Passive Income Targets – November 2012

By: ispeculatornew
Date posted: 11.20.2012 (4:00 am) | Write a Comment  (9 Comments)

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After starting this new series earlier this year, I received a lot of positive feedback. Going forward, on a monthly basis. I talk a lot about the need accumulate different passive income flows. As time goes by, my objective is to be able to live entirely off of these new income streams but also be able be diversified enough to be ok no matter what happens. In many ways, that is what’s behind my interest in dividend income. For now, I prefer to avoid using actual numbers (might change later on) so what I will do is express all of this data in %. The objective of course is for all of these flows to end up generating 100% of my current income. I also want to gradually make sure that my income producing assets are not all locked away in accounts that will only be available upon retirement. In terms of income, I will be using my gross household income. Counting the bonus would only make things more difficult to track and would not represent how I currently live on my finances.

For example, if my base salary is currently 100K, my objective is to make 100K of passive income on an annual basis. This could be done through a variety of methods which I will be exploring of course. A few people tried to figure out how much capital I have by looking at the USDP size. The main issue is that the USDP is only part of my dividend income. I also get income from my ETF holdings, etc.

How Much Do I Really Need?

I am aiming for an income of 100K or so, before taxes. To be clear, I feel like I need significantly less than that. Why? Let’s imagine that I currently make 100K of gross income. I am able to save 10K in a non-taxable account so my pre-tax income is 90K. I pay about 50% of that in taxes which takes me down to 45K. Then, I save 5K in a taxable account. So how much disposable income do I really have? About 40K. Once I reach retirement, I’ll hopefully still be growing my investments but it’s fair to say that if I made 80K pre-tax, that would be more or less equivalent of my current income. Would you agree? There are other factors to consider such as the fact that my mortgage will likely be paid off but I also expect higher tax rates.

Overall, I feel like aiming for the same level of income as I am currently making is very very reasonable and I could easily live with less but why aim lower if I’m confident I can reach that 100K?:)

Why Am I Doing This?

I’m a strong believer in working with clear objectives but also holding myself accountable so writing about these objectives will without any doubt help me reach financial independence more quickly.

Current Passive Income Flows:

3.69% – Dividend/Investing Portfolio: I am currently generating a dividend yield of about 3.50%. This portfolio will be increasing over time, especially on year end bonuses (a month from now). I use a bucket system which I will be writing more about but the main retirement components are a long term dividend portfolio (see the Ultimate Sustainable Dividend Portfolio) and an ETF portfolio (see BuildYourETFPortfolio for more details on how I build mine). I saw a slight increase here thanks to markets rising and a similar yield.

4.86% – Private Investment In My Online Company: I have discussed how my web company has been the best investment of my life so far. Currently, the company is paying back very little as it is focused on repaying debts and we are still very much focused on growth. This certainly has the potential to increase over the next few years but probably not until 2013. We have seen a lot of volatility lately in income sources as you might have read on TheFinancialBlogger but the debt repayment continues.

Total: 8.55%

It’s not spectacular by any means yet. That being said, I am 31 years and do have a decent base (I could live with less easily).. I will continue to work on getting that total as close as I can do 100%:) I do expect a significant jump in January after the bonus payments.

Passive Income Ideas

0% – Real Estate: I have started writing about adding real estate to my income flows. One aspect that I love about Real Estate Investing is how much of an inflation hedge it will represent for my portfolio.

0% – P2P Lending – This is a new idea which I will certainly discuss in the near future, one that could add some extra passive income

0% – Annuity – No intention of buying an annuity for the time being

0% – Other ideas – I could end up starting other businesses or projects will I’ll certainly keep you posted about.

What I Am Not/Will Not Include

Pensions: I do know that the government will be paying me a sum of money once I retire. However, given how poor government finances look like these days, I personally think it’s crazy to count on the government actually fulfilling its promises. It won’t happen. Yes, there will be money, but not anywhere what is currently being promised. Whatever I do end up getting will be a nice surprise.

