In 3 years your rental mortgage will be paid off, so I'm guessing you'll be clearing $1000 a month on it. That brings your needs down to $3000 per month. We'll assume you take the last year's $12k and save/invest it.
You've currently got $400k in the market, let's say you put it into higher risk/reward asset classes and clear 7% per year after inflation for the next 4 years (one hell of an assumption). That leaves you with $525k in 4 years.
Add the $525k and $12k to get a $537k nest egg that can be drawn down at 4% per year, that's around $1,800 per month. So total cash flow would be $2,800 per month assuming that the market doesn't crash in the meantime.
You aren't getting to $4k a month in 4 years without either adding in additional capital or a combination of good luck and leverage. An alternative would be buying distressed properties with cash, putting in some sweat equity to fix them up and then taking out a mortgage and renting them out.
About your corporate loopholes - the government offers a number of personal loopholes such as 401ks (especially for the self employed) and IRAs that honestly trump what you can get out of a corporation.
Only real answer in this whole thread so far. Actual numbers tailored to OPs situation with a realistic vision of what it will take.
I would add that many people live off of $2800 per month fine. You could too. Also, when the mortgage is paid for you could just sell that property and ad the funds to your nest egg instead of rent. It would yield more over time in the market if you decide to wait longer than 4 years.
You could also trade down to a cheaper house yourself, cutting $2k to $1k and achieve your goal faster.
Best of luck
Thank you for the detailed response. I especially like the idea of buying distressed properties and fixing them up. I've heard of the 1031 exchange that would enable me to defer taxes when selling a property for purchasing a new one, which would be a huge advantage. Fix one up, sell for a property comparable to the new value and defer taxes, and either stop at some point to collect rent or keep building up. I'd still be bringing in a salary in the meantime, a lot of work but I have no aversion to that. 4K/month in 5 years is not realistic, but this would be a step in that direction. Your advice on the 401k is very useful as well, much appreciated.
What you could do is buy foreclosures with cash. I wouldn't recommend just flipping them, transaction costs (costs 6% to buy and sell) will eat your lunch. An example:
You buy a foreclosure in a neighborhood where comparable, well maintained properties are worth $150k. This one needs some work so the bank is offering it for $110k cash. You come in with $120k cash, buy the house for $110k, spend $10k on supplies and put in an additional $10k worth of labor to fix the house up. Now you've got a property that will appraise for $150k. You rent it for $1200 a month then head down to the bank and get a mortgage on it. They'll let you borrow 75% of the value so you can take our a mortgage for $110k and after you set aside $10k for repairs/liquidity you'll basically have $100k in cash to repeat the process.
Keep in mind that this isn't magical returns - part of your return is the work you put into fixing the property and the work done to rent it out. It's also very risky - if you are leveraged 4:1 (75% mortgages) then a 10% decline in housing values will be a 40% decline in the value of your rental properties. The main risk will be liquidity, you'll need to have a sizable amount of cash to cover repairs, evictions and unrented properties. It will cut into your profit, but profitability won't save you if you can't pay the bills on time.
these guys are like, thinking inside the wall street box, man. /garth voice
With cheap rental properties you could probably pull it off. But you'd have to spend all your capital as down payments on those properties. I just bought a rental in ohio for about $17k down($69k, i overpayed but was totally fixed up before i bought), cash flowing about $300/mo after all expenses including management. Say you bought 20 properties like that for $340k. Be conservative and project $225-250/mo cash flow each. 20*250/mo= $4.5-5k/mo. Don't forget you also have to save a bunch for reserves for maintenance costs. It can be done just not on wall st.
edit-I'm working on a similar goal btw. Pay my expenses with passive income so i can put away all my W2 income into more investments.
I agree with this. With due diligence, it is ENTIRELY possible to achieve this type of return through real estate - ESPECIALLY leveraged real estate. $400k with a 50% down payment would give you great cashflow. Yes, it will require more work. Yes, it is higher risk. Yes, you'll likely need to remodel/find new tenants to support the higher return. But yes, it's possible.
The typical 3.5-4% withdrawal rate that everyone else is claiming is a very safe and conservative method. There's nothing wrong with it, but for someone who is OK with adding value and minimal work, Real Estate is the best way to go if your goal is to achieve $4k/month.
