The new buzzword around town is F.I.R.E., which stands for Financial Independence Retire Early. The general idea is that you will invest enough money, have a business, and/or have enough real estate income to retire from your job and live off of your passive income stream. How will you know when will have enough income to retire early? Simple. You would predict how much money would need to cover your living expenses, and then work to get passive income to cover that amount (plus a buffer amount). For example, if you predict your living expenses to be $3000 a month, I would aim to achieve $4000 a month of passive income.
There are two ways to achieve F.I.R.E. I will call them 1) Capital Gains F.I.R.E. and 2) Income Portfolio F.I.R.E.
- Capital Gains F.I.R.E. is basically investing in the stock market and hoping that the value (price) of your investments rise over time. Let’s say you achieve $3 million in your investment account. You would then withdraw your living expenses each year. Let’s say $48,000 a year. Hopefully, the remaining amount of money would recover by way of stock prices going even higher. I don’t particularly like this method. It would be faster to achieve than the income portfolio, but it is very dependent on the stock market going up. If the stock market takes a turn for the worst, you may see your withdraws take a major beating.
- Income Portfolio F.I.R.E. is when you use a combination of the stock market (dividend stocks), bond interest, real estate rental income, and businesses to create a complete portfolio that isn’t dependent on one market. For example, to reach $4,000 a month, maybe I would have $1,500 dividend stocks, $500 bond interest, $1,000 rental income, and $1,000 business income. This way, you are diversified in case of a drop in the stock market.
The few of us who plan on retiring from the military are already set up pretty well. Hopefully, we are setting ourselves up with more passive income to supplement our retirement packages. I know I am already doing all 4 of the methods in the Income Portfolio F.I.R.E. So how do you get started with dividend stocks, bonds, real estate, and business? I’ll break it down, one by one.
- Dividend Stocks– Dividend stock companies pay a portion of there profits to shareholders. Let’s take McDonald’s (MCD) for example. Right now (Oct 4, 2020), MCD sells for $222 and has a 2.25% dividend yield. These means for every share of MCD, they will pay $5 a year in dividends. Doing the math, it would take 3600 shares ($799,200) to get to $1,500 a month. Obviously, you wouldn’t want to put all your eggs in the MCD basket. You would want to diversify across dividend-paying stocks.
- Bond Interest– Bonds, especially for the US Government, are a lot safer than stocks. However, with little risk comes little reward. For me, after growing up poor, I like a little safety. I buy 30-year bonds from www.Treasurydirect.gov. These bonds payout twice a year. The yields (payout ratio) on bonds are pretty low now, but I still choose to invest. Today, the interest rate on a 30-year bond is 1.375%. For example, if I bought a $1,000 bond today it would pay me $6.86 twice a year for a total of $13.75 a year. At current rates, I would need $436,000 of bonds to get my $500 a month payout. Again, a lot more money than stocks, but a lot safer.
- Real Estate Income– There are a few ways to earn real estate income. You can buy a rental home or multi-family complex and rent it out to tenets. You can rent out rooms in your house or on your residence, or you can invest in a crowd-sourced real estate investment trust (Fundrise). I love real estate and it shouldn’t be too hard to get to a $1000 a month in real estate income. Kris and I are currently around $2000 a month and looking to add even more to our portfolio. Real Estate is also the only one of these four where you can you the bank to leverage making more money.
- Business Income– There are to ways to make passive business income. You can build an audience that will buy, listen, or watch your products. These products can include books, YouTube videos, online courses. This income will come in passively because you did all the work upfront. Also, you can be a little more active and do seminars, podcasts, or coaching/mentoring. Everyone is good at something, decide what you are good at and go for it. It will take a while (years) to build an audience, but you can leverage your free time in order to make this business model work. The other way is to start a business that can be run by someone else eventually. For example, say I build a lawn-mowing business that earns me $2000 a month when working by myself. When I want to retire, I can pay someone $1,000 a month to run my business and I can passively earn that $1,000 still. You do not want to start a business that requires YOU to run it. Say like a dentist’s office where you are the only dentist. This means that you cannot retire early because all your income will stop. Think long and hard about what business you want to start. You can also start a network marketing business (sales) or buy a franchise (McDonald’s).
The moral of the story is to convert your earned-income into portfolio income by buying dividend stocks, bonds, and real estate. Convert your free-time into business income. If you can continually do this, you will be well on your way to being financially free. Also, when you buy or build assets you can forward those to your children and grandchildren. So they are picking up right where you left off. What an amazing life. Having only earned income when you retire is a recipe for disaster. I believe F.I.R.E. is achievable to anyone who wants to take the time and energy to earn it.
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Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
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