Today we’re going to run over a few of the key components to any retirement but especially that of someone looking to quit the rat race early and sustain their lifestyle from some sort of investment portfolio.
Now when I say “investment portfolio” this doesn’t have to mean stocks or bonds it can mean rental properties, solar panels that produce income etc. There’s a different blend that everyone can and will use and it will vary based on your experience, opportunities and skill sets.
Before we get in to how we will fund our retirement years we need to ask ourselves one very important question – and this may be the most important question when planning your future: What is “your number”?
Notice that I say “your” and not “the” number? That’s because this number will vary so greatly depending on what your future looks like to you and what you’re already accustomed to.
We’ve lived in two very different phases of adult life, one where we were students/ into our early job/career phase where we made due on next to no money. From Mr.FIC’s point of view there was a point in time fresh out of school where I was only earning around $30k per year, lived in a basement suite and managed to pay all the bills, have some fun with friends and still managed to save a little each month.
If you’d asked this version of me what he needed to retire? He’d have likely said if he could bring in $40k per year then that would be more than enough.
Now contrast this to our current situation where we make a substantial amount more Than that and we’d need about $60,000 per year to cover our current living expenses without taking into account any travel (which we both love).
I’ve even been in contact with coworkers who regularly claim that they can’t retire despite having in some cases an excess of $1 million banked and in stocks plus homes paid off etc. yet in their eyes it’s still not enough because they feel they need to replicate at least a $100,000 dollar income through their retirement years as that’s what they “get by” on right now.
All of that was a long winded way of saying KNOW YOUR NUMBER. And to do this the first step I would say is go onto your online banking right now and bring up a month of transactions for your checking account, visa and whatever else you pay your bills with. Look at the last month that is fully completed so in this case as it’s mid August we’ll look at July – tally up all of your expenses for the month first into one large sum and then break it down into a few categories if possible.
Sort the spending firstly into mandatory expenses such as rent, utilities, food. Then move on to the entertainment and other categories. The reason for this is that humans are smart, and if you tell yourself okay next month I’m tracking to see what I need you’ll work around the actual spending as much as you can to make the numbers look as good as possible and make yourself feel better. If you do it on a month that’s already been you don’t give yourself that opportunity to fudge your own numbers and you’ll get a more realistic answer to what your number is.
Once you’ve got your number needed we then need to break off into how it is we’ll come up with these funds after we quit working for regular income.
Let’s look at some options:
Option 1- Real estate: Real estate includes owning rental properties that pay for themselves and provide residual income after all expenses associated with the property are paid for, if an investor has multiple homes they can try and pay most/all of their expenses through purely rental properties.
Option 2- Index Investing: This is one that is also very common in the fire community. The investor simply puts as much money as possible into index funds with he intent of growing it into a sum that they can live off using the 4% rule where the funds total in excess of 25x their annual needs/expenses. Thought being that $1 Million dollars for instance allows a withdrawal of $40k (4%) per year and market growth of the remaining funds will allow for you to continue this year after year.
Option 3- Dividend Investing: Much like above, in this method again your money is tied up in the stock market only this time you’re targeting stocks/ETF’s that pay you dividends that you will live off of. The math is more or less the same only in this scenario you don’t actually sell any shares you simply take your (again example)
$1 Million dollar portfolio yielding 4% and collect the $40k per year to pitch towards your expenses. This is another viable option.
Option 4- Side hustles: These are still “work” but are meant to be more of a passion project and can include things like blogging, YouTube channels, selling crafts, teaching lessons or whatever else it is you can provide value doing that others are willing to pay for.
These are some of the options that are most commonly discussed online and I would say that you’re doing yourself a disservice if you’re not looking into using at least a couple of these different methods to fund your retirement.
For those wondering we’re currently doing all 4 to some extent:
-We rent out the basement of our home, covering 63% of our mortgage.
-We hold well over $100,000 in dividend paying stocks.
-We have over $30,000 invested into index funds through workplace savings plans.
-We have this blog which has recently begun paying us a small side income.
The point of emphasis is to do your FIRE planning with intention, find the number you need and work backwards from there to determine which path you’re most passionate about and that will be most enjoyable for you to attain your goals.
Have an image of what the finished product looks like in your mind, are you the landlord of 15 rental properties retired by the sea somewhere paying a property management company to watch over them? Are you fully invested into the stock market? Do you need way less than you first thought because you’ve found you’re now bringing in income from your side projects like your YouTube channel that are going to cover a portion of your expenses?
These are all things that need to be on the find of someone looking to become Financially Independent and Retire Early.
As always thanks for stopping by, we hope you’ve learned something from this post and if you have any questions or comments please feel free to leave them below. We also love to hear from people on Instagram @FindependenceCanada.
FIC.