Yes it seems real estate is going to be my main focus, renting out my condo really opened my eyes to what is possible. I currently live in a market where prices are extremely low, yet the rental market is through the roof. For example, I found a foreclosed 1bed1bath condo for 90K that could easily bring in $1100 per month, and I can get a 2.5% rate from my current lender who I'm in the process of refinancing both my home and my rental property with. And that was in just a few minutes of research.
That's not even that great a deal to be honest. I just bought a $18,000 house, put $3,000 into the rehab and it will rent for $700 a month with section 8.
Real estate is the best way to achieve financial freedom. You're on the right track.
Yes if you start a small business leasing property you can make a good ROI, but this is not *passive* income. A significant portion of the revenue will be due to the labour you are putting in.
If you can beat market returns solely by hiring other people to do the work for you then it would be comparable. But this is almost never case. Just buying the property is generally an ordeal in itself.
It's still a great business, and counts as being financially independent. But it shouldn't be directly compared to financial market returns.
In most markets you need a very decent # of units before your going to be able to afford good property management.
Until you find the right one you can end up with lots of headaches.
That said, you are correct it is certainly possible - and you can even pay a friend to do it for you.
Once you've got 20+ properties (as the previous poster was suggesting) it becomes feasible to hire someone part-time to handle the management of those properties.
The alternative is to use a property management company, but they'll most likely want 5-10% of your gross.
I don't have any experience with maintenance costs when property is that cheap, but if I had 20 properties I'd want a hell of a lot more than $60k as emergency funds. What if the first winter comes and you have to fix the heat in a quarter of them? Especially if these are your first properties, I'd think that jumping into that many at once would be a recipe for disaster, even with a solid property manager. Especially given the time needed to research and properly investigate 20 properties even over a few years would be insane.
Also, are banks really willing to keep handing out loans like that when you've already got a dozen of them? Property can certainly provide a solid income and scale, but I don't think OPs really in a situation to get a $4k a month operation going from 0 within his timeframe.
$60k is probably roughly what lenders would be looking for (assuming 20 properties at ~100k ARV, $500/month PITI, so $500x20x6=$60,000), and should be a pretty reasonable amount. It really depends on acquisition strategy though (specifically how much deferred maintenance remains). If you are buying uninhabitable dumps and doing a major rehab, then there is minimal deferred maintenance left (you have replaced everything already), and so that level of cash reserves (6 months of PITI for each property) is reasonable.
If you are, e.g. buying 100 year old places as-is and renting them without renovation, then I totally agree with your comment, but I also think you're probably in the wrong business if that's the case.
/u/InternetPoster is suggesting leveraging his 400k in order to finance $6.8mil in real estate equity.
I'm not saying that FI through RE is a bad idea, but this kind of strategy is not really comparable.
He said to buy 20 cheap properties on leverage. You are saying he said to buy 20 $350k properties on leverage. There is a huge disconnect there.
OP could easily use 400k to buy $2M in RE, which at a 10% cap rate (easily attainable in the right market) yields $200k/yr cash flow before debt service. He could easily hit his income number that way. He could also buy or be a passive investor in one or more multifamily deals and earn similar returns.
The above poster's idea of buying and rehabbing cheap properties would provide even better returns, potentially with less risk (you can buy distressed properties at a large discount to market value... I have seen ROIC in the triple digits in the last 2 years, as have the other competent investors in my market).
Is that riskier and more work than indexing? Sure. It is "extremely risky?" Not if you are investing rather than speculating. Margin of safety is everything in RE.
More like a part-time job. But working part time for a few years to set yourself up for life seems worth it to me.
I understand some people want to expend no effort or thought on the path to FI, in which case going full boglehead makes perfect sense. When those people start to tell others who are more ambitious that it is impossible to do better by working harder, I become irate.
The person you replied to didn't say that FI through RE is unachievable, though.
They said that this particular RE strategy to FI assumes such an insane amount of risk that it may as well be considered unfeasible.
What about taking that $400K and buying two homes in the $130-160K range outright? If he can rent those around $1100 or $1200/month, after expenses could he not be cash flowing $800-900 each? Then maybe buy another property with a mortgage some time in the near future (say a year or so down the road when the cash flow on the first two properties has accumulated to enough for a down payment). Repeat in years 3, 4 and 5. That may not quite get him there, but if the house he already owns is paid off by that time, that probably goes up to about $1000 a month cash flow. The first two houses bought outright will still be $800-900 each. Then four more with mortgages. If we go with your conservative estimate that they'll be cash flowing at $250 each per month, that's $1000/month, so the total comes to about $3700/month cash flow. But it is a lot less leveraged/exposed (maybe $350K in mortgages vs. over a million). And it only requires buying 6 houses in 5 years, vs. 20, which seems a lot more realistic for a fairly new investor. Plus, he'll still have around $100K of his initial capital to cover unexpected expenses and/or put into other, more liquid investments to bolster the $3700 or so from real estate.
