Author Topic: 4% with a side of Hustle  (Read 711 times)

Jacks

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4% with a side of Hustle
« on: October 28, 2020, 11:47:04 AM »
Afternoon guys!

My wife and I have an Airbnb that we run out of our house that brings in around $1,900/month (pre-tax). We spend, on average, 50k per year, and are using the 4% rule to guide our retirement number. Therefore, if we had no Airbnb, I would need $1.25M, but we plan on running our Airbnb well into retirement, so it will be a sort of side hustle bringing in extra money, even once I quite my 9-5.

How does this factor into our final number? I tried to use the FireCalc that MMM suggests in his "4% rule" article, but it was wigging out on me and no matter what variables I put in, I was getting 100% chance of success.

secondcor521

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Re: 4% with a side of Hustle
« Reply #1 on: October 28, 2020, 12:39:31 PM »
I'd suggest the following methodology:

1.  Go to http://www.firecalc.com.

2.  In the first tab labeled "Start Here" (there are multiple tabs across the top), put $50000 in as your spending.

3.  In the second tab "Other Income/Spending", put Pension Income of $22800 starting in 2020.  This represents the $1900 a month from your AirBnB.  FIREcalc uses annual numbers for inputs on this screen.

4.  In the last tab "Investigate", go to "Search for settings that will get a success rate of as close to
100% as possible (usually within 1%) by changing...Spending Level or  Starting portfolio value" and click on Starting portfolio value.

5.  Optionally, you can change any other inputs to more closely match your situation.

6.  Click Submit.

If you don't change anything in step 5, you should see that a portfolio of $756,651 (plus the AirBnB income) is historically 100% safe over a 30 year period.

This exercise does assume several things:

1.  That you continue the $1900 income indefinitely and increase it by inflation.

2.  That you're including all of your spending in the $50K number, including taxes and healthcare.

3.  That the future isn't any worse than the worst of the past.

4.  That your situation matches the other inputs in the tool.

Logically this makes sense if you buy the 4% rule.  The $22800 you're bringing in represents the equivalent of $22800 / 4% = $570,000 in FIRE stash.  The $50,000 - $22,800 = $27,200 you still need is covered by an additional $680,000 from the portfolio ($27,200 / 4% = $680,000).

Also, note that the $756,651 plus $570,000 is pretty close to your $1.25M number.

(The difference between the $756,651 and the $680,000 number is because 4% is not 100% safe over 30 years assuming FIREcalc defaults; it's only about 95% safe.  If you change the 100% to 95% in step 4 above, you'll get a number which is very close to the $680,000 number.)
« Last Edit: October 28, 2020, 12:41:06 PM by secondcor521 »

ChpBstrd

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Re: 4% with a side of Hustle
« Reply #2 on: October 28, 2020, 12:59:39 PM »
I think your financial model should account for the rental, but not forever. You're not going to be running this thing when you're 85, are you? Also, as we project farther and farther into the future, we run the risk of not being able to see trends that could affect this side hustle. E.g. if something caused people not to want to get AirBnBs in your area, or if something caused prices to drop, or something caused you to be unable to manage it, or you changed your life plans, etc.

I might include these revenues in my model for 10 or 15 years, but not thereafter. If in year 16 you want to keep it going that's gravy, but we're getting speculative by that point.

Jacks

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Re: 4% with a side of Hustle
« Reply #3 on: October 28, 2020, 01:27:47 PM »
I think your financial model should account for the rental, but not forever. You're not going to be running this thing when you're 85, are you? Also, as we project farther and farther into the future, we run the risk of not being able to see trends that could affect this side hustle. E.g. if something caused people not to want to get AirBnBs in your area, or if something caused prices to drop, or something caused you to be unable to manage it, or you changed your life plans, etc.

I might include these revenues in my model for 10 or 15 years, but not thereafter. If in year 16 you want to keep it going that's gravy, but we're getting speculative by that point.

This is the exact issue I have run into: how do I account for this income stopping after a set period of time. I know that I wont be doing it when I'm way old, but I do hope to carry it on for the next 20 years or so. When I first ran the numbers I came up with the same thing as Secondcor521

We live near Siesta Key Beach in Florida, so, with the exception of some major disasters, I think we should be pretty safe to have the area be "desirable". Even if airbnb fails, the space is set up in a way that we could get an annual renter and get around $800/month.


secondcor521

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Re: 4% with a side of Hustle
« Reply #4 on: October 28, 2020, 01:58:22 PM »
This is the exact issue I have run into: how do I account for this income stopping after a set period of time. I know that I wont be doing it when I'm way old, but I do hope to carry it on for the next 20 years or so. When I first ran the numbers I came up with the same thing as Secondcor521

I didn't think about it when I made my first post, but you can just add an "off chart spending" on the second line of the second tab with 22800 starting in 2040 in that box.  That cancels out the 22800 in the first row after the twenty years are up.

If I did the entries right, that looks like a starting portfolio of about $875K would be required for 100% safety, $50K spending, and the rest default.

Jacks

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Re: 4% with a side of Hustle
« Reply #5 on: October 28, 2020, 02:24:33 PM »

I didn't think about it when I made my first post, but you can just add an "off chart spending" on the second line of the second tab with 22800 starting in 2040 in that box.  That cancels out the 22800 in the first row after the twenty years are up.

If I did the entries right, that looks like a starting portfolio of about $875K would be required for 100% safety, $50K spending, and the rest default.

This is Brilliant. I didn't think about doing it that way either. Thanks for the reply!

desk_jockey

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Re: 4% with a side of Hustle
« Reply #6 on: October 28, 2020, 09:54:55 PM »
The other popular calculator will allow you to put extra income(s) for a finite number of year: cfiresim.com

Also remember that those calculators are looking back at the past 140 some odd years.  A 100% result only means it survived all past years.  A 100% calculator result really doesn’t do anything more for you looking forward than does a 98% or 97% result. 

mistymoney

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Re: 4% with a side of Hustle
« Reply #7 on: October 29, 2020, 09:59:01 AM »
I think your financial model should account for the rental, but not forever. You're not going to be running this thing when you're 85, are you? Also, as we project farther and farther into the future, we run the risk of not being able to see trends that could affect this side hustle. E.g. if something caused people not to want to get AirBnBs in your area, or if something caused prices to drop, or something caused you to be unable to manage it, or you changed your life plans, etc.

I might include these revenues in my model for 10 or 15 years, but not thereafter. If in year 16 you want to keep it going that's gravy, but we're getting speculative by that point.

https://engaging-data.com/will-money-last-retire-early/

this one will let you stop it, but you can only do one added income I think

This is the exact issue I have run into: how do I account for this income stopping after a set period of time. I know that I wont be doing it when I'm way old, but I do hope to carry it on for the next 20 years or so. When I first ran the numbers I came up with the same thing as Secondcor521

We live near Siesta Key Beach in Florida, so, with the exception of some major disasters, I think we should be pretty safe to have the area be "desirable". Even if airbnb fails, the space is set up in a way that we could get an annual renter and get around $800/month.

Jacks

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Re: 4% with a side of Hustle
« Reply #8 on: October 29, 2020, 03:33:18 PM »
I find it really interesting...

CFIRESIM shows that I need close to 1mil, but the settings from @Secondcor on firecalc showed ~$875k needed. Truth be told, I wasn't able to get the firecalc working properly, even using the instructions from Secondcor, but I trusted their math.