in my passive income pyramid. For this report, I ignore the bottom section, “career/job” – that’s not passive at all. (I do have some income in that area, but that’s not the focus of this report.) I combine dog sitting and blogging into one section of “somewhat active” income. I leave real estate and investment income as their own separate main sources of very passive income.

1. Blogging + Dog Sitting Income

December was a very bad month for blogging income. I usually get a lot of advertising inquiries a month, maybe 8-10 or so. I don’t remember getting a single one in December. I’ll need to figure out how I can do better. For now, I’ll just have to deal with it.

We found the Christmas Star! Maybe when the next 800-year event happens we’ll remember to bring our telescope (and have a good one – ours is fairly cheap.)

Additionally, COVID has killed the need for dog sitting this year. We got a couple of stays in December and due to holiday rates, it wasn’t horrible. I think dog sitting is going to be down until summer. I’m hopeful COVID will be down with vaccines and everyone getting more time outside. Summer is a big vacation and tourist season for us, so if that happens I can make some money again. If not, it’s no big deal.

In November, dogs and blogs combined for a total of $1,021.93 – the lowest in years. In December, it was:

Total Blogging + Dog Sitting Income: $1,036.52

That’s really poor, but at least I didn’t have to do too much work for it. If I tried to calculate an hourly rate it would be really, really good. Just as importantly, I enjoy writing this blog. The dogs that we are sitting are regular customers… and great dogs. It’s a good combination.

When there is some dog sitting my kids can pitch in to help. My 8-year old is extremely good with dogs at this point. He can feed them, let them out, and play with them in the yard. My 7-year-old is good too. This help means that I can pay them a legitimately earned income (a small percentage of the overall dog-sitting income). Because the income is earned they can save money in their kid Roth IRAs and it will be money that they’ll never pay tax on. I want to get them more involved in blogging, taking pictures and things like that, but it’s going slow. They get a lot of school work and home work.

(Note: The blue line is the monthly number. The red line is a 3-month average which helps smooth the curve.)

2. Rental Property Income

We recently sold a condo and bought a new one that’s closer to us. It’s much easier to manage. We got new tenants in January, so finally we’ll start getting money from it. I’m very excited about the tenants that we got. They volunteered to paint the whole place and do other improvements. We weren’t expecting this, but it looks great now. We’re giving them a big discount on the rent – it’s the right thing to do.

Santa comes down every street in our town over a couple of weeks. It’s hard to get a good picture of him, because he’s so busy, but I was able to catch this.

As for December’s numbers, Zillow’s estimates of our properties were up – always a good thing. We paid down the mortgages as we always do. We gained around $60K in equity in 2020, just like we did in 2019. It is difficult to deal with tenants, but I like to think of those equity gains as a $60,000 salary. We can’t spend the money, because it isn’t liquid. Still, the “work” for that $60,000 is pretty minimal.

This month we went from 60.71% to 61.55% ownership of the equity in our properties. That’s a really nice move forward. Previously, I calculated that, after insurance, property taxes, condo fees, and estimated maintenance we’d make $3,325 a month. That number represents our net gain. I recently updated this with the new property and it looks like we’ll be at $3,387.50 – a minor difference.

Bored kids are imaginative kids, I’m told. Here they build a fort in our living room, which carried on up in their bedrooms.

If you multiply our expected net rent $3,387.50 by the amount of equity we have (i.e. where we are on our journey) 61.55% you get $2,085 in estimated monthly passive income. When I started tracking this (beginning of 2017), we only owned 36.4% of the properties and they had lower rents. The math worked out to $1,174 back then. So in 47 months, we’ve seen the number grow $911/mo. That’s good passive growth in 4 years.

As the years march on, the ratio will grow to 100% of a rent that should net $3,387.50 monthly after expenses. Since rent is inflation-resistant, we can raise it as costs of living go up. We don’t have to factor in inflation like other investments. So we can think of it as $40,800/yr. of income in today’s dollars buying the same value of stuff in the future. That should be enough money for us to live on with our own home paid off (plus our solar panels, frugal shopping habits, and military healthcare.)

In the previous report, the rental property income was $2,056.

Total Rental Property Income: $2,085

3. Dividend Income

For this section, I assume we will earn a 2.5% dividend yield on our holdings. That could be from a high-dividend ETF or from simply holding strong companies that have a long history of dividend growth. There are some income investing here. We can also look at making passive income with dividend kings. If I wanted to simply retire on this dividend income, I would get Sure Dividend’s newsletter to try to get closer to a 4% average dividend yield. That link to the newsletter has a special discount rate and in full disclosure, I make a few dollars if you sign up for it.

The market has been doing great – it’s just been a big bull market. Some of the stocks that I picked have done really well. I wouldn’t have expected Snapchat, Pinterest, and solar panels to be up 5x, but they have. Once again, our portfolio is at an all-time high. We’ll see if investments can continue to grow. The stock market economy doesn’t seem to care about COVID because it’s looking to the future with vaccines.