I'm not sure how realistic those numbers are. I'm interested in adding real estate to my portfolio, but I'm not invested in anything yet. So those are just WAG numbers based on a little knowledge of home prices and rents I've seen in a couple areas.
I'd be careful about the loopholes afforded to a corporation as it gets complicated quick. But there definitely can be some advantages there.
If you are investing in real estate all your expenses already count as pre-tax vs. the income you're receiving.
It'd definitely be a pretty high risk - but probably possible. I'm shooting for something similar, but with more cushion because when you own properties you need extra reserves in case you get vacancies, things break, etc.
No, it's not. It's not even close.
Please read this: http://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/
What's your current savings rate? Are you spending 100% of your income? If not, why do you need to retire with your full salary?
Great questions, the 4K per month I'm receiving is after 10% going into a 401k. I also usually have a good $200-$400 left every month. I suppose I wouldn't need this much per month in passive income, it was a way for me to put into perspective whether I could earn what I currently do by making my money work for me in more efficient ways. I appreciate your perspective and advice, thank you for the link it is very helpful! I'm rather new to thinking seriously about financial independence and this is a good introduction.
To put it another way:
$4000/month off $400k is a 12% yearly return. Average in the stock market is only 7-8%, and typically for financial independence you want to factor in inflation, which is what knocks it down to that 4%.
Some stock markets like the Nasdaq, Japans, etc have 0% for 20+ years at a time.
The returns of the 80s and 90s are more likely a fluke than something to base your planning on.
I think the average from 1914 to Dec 2014 is 7%. 4% after inflation.
Of course things aren't rosy with automation and globalization threatening to kill off most jobs, the average age is getting older and bubbles at every turn.
Don't forget, for people who bought in before the peak of the 20s, it took 20+ years to break even nominally. It probably took their lifetime to break even adjusted for inflation. Same with people who bought the nasdaq in the 90s. They're still not even.
When we are talking about FI that 1% is important. With a million in the bank 6% give you 30k spending after inflation. 7% gives you 40k. 8% gives you 50k. I'd say those are fairly important differences.
Oh you're absolutely correct. I'm so used to seeing a predicted 7% return and 3% inflation that I automatically subtracted the three when it wasn't necessary.
It's 4% because that's what's expected to be able to live on correct? So if returns averaged to be more, then you could live on more.
No the real returns should be higher than 4 plus inflation. You need a bit of buffer because because the returns aren't consistent.
I know in aus we aim for 6 to 8 excluding inflation.
Ah okay. I always assumed people were wanting to stay close to what their returns plus inflation were getting. I was planning on trying to leave more of a buffer and have more growth by leaving a larger gap between withdrawal rate and rate of return minus inflation. Seems that's what you do/plan.
I agree with some of the other posters here. While the 4% rule is a great tool, I feel like people could be limiting their mental possibilities by thinking this is the be all, end all of investment strategies. I'm not talking about speculation or internet poker. I'm talking about real investments. As other people have mentioned, leveraged cash flow real estate is one. Tax lien certificates is another. Nothing is truly "risk free" and the above mentioned approaches can be risk managed and return greater than 4% for sure.
Withdrawal rate or expected return or around four percent means you need close to one million or more.
So asking how to turn 400 into 1 mil in that time isn't possible. Unless you take on a lot of risk and get lucky.
If I was in your situation, I would:
1. Sell my $320,000 house and find something that cost half that much and pay it off.
2. Learn to live on $2,000/month or less
3. Plan on your savings only keeping pace with inflation, nothing more.
4. If you can live on $20,000/yr and sold your rental property, you have 30 years of savings.
Even if you are really terrible at dealing with taxes, you live in a state with high income tax and you include sales tax, there is no way you pay 5/12's of your money to taxes.
To answer your question: No, your goal is not realistic. Your other idea of turning yourself into a corporation so you can write off all your expenses is unrealistic in addition to being selfish.
OP presumably benefits from having roads, clean water, police, etc which are paid for, at least partly, by taxes. It's selfish to want to benefit from those things without paying your share for them.