I feel like I am being extremely conservative here. By not including my government pension and also not including the fact that lower revenues will mean less taxes to be paid, I’m overestimating the amount of passive income that is truly needed. That is more than fine by me. I’d also like to think that my house will be paid by then making my level of spending lower all things being equal.

Do you have any questions or comments? I’d love to hear any ideas or how you’ve been managing on your end as well!

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  1. Comment by Cautionary — November 20, 2012 @ 9:38 am

    I like your personal plan that a government pension probably won’t be there for you when you retire. I agree.

    Given the size of governmental debt & the demographics of the taxpaying public, I personally think a wealth tax is inevitable. You might run the numbers for various wealth tax scenarios to see how it affects the size of the portfolio you will need to achieve your $100K pre-tax target – and more importantly its long-term sustainability.

  2. Comment by IS — November 20, 2012 @ 12:02 pm

    @Cautionary – Yes, agreed, although I do think that my 100K is so reasonable given how few expenses I’ll have by then that I’m not too worried about tax rates climbing up in terms of my personal retirement. I certainly hope that will not be the case, but I don’t think it will have a significant impact on my retirement… who knows, maybe I’ll have to adjust my thinking on that

  3. Comment by Ken — November 24, 2012 @ 11:50 am

    As you know, the tax on dividends is going up, possibly as high as a marginal rate of 43.8%, depending on how congress rules. It seems to me that would seriously compromise a dividend portfolio. (And in California I have to now pay a top marginal rate of another 13%!)

  4. Comment by IS — November 24, 2012 @ 1:21 pm

    @Ken – It’s certainly not good news but a large portion could be added to non-taxable retirement accounts which would help a great deal.

  5. Comment by TallD — December 7, 2012 @ 4:27 am

    At 31 I too thought that I could put away for retirement with discipline. But now with a wife and 3 kids at 36 I had to cut back the savings for more current needs: e.g. house remodeling, starting to save for kids’ education. How did you calculate and model the future of the USDP? Does your current model account for the needs of a family, that you may, or may not have just yet? Will you be able to put away 1k or 2k monthly ‘just’ for the dividend portfolio?

  6. Comment by IS — December 7, 2012 @ 8:59 pm

    @TallD – All good points, I do have a house and small family (just 1 kid for now) so yes that certainly makes it a lot more challenging but I am confident that if saving is a top priority, putting away $500-1000 per month for the USDP will not be a big issue. But there might be adjustment at some point..when do you expect to get back in “saving mode”?

  7. Comment by Conspiracy Theory — December 14, 2012 @ 4:39 pm

    I expect that based on the errosion of all markets and increased taxation that saving is futile. You may as well live in the present and enjoy it because all you are going to accomplish is sacrificing the potential lifestyle you could have now so that the government can steal all your hard work away and give it to the losers later anyways. You will get taxed higher and the irresponsible will be taken care of with your extra taxes. ANY and ALL income you have will be taxed right into the hands of those who have done nothing to deserve it.

    I can only speak from experience, I could have had a much better life if I wasn’t so concerned about saving for the future. Now I see all the same people who were spending out of control around me getting kick backs and living within a few % of where I am able to with no kick backs and having sacrificed so much youth that could have been enjoyed all so I could be a few % better off on my own nickel heading into my 60s than the guys who had all the fund and are now being supported on my tax dollars. ppppffftttt. It’s a noble thought and a great one but the system of helping those who do not help themselves will hold you down. If you can’t beat them, join them.

    I remember feeling as you do now and you probably just think I’m a crazy old man but one day you’ll think about this again and realize what you’ve given up to be equal with those who gave up nothing.

  8. Comment by Pauly — December 28, 2012 @ 12:00 pm

    wow old man, now I’m 22, just bought a house and im investing in stocks… most of my friends, they are just having fun. i have to rethink my lifestyle.

  9. Comment by IS — January 12, 2013 @ 8:10 am

    @Conspiracy Theory – I see where you’re coming from and do think that many of your points make sense (higher taxes, etc) and in a way, yes we should live our life in the present. That being said, I think there’s a way to do both, to live in the present but also save for the future. I’m absolutely opposed to postponing all travelling and spending till retirement but I don’t believe in not saving either…makes sense?

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