We continue to get a profit-sharing check since I bought (a lot of) a company. The business is doing well. It’s actually almost ideally positioned in this pandameic due to its virtual nature. The investment income from this is essentially the same as dividend income. It is taxed differently, but for the purposes of this report, it makes sense to group together all stock ownership in this bucket.

Total Dividend-ish Income: $3,441

Last month, it was $3,323 and we jumped up again. We are now far past the pre-COVID number highs. This number rarely goes up much (since it’s a small percentage of our nest egg), but this was another month of extreme gains.

Kids at the Launch trampoline park. It’s kind of weird to social distance while bouncing around, but it was mostly empty for a lot of the time we were there. The kids said it was the best time they’ve had in forever… which may be 2 days in “kid time.”

Annualized, this monthly $3,441 is $41,296. If our mortgage was paid off, we might be able to live on this by itself. However, because most of our investments are in retirement accounts, we can’t use much of this potential income for now. (We can use the profit-sharing check as it goes straight to our checking account.) We’ll let this investment continue to compound for another 15 years until we are 59.5. Then we’ll have to see if we want to tap it or let it continue until we are required to take some of it at age 72.

Very Close to Passive Income

Our “very close to passive income” is a combination of rental property income and dividend income. If there were some royalty income from books, movies, or music, I’d include that as well. I’m too tone-deaf to have a rockstar music career, but maybe I’ll write a book someday.

Kids love Just Dance on the Nintendo Switch. I like a video game that gets them moving.

The stock market goes up and down fast, even more so nowadays. That makes the dividend calculation fluctuate a lot more than it normally would. We don’t know if companies can reliably pay dividends anymore. Without customers and profits, many companies have cut their dividends. However, the stock market is looking ahead to summer 2021 with a lot of vaccine and outside time.

The rental property income typically keeps going up because the mortgages are always getting paid down every month. Unless there’s a housing market crash, this should continue to happen. We haven’t seen any kind of crash… instead the housing market is booming.

For a few years, I’ve been saying:

I love having both types of income working together for us. I think everyone interested in FIRE should have stocks and real estate income streams. The diversification gives me great confidence that we’ll be better prepared than most people in the case of an unfortunate economic event. We’ll still likely get rent checks if the stock market crashes. We’ll still get dividend checks if a tenant is late paying for awhile. Of course a bad economy may impact both at the same time, but that’s what an emergency fund is for.

Finally, our 8-year-old stayed up for the New Year. His younger brother had to the good sense to go to sleep hours before.

We are almost a full year in of a ginormous unfortunate economic event (it’s worse outside of economics, but for the sake of this article, I’ll stick to economics). Stocks went down a lot, but then went back up. Real estate has held steady. Overall, the plan keeps rolling along, even during COVID-19.

While the stock market is doing well, the real economy is very bad. It used to be terrible, but some people are getting back to work and some jobs are coming back. We’re finally getting a president who won’t ignore COVID and hope it disappears. We’re also getting a president who is going to start to reverse the climate change disaster that sees so many natural disasters ravage the United States. Even if you are a heartless soul who doesn’t care about the people losing everything in fires, you should be able to agree that American business works best when it literally doesn’t have to put out fires.

Very Close to Passive Income: $5,526

Last month it was $5,379. The $5,526 extends our all-time high.

This would be over $65,000 a year of almost completely passive income. What’s better is that there would be no need to touch the investments themselves. We wouldn’t have to sell stocks or get a reverse mortgage. Property maintenance and property taxes for rental properties are already factored in. We would still have all the underlying assets (property, stocks, etc.) and be able to pass these on to the kids for them to build on – unless we choose to draw them down for more fun, charity, or other spending.

This “very close to passive income” has grown from $2,354/mo. in January 2017. It’s worth noting that, once again, these are fudged numbers that aren’t “real” yet (except for the profit-sharing check). We’re just about at four years of tracking this number, and we have gained more than $3,000 in passive-ish income. I wonder if we can get to $8,000/mo. in passive income by the start of 2025 (which will be another 4 years). I think that would be too aggressive, but it would give us something to hope for.

Final Passive Income

When you add up “dogs and blogs” to the “very close to passive income” you get:

Passive Income: $6,562.52

Last month it was $6,400.93. I’d like to see this get closer to $8,000 in 2021, but I need a plan to add something new – it doesn’t look like dogs and blogs is going to get me there. For now, I’ll just be happy that with four different income streams (and two consistent ones), there isn’t much room for everything to drop.

This $6500+/mo income is $78,750.24 a year. That largely hypothetical annual income for writing on a blog, taking care of one dog, and investing is really nice. In the long term, $78K would be a lot more income than we’d need – given our necessary expenses for the next 45 years. Of course, those necessary expenses aren’t going to cover all our spending, but it’s a large percentage of it.

As 2020 has proven, you never know what bad news is lurking around the corner. This preparation gives us the financial flexibility to fight it.

None of the numbers here include my wife’s bread-winning pharmacist income, her vested military pension (more passive income), or the freelance work I’ve been doing over the last couple of years (which isn’t passive at all). That’s the fuel that drives the passive income engine – it allows us to live well and invest. My income doesn’t match my wife’s, but I’m good at stretching a dollar in almost all our spending.