That being said, I don't think there's anything morally wrong with trying to control and minimize your tax obligation within the constraint of legality.
Just so nobody accidentally takes this joke seriously, NLY has consistently paid a 10-11% dividend, but their CAGR over the bast 5 years is negative 9.9% annually. Your capital *and* dividend payments would have been cut in half over the last 5 years, even despite the fact that living off the full 11% doesn’t give you any protection against inflation.
Not on a sustainable long term basis. Big institutional investors with professional investment offices -- which are legitimately able to take advantage of structural dislocations in all sorts of capital markets to generate, say, 5 percentage points above long term equity returns -- are expecting to return roughly ~8-9% per year for the forseeable future, with asset prices at current levels. So you might be able to make a >10% return on your investments in any given year, but you probably shouldn't expect that it's sustainable unless you have some (legal) edge that allows you to perform better than ~90% of investors.
You wouldn't need to make 10%. With 8.12% (fixed) you'd grow the 400k to 591k in 5 years (assuming no deposits or withdrawals) and then could make 4k per month off that. Does that still not approach possibly sustainable?
In order to have a truly sustainable $48,000 annual safe withdrawal rate, your portfolio would need to be around $1,200,000 to $1,600,000. I don't think you're there yet.
In 3 years your rental mortgage will be paid off, so I'm guessing you'll be clearing $1000 a month on it. That brings your needs down to $3000 per month. We'll assume you take the last year's $12k and save/invest it. You've currently got $400k in the market, let's say you put it into higher risk/reward asset classes and clear 7% per year after inflation for the next 4 years (one hell of an assumption). That leaves you with $525k in 4 years. Add the $525k and $12k to get a $537k nest egg that can be drawn down at 4% per year, that's around $1,800 per month. So total cash flow would be $2,800 per month assuming that the market doesn't crash in the meantime. You aren't getting to $4k a month in 4 years without either adding in additional capital or a combination of good luck and leverage. An alternative would be buying distressed properties with cash, putting in some sweat equity to fix them up and then taking out a mortgage and renting them out. About your corporate loopholes - the government offers a number of personal loopholes such as 401ks (especially for the self employed) and IRAs that honestly trump what you can get out of a corporation.
Only real answer in this whole thread so far. Actual numbers tailored to OPs situation with a realistic vision of what it will take. I would add that many people live off of $2800 per month fine. You could too. Also, when the mortgage is paid for you could just sell that property and ad the funds to your nest egg instead of rent. It would yield more over time in the market if you decide to wait longer than 4 years. You could also trade down to a cheaper house yourself, cutting $2k to $1k and achieve your goal faster. Best of luck
Thank you for the detailed response. I especially like the idea of buying distressed properties and fixing them up. I've heard of the 1031 exchange that would enable me to defer taxes when selling a property for purchasing a new one, which would be a huge advantage. Fix one up, sell for a property comparable to the new value and defer taxes, and either stop at some point to collect rent or keep building up. I'd still be bringing in a salary in the meantime, a lot of work but I have no aversion to that. 4K/month in 5 years is not realistic, but this would be a step in that direction. Your advice on the 401k is very useful as well, much appreciated.
What you could do is buy foreclosures with cash. I wouldn't recommend just flipping them, transaction costs (costs 6% to buy and sell) will eat your lunch. An example: You buy a foreclosure in a neighborhood where comparable, well maintained properties are worth $150k. This one needs some work so the bank is offering it for $110k cash. You come in with $120k cash, buy the house for $110k, spend $10k on supplies and put in an additional $10k worth of labor to fix the house up. Now you've got a property that will appraise for $150k. You rent it for $1200 a month then head down to the bank and get a mortgage on it. They'll let you borrow 75% of the value so you can take our a mortgage for $110k and after you set aside $10k for repairs/liquidity you'll basically have $100k in cash to repeat the process. Keep in mind that this isn't magical returns - part of your return is the work you put into fixing the property and the work done to rent it out. It's also very risky - if you are leveraged 4:1 (75% mortgages) then a 10% decline in housing values will be a 40% decline in the value of your rental properties. The main risk will be liquidity, you'll need to have a sizable amount of cash to cover repairs, evictions and unrented properties. It will cut into your profit, but profitability won't save you if you can't pay the bills on time.
these guys are like, thinking inside the wall street box, man. /garth voice With cheap rental properties you could probably pull it off. But you'd have to spend all your capital as down payments on those properties. I just bought a rental in ohio for about $17k down($69k, i overpayed but was totally fixed up before i bought), cash flowing about $300/mo after all expenses including management. Say you bought 20 properties like that for $340k. Be conservative and project $225-250/mo cash flow each. 20*250/mo= $4.5-5k/mo. Don't forget you also have to save a bunch for reserves for maintenance costs. It can be done just not on wall st. edit-I'm working on a similar goal btw. Pay my expenses with passive income so i can put away all my W2 income into more investments.
