These days I’m all about passive income. I guess you could say I’m a little obsessed!
It is really hard to retire without passive income. The traditional way to retire is invest money into your 401(K) and withdraw from that nest egg throughout retirement.
In fact, that’s how the 4% rule came about–basically you take out 4% of your nest egg every year during retirement.
Depending on just one nest egg during retirement is dangerous. That’s like putting all of your money in one stock!
In my view, it is best to have multiple sources of passive income to retire.
Why it is hard to retire without passive income
Withdrawing 4% from a retirement account is also risky. What if the stock market crashes during your retirement (which is very likely)?
Well, you might have to draw down less than 4% of your retirement nest egg and your quality of retirement will suffer.
The thing is net worth and passive income are two very different animals. Net worth doesn’t pay the bills. Often times net worth isn’t very liquid as well.
In contrast, passive income is recurring. Most passive income streams will have cash flow coming in on a monthly basis.
The other point worth noting is passive income streams are worth A LOT more than you think.
Let’s say you had a side hustle that brings in $1,000 passive income every single month (or $12,000 a year).
An aggressive dividend portfolio would yield around 6% annually. This means a $1,000 a month side hustle is worth the same thing as a $200,000 dividend portfolio yielding 6% ($200,000 * 6% = $12,000)!
As you can see, having a passive income stream is worth multiples of the monthly income it brings in. This means you don’t have to save as much for retirement to get the same monthly cash flow!
Passive income ratio
So, what are some good passive income goals to have?
Well, that depends on a variety of factors, including your age and annual living expenses (and general lifestyle).
As a result, I want to introduce the Passive Income (PI) Ratio:
Passive Income Ratio = Passive Income / Annual Living Expenses
Be sure to include ALL living expenses in this calculation. This includes:
- Rent/mortgage payments
- Discretionary expenses
- Costs of raising a child
The PI ratio effectively measures the amount of passive income generated relative to your living expenses. Obviously, the higher the ratio, the better!
You need a passive income ratio of at least 100% to retire.
Passive income ratio guidelines by age
Building passive income takes time, hard work, and a little luck.
With that being said, I think this is a good guideline of passive income by age for folks trying to reach early retirement:
*22 – 30: Enough passive income to pay rent (or the mortgage).
*30 – 35: Passive Income Ratio of 80% – 100%.
*35 – 40: Passive Income Ratio of 100% – 150%.
*40+: Passive Income Ratio of 150%+
One question I get asked a lot is why generate a PI ratio of over 100%.
The answer is to be safe. You never know when a passive income stream might die out.
Your rental property could be crushed by a natural disaster. Your blog could be hacked. Or your dividend portfolio may crash.
Having a little extra wiggle room is a smart thing (just to be safe). Also, I think it allows some room for lifestyle inflation during retirement.
After all, you worked hard, you should be able to kick back and relax!
How to earn more passive income?
What should you do if your Passive Income Ratio is low (or zero)?
Well, the best thing is to get started right away. The hardest part about generating passive income is simply getting started.
The first thing you want to do is get your budget in place and invest all your active income into passive income streams.
Dividend stocks are amazing because great companies pay (and increase) dividend payments every year! This is like getting a raise every single year!
If you’re interested more about dividend investing, be sure to check out my online course.
You’ll learn how to:
- Construct a diversified dividend portfolio from scratch.
- How to select dividend stocks using my 9 factor check list
- How to monitor and rebalance your portfolio
- Strategies to avoid big losses.
- How to screen for great dividend stocks.
After investing all of your active income into passive income streams, you need to get a side hustle ASAP. A side hustle is great because you are adding another passive income stream.
In general, it takes 5 – 6 different sources of passive income to retire comfortably.
Here are a few ideas for side hustles:
- Online Courses: Create online courses on a topic you are knowledgeable or passionate about.
- Niche Sites: Build a niche site around one of your hobbies and generate passive income through affiliate marketing.
- Start selling eBooks: I make $1,500 – $1,700 a month self publishing erotica. If you want to learn how to make $1,000+ a month selling erotica, I would highly recommend checking out my course!
Readers, do any of you have passive income goals? What is your Passive Income Ratio? How much passive income do you think you’ll need to retire comfortably? Let me know in the comments!