As always, I’m still hoping to write a book someday. That would add some more passive income. My wife will probably get her book out first. She’s had an incredibly interesting life until she met me – I am so boring. I may tip my toe into self-publishing sometime this year. I would love to talk to a real publisher, but I don’t want to take on the “job” of writing. That’s probably a deal-breaker. If you know someone who I could talk to contact me.

My favorite thing about the graph below is that it doesn’t dip down too far. It’s been above $6,000 for a while now. Though we are getting close to dipping below that $6,000 mark. If it dips below $6000 and touches $5000, we’ll have to examine some things.

(Once again, the blue line is the monthly number. The red line is a 3-month average which helps smooth the curve.)

Net Worth Update

My net worth updates aren’t very exciting as I don’t share the exact numbers. That’s why it’s just a footnote here.

I truly believe that net worth is one of the most important numbers in personal finance so it is worth sharing in some way. Showing relative growth can be useful.

Like most investors in December, our net worth did extremely well. We saw it jump 3.58%. For the year overall, our net worth is up 26.01%. If you didn’t know better you might think 2020 was another boring, great financial year – a typical saving and investing plan for us. In fact, growing our net worth 26.01% in a year might be above average. With the Rule of 72, we’d double our net worth in around 3 years.

Diversification helps a lot in bad times. Even when the stock market was way down, we were still grounded with our real estate. We can’t control the market, but we can be happy that the amazing river of compound interest has been working well for us over the years.

I feel it’s important to acknowledge that everyone is in a different place in their financial journey. I’ve been blogging about personal finance for 15 years. FIRE wasn’t a “thing” back then, but it’s in the news a lot now. We naturally are further along in that journey than some younger readers who may be just starting out. If you are one of these readers, I hope you won’t be discouraged by some of the numbers above. I didn’t start many of these graphs until year 11 of blogging (year 13 of early retirement planning). Please try to use it as motivation for what may be possible (depending on your circumstances and market luck) over 10-15 years.

There’s a big wild card in calculating our net worth. Now that my wife’s pension is vested, it’s reasonable to ask whether to include a pension in your net worth. I decided that it does make sense to include it. She could have earned more direct monetary compensation if she didn’t work for the government. That would have boosted all the numbers across the board. Calculating pension value is not easy, but here’s the best way to know what a pension is worth. In the end, it seems my wife’s pension may be worth $2.3 million. However, like most of the money mentioned in this article, this isn’t money we can spend right now.

Because the pension would dominate our net worth, I’ll note two separate numbers in my personal spreadsheet. I don’t share the numbers anyway, aside from these hints, so I don’t think it should matter much to you. It’s not like I’m suggesting that you might want to make a financial-based decision on a pension.

I always end this article by asking how your last month went. I know that COVID-19 is making everything difficult. I hope that some of it is getting easier. I’m sure that for many the kids going back to school, in whatever form, represents new challenges and anxieties. Feel free to use the comment space to vent, I try to give a thoughtful reply to every comment I get.

Filed Under: Alternative Income Tagged With: alternative income streams, passive income

How To Teach Kids About the Stock Market?

January 11, 2021 by Lazy Man 2 Comments

I’m going to go with a quick post today. I’ve been working on the last update of 2020, but this question came up and gave me some pause. We’ll push that update to Wednesday.

For the last five years, I have been investing our kids’ money. They were ages 2 and 3 when I started. It was enough money from grandparents and such to get started, but also not any money that they’d miss. That’s a great thing about investing money when the kids are so young… they don’t need the money.

Now they are 7 and 8 and thanks to investment gains have a nice portfolio. They also don’t know about this money as it was all managed behind the scenes by me. They know about savings accounts and are super proud to be hundredaires. They don’t know that they are multi-thousandaires.

It occurred to me that they are old enough to keep some money in their savings and perhaps save for things they want. They seem to have nearly everything, but when you are an 8-year-old having 21 stuffed Pokemon is better than 20. They might also notice if I keep sweeping money out of their savings into the Robinhood account where I invest their money. This led me to ask my wife about how much we should keep around in savings. This led to her saying, “Why don’t you tell them what you are doing?”

It all makes perfect, but now I’m left with the puzzle of explaining the stock market and index funds to a 7 and 8-year-old. I think I can walk them through it, but hopefully, I can find a good video on YouTube. Of course, if you are reading this, please make use of the comments to let me know if you’ve found yourself in a similar situation.

I’m hoping it goes well and they can see how much free money they’ve made. I’m afraid that they’ll want to take it all out and spend it on Pokemon cards. It will be tempting for them I’m sure. At least at this time, they still have enough Christmas presents that they haven’t even opened up yet.

Do you have young kids at home? Do you sweep some of their savings into a brokerage account? If so, how much money to keep in savings and how do explain what you are doing, so they realize that is going to be very helpful down the line?

Filed Under: Kids Tagged With: Kids, market, stock, teach

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