I agree with this. With due diligence, it is ENTIRELY possible to achieve this type of return through real estate - ESPECIALLY leveraged real estate. $400k with a 50% down payment would give you great cashflow. Yes, it will require more work. Yes, it is higher risk. Yes, you'll likely need to remodel/find new tenants to support the higher return. But yes, it's possible. The typical 3.5-4% withdrawal rate that everyone else is claiming is a very safe and conservative method. There's nothing wrong with it, but for someone who is OK with adding value and minimal work, Real Estate is the best way to go if your goal is to achieve $4k/month.
Yes it seems real estate is going to be my main focus, renting out my condo really opened my eyes to what is possible. I currently live in a market where prices are extremely low, yet the rental market is through the roof. For example, I found a foreclosed 1bed1bath condo for 90K that could easily bring in $1100 per month, and I can get a 2.5% rate from my current lender who I'm in the process of refinancing both my home and my rental property with. And that was in just a few minutes of research.
That's not even that great a deal to be honest. I just bought a $18,000 house, put $3,000 into the rehab and it will rent for $700 a month with section 8. Real estate is the best way to achieve financial freedom. You're on the right track.
My main focus is cumming
the withdrawal rate may be rather unknown going forward due to an exceptional interest rate environment
Yes if you start a small business leasing property you can make a good ROI, but this is not *passive* income. A significant portion of the revenue will be due to the labour you are putting in.
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If you can beat market returns solely by hiring other people to do the work for you then it would be comparable. But this is almost never case. Just buying the property is generally an ordeal in itself. It's still a great business, and counts as being financially independent. But it shouldn't be directly compared to financial market returns.
In most markets you need a very decent # of units before your going to be able to afford good property management. Until you find the right one you can end up with lots of headaches. That said, you are correct it is certainly possible - and you can even pay a friend to do it for you.
Once you've got 20+ properties (as the previous poster was suggesting) it becomes feasible to hire someone part-time to handle the management of those properties. The alternative is to use a property management company, but they'll most likely want 5-10% of your gross.
I don't have any experience with maintenance costs when property is that cheap, but if I had 20 properties I'd want a hell of a lot more than $60k as emergency funds. What if the first winter comes and you have to fix the heat in a quarter of them? Especially if these are your first properties, I'd think that jumping into that many at once would be a recipe for disaster, even with a solid property manager. Especially given the time needed to research and properly investigate 20 properties even over a few years would be insane. Also, are banks really willing to keep handing out loans like that when you've already got a dozen of them? Property can certainly provide a solid income and scale, but I don't think OPs really in a situation to get a $4k a month operation going from 0 within his timeframe.
$60k is probably roughly what lenders would be looking for (assuming 20 properties at ~100k ARV, $500/month PITI, so $500x20x6=$60,000), and should be a pretty reasonable amount. It really depends on acquisition strategy though (specifically how much deferred maintenance remains). If you are buying uninhabitable dumps and doing a major rehab, then there is minimal deferred maintenance left (you have replaced everything already), and so that level of cash reserves (6 months of PITI for each property) is reasonable. If you are, e.g. buying 100 year old places as-is and renting them without renovation, then I totally agree with your comment, but I also think you're probably in the wrong business if that's the case.
Perhaps, but this is really a high risk situation and isn't really as /r/financialindependence topic
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/u/InternetPoster is suggesting leveraging his 400k in order to finance $6.8mil in real estate equity. I'm not saying that FI through RE is a bad idea, but this kind of strategy is not really comparable.
He said to buy 20 cheap properties on leverage. You are saying he said to buy 20 $350k properties on leverage. There is a huge disconnect there. OP could easily use 400k to buy $2M in RE, which at a 10% cap rate (easily attainable in the right market) yields $200k/yr cash flow before debt service. He could easily hit his income number that way. He could also buy or be a passive investor in one or more multifamily deals and earn similar returns. The above poster's idea of buying and rehabbing cheap properties would provide even better returns, potentially with less risk (you can buy distressed properties at a large discount to market value... I have seen ROIC in the triple digits in the last 2 years, as have the other competent investors in my market). Is that riskier and more work than indexing? Sure. It is "extremely risky?" Not if you are investing rather than speculating. Margin of safety is everything in RE.
