Comments on: Living Off Passive Income – Amount Of Required Investments?

By: Uncle Leo

Uncle Leo — Mon, 23 Nov 2009 16:31:47 +0000

It depends on how old you are when you stop working, what your life expectancy is, how much inflation is expected, how well your investments do, and how rapidly you withdraw your savings. Other factors may come into play as well–e.g., are you trying to take care of a spouse’s needs as well?
Basically, finance people use what’s called a Monte Carlo analysis to calculate a large number of potential investment performance scenarios for the future. They then take the median outcome (median in terms of portfolio value) and base their advice on it. The conventional wisdom from this analysis is that if you retire at age 65 and want to be prepared for a 30-year retirement (which would be prudent), you should withdraw no more than 4% of your portfolio per year. The withdrawal amount can be adjusted annually for inflation. It would be wise to ease back on withdrawal amounts in years where your portfolio takes a tumble. That would mean you’d need $1 million to start with for a 30-year retirement in order to achieve your $40,000 goal.
Of course, all this is just an estimate based on mathematical techniques, which, like all efforts to explain the world with math, may not provide a complete picture. Some financial advisers will say that withdrawal amounts in the 5-6% range are okay. But the recent volatility in the financial markets indicates that those who are financial prudent are likely to have higher quality sleep.

By: chimneyg

chimneyg — Mon, 23 Nov 2009 09:49:11 +0000

It’s going to depend on the rate of return. At 4% you would need a $1,000,000 investment. At 6% you need $680,000. At 8% you only need $500,000.

By: Ross T

Ross T — Mon, 23 Nov 2009 03:51:32 +0000

My bill come to about £1250 every month. I have about £750 coming in from passive income. I have about £100,000 in investments (property).

By: muncie birder

muncie birder — Mon, 23 Nov 2009 01:55:22 +0000

To live off of passive income you need to consider more than current income that it can produce. You also need to consider probable inflation rates. You want not only sufficient income to live on today but also sufficient income to live on in the foreseeable future–say the next 20 years in my particular case. I will not live any longer than that. You also have to account for expected returns. They have been absolutely dismal these past couple of years. Worse than dismal. The government does not give a crap about savers. They pander to borrowers.
Also you will not live too well on only $40,000 a year. It is possible I will admit, but who wants to live in front of the bub tube all day? If you are living on passive income, it is time to LIVE. Figure at least $60,000 assuming there are no rug rats to support.
I think that you can do it on about $2,000,000. Remember you need to plan for the future too, not only the present. You need to generate more income than is required to live on so you can reinvest to allow for the future.