Hi guys! Got an off-cycle post for you all today.
Specifically, I wanted to take a look at the specific point in time where one decides to pull the trigger on retirement in the whole 'Financially Independent, Retire Early' affair.
The rule of thumb, in traditional FIRE fare, is to save up 25x your annual salary. The idea is that with an annual 4% withdrawal of your savings, you can live off that amount while still not dipping into the principal of your savings; the consensus being that your savings should grow to match or outpace that 4% withdrawal rate.
For example, if you were looking to live off $80,000 a year; 25x that works out to be exactly $2,000,000 (two million dollars). 4% of that amount, if you hadn't guessed, works out to be $80,000!
Here's where things get interesting: That equation does not take into account any other sources of income--the expectation that you've stopped working, and your only income is your withdrawals from these savings.
But, if you're like me (and likely are if you've been perusing this blog), you've been pursuing one or more passive income projects towards the goal of financial independence.
Just so we can be on the same page as what I consider passive income in this context; the litmus test I use is this: If you can cease all active work and still earn revenue from the time or money you've invested, it's considered passive income. Things like ad revenue from Youtube videos, Print on Demand sales, affiliate income, et cetera.
This makes a HUGE difference to the target savings amount needed for the 4% rule when you account for it.
As an example, let's consider my own Youtube ad revenue income: I generate, at this point in time, an average of around $120 revenue a month. This drops the annual withdrawal amount from $80,000 to $78,560. Or, multiplying that by the 25x saving rate mentioned earlier, a target savings amount of $1,964,000; a reduction of 1.8%.
Some might argue that that is an inconsequential amount. But, consider it once you start layering in other sources of monthly income (all numbers similar to what I pull in a month): $50 from print on demand sales. $50 from 3D model & 3d printing on demand sales. $50 from affiliate sales. And, of course, $500 from cryptocurrency mining. Combined with the Youtube income, let's call it $770 total.
All of a sudden, that yearly amount drops from $80,000 to only $70,760; a total savings target of $1,769,000; a drop of 11.55%. That's one tenth of the savings need eliminated. And it only gets better the more additional income you can develop.
You can work on the problem on both ends, too. By deleting costs and reducing your living expenses, you can bring those numbers down even further. If you can cut the amount you need to just $70,000 before accounting for passive income; using that same $770 monthly income we just went over, that cuts the target savings for FIRE to roughly 1.5 million. That knocks off an entire one quarter of your savings target.
It's really interesting to play around with these numbers and see what's the most feasible for you.
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See you next month!
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