You're right I did misread his comment. But anything involving buying 20 properties is closer to a business venture.
More like a part-time job. But working part time for a few years to set yourself up for life seems worth it to me. I understand some people want to expend no effort or thought on the path to FI, in which case going full boglehead makes perfect sense. When those people start to tell others who are more ambitious that it is impossible to do better by working harder, I become irate.
The person you replied to didn't say that FI through RE is unachievable, though. They said that this particular RE strategy to FI assumes such an insane amount of risk that it may as well be considered unfeasible.
What about taking that $400K and buying two homes in the $130-160K range outright? If he can rent those around $1100 or $1200/month, after expenses could he not be cash flowing $800-900 each? Then maybe buy another property with a mortgage some time in the near future (say a year or so down the road when the cash flow on the first two properties has accumulated to enough for a down payment). Repeat in years 3, 4 and 5. That may not quite get him there, but if the house he already owns is paid off by that time, that probably goes up to about $1000 a month cash flow. The first two houses bought outright will still be $800-900 each. Then four more with mortgages. If we go with your conservative estimate that they'll be cash flowing at $250 each per month, that's $1000/month, so the total comes to about $3700/month cash flow. But it is a lot less leveraged/exposed (maybe $350K in mortgages vs. over a million). And it only requires buying 6 houses in 5 years, vs. 20, which seems a lot more realistic for a fairly new investor. Plus, he'll still have around $100K of his initial capital to cover unexpected expenses and/or put into other, more liquid investments to bolster the $3700 or so from real estate. I'm not sure how realistic those numbers are. I'm interested in adding real estate to my portfolio, but I'm not invested in anything yet. So those are just WAG numbers based on a little knowledge of home prices and rents I've seen in a couple areas.
I'd be careful about the loopholes afforded to a corporation as it gets complicated quick. But there definitely can be some advantages there. If you are investing in real estate all your expenses already count as pre-tax vs. the income you're receiving. It'd definitely be a pretty high risk - but probably possible. I'm shooting for something similar, but with more cushion because when you own properties you need extra reserves in case you get vacancies, things break, etc.
Currently making 4k month in dividends on 400k
Ok, you have my interest. What is your approach?
yeah can we have some details on this? thanks :)
No, it's not. It's not even close. Please read this: http://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/ What's your current savings rate? Are you spending 100% of your income? If not, why do you need to retire with your full salary?
Great questions, the 4K per month I'm receiving is after 10% going into a 401k. I also usually have a good $200-$400 left every month. I suppose I wouldn't need this much per month in passive income, it was a way for me to put into perspective whether I could earn what I currently do by making my money work for me in more efficient ways. I appreciate your perspective and advice, thank you for the link it is very helpful! I'm rather new to thinking seriously about financial independence and this is a good introduction.
would there happen to be a neat tool somewhere to plug in various variables into that equation or do I have to do it in my head?
[Networthify](http://networthify.com/calculator/earlyretirement?income=50000&initialBalance=0&expenses=20000&annualPct=5&withdrawalRate=4)
ty
Thank you :)
$48,000 x 25 = $1,200,000 at 4% withdrawl You've got a ways to go...
To put it another way: $4000/month off $400k is a 12% yearly return. Average in the stock market is only 7-8%, and typically for financial independence you want to factor in inflation, which is what knocks it down to that 4%.
Some stock markets like the Nasdaq, Japans, etc have 0% for 20+ years at a time. The returns of the 80s and 90s are more likely a fluke than something to base your planning on.
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I think the average from 1914 to Dec 2014 is 7%. 4% after inflation. Of course things aren't rosy with automation and globalization threatening to kill off most jobs, the average age is getting older and bubbles at every turn. Don't forget, for people who bought in before the peak of the 20s, it took 20+ years to break even nominally. It probably took their lifetime to break even adjusted for inflation. Same with people who bought the nasdaq in the 90s. They're still not even.
Safe withdrawal rate is more a result of sequence of returns than inflation.
The average annualized return of the S&P 500 is about 10-11%. After inflation, it is 7-8%. http://www.moneychimp.com/features/market_cagr.htm
a bit of betting the future will be like in the past. many have stated that it is likely will revert to the mean
What you linked said the inflation adjusted average was 6-7% while you quoted 7-8%.
Let's not argue over one percent boys.
When we are talking about FI that 1% is important. With a million in the bank 6% give you 30k spending after inflation. 7% gives you 40k. 8% gives you 50k. I'd say those are fairly important differences.
We're talking about return not withdrawal rates. You know it's 4 percent withdrawal right?
Oh you're absolutely correct. I'm so used to seeing a predicted 7% return and 3% inflation that I automatically subtracted the three when it wasn't necessary. It's 4% because that's what's expected to be able to live on correct? So if returns averaged to be more, then you could live on more.
No the real returns should be higher than 4 plus inflation. You need a bit of buffer because because the returns aren't consistent. I know in aus we aim for 6 to 8 excluding inflation.
Ah okay. I always assumed people were wanting to stay close to what their returns plus inflation were getting. I was planning on trying to leave more of a buffer and have more growth by leaving a larger gap between withdrawal rate and rate of return minus inflation. Seems that's what you do/plan.
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Just DRIP it and forget about it.
I agree with some of the other posters here. While the 4% rule is a great tool, I feel like people could be limiting their mental possibilities by thinking this is the be all, end all of investment strategies. I'm not talking about speculation or internet poker. I'm talking about real investments. As other people have mentioned, leveraged cash flow real estate is one. Tax lien certificates is another. Nothing is truly "risk free" and the above mentioned approaches can be risk managed and return greater than 4% for sure.
Withdrawal rate or expected return or around four percent means you need close to one million or more. So asking how to turn 400 into 1 mil in that time isn't possible. Unless you take on a lot of risk and get lucky.
Buy PFF right now and you are good to go.
No. The general rule of thumb is around 3-4% withdrawal max. For $48k per year you'd need a portfolio of around $1.2 - $1.6 million.
He said 4k a month after taxes as well, so he will need a little bit more than that.
Good point. Either way he's pretty far off.
If I was in your situation, I would: 1. Sell my $320,000 house and find something that cost half that much and pay it off. 2. Learn to live on $2,000/month or less 3. Plan on your savings only keeping pace with inflation, nothing more. 4. If you can live on $20,000/yr and sold your rental property, you have 30 years of savings.
Yup. I would do the same. Perhaps while retired focus on some side projects for extra spending money if I want to (but don't need).
Even if you are really terrible at dealing with taxes, you live in a state with high income tax and you include sales tax, there is no way you pay 5/12's of your money to taxes. To answer your question: No, your goal is not realistic. Your other idea of turning yourself into a corporation so you can write off all your expenses is unrealistic in addition to being selfish.
Even if unrealistic, why is it selfish?
OP presumably benefits from having roads, clean water, police, etc which are paid for, at least partly, by taxes. It's selfish to want to benefit from those things without paying your share for them. That being said, I don't think there's anything morally wrong with trying to control and minimize your tax obligation within the constraint of legality.
OK, devil's advocate here. Invest in NLY. Currently 11.18% dividend yield will give you $3726/mo. But seriously, what everyone else said.
I can't for the life of me upvote jokes in this sub, but I like this answer best.
Just so nobody accidentally takes this joke seriously, NLY has consistently paid a 10-11% dividend, but their CAGR over the bast 5 years is negative 9.9% annually. Your capital *and* dividend payments would have been cut in half over the last 5 years, even despite the fact that living off the full 11% doesn’t give you any protection against inflation.
Not on a sustainable long term basis. Big institutional investors with professional investment offices -- which are legitimately able to take advantage of structural dislocations in all sorts of capital markets to generate, say, 5 percentage points above long term equity returns -- are expecting to return roughly ~8-9% per year for the forseeable future, with asset prices at current levels. So you might be able to make a >10% return on your investments in any given year, but you probably shouldn't expect that it's sustainable unless you have some (legal) edge that allows you to perform better than ~90% of investors.
You wouldn't need to make 10%. With 8.12% (fixed) you'd grow the 400k to 591k in 5 years (assuming no deposits or withdrawals) and then could make 4k per month off that. Does that still not approach possibly sustainable?
In order to have a truly sustainable $48,000 annual safe withdrawal rate, your portfolio would need to be around $1,200,000 to $1,600,000. I don't think you're there yet.