Author Topic: How do I generate enough cash flow to achieve ER?  (Read 5300 times)

Baylor3217

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How do I generate enough cash flow to achieve ER?
« on: February 15, 2013, 10:40:34 PM »
I've dutifully slaved away in the rat race for 13 years, saving, maxi out out Roth and 401k and here's what I have to show for it at age 35:
- 401k $300,000
- cash and other liquid investments $425,000
- total $725,000

My job generates about $10,000 per month after taxes including a few investments that creat a couple hundred a month.

I spend well less than 50% of that.

I feel I'm in a very fortunate situation but don't know how to take it to the next level.

Thoughts from you badasses out there?
« Last Edit: February 16, 2013, 08:57:16 AM by Baylor3217 »

Baylor3217

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Re: How do I generate cash flow?
« Reply #1 on: February 15, 2013, 11:27:40 PM »
Said another way, I feel I'm nowhere near the roughly $3,000 a month in expenses I'd need to generate to retire.

DebtDerp

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Re: How do I generate cash flow?
« Reply #2 on: February 16, 2013, 12:43:22 AM »
What's your goal? Are you hoping to retire? Are you looking for investments that generate good cash flow? What are your expenses like? We need more info.

happy

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Re: How do I generate cash flow?
« Reply #3 on: February 16, 2013, 04:32:59 AM »
Well, more info is always good, but I think OP was asking about how to live off his/her stache. By my calculations, he/she has about 2 years to go depending on the desired SWR.

As I am finding its better if you start to plan how you will live off the stache some time before you get there.  I haven't retired yet but am getting closer and would be very close if only I had planned it a bit better. So I am very interested in the answers that others post. From what I can figure its good to have cash available for the first 1-5 years, ( depending how conservative you are).  I have heard of the idea of a cash ladder, where you organise term deposits maturing in successive years for the first few years... this optimises the return by getting a higher cash rate whilst protecting from a drop in the market.

There is also the issue of whether you live off the dividends produced by the stocks or sell off a bit of your stocks each year to live off. Dividends are preferred by some because they are a little less volatile.

arebelspy

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Re: How do I generate cash flow?
« Reply #4 on: February 16, 2013, 08:02:36 AM »
Well you don't quite give us enough data, but I'll make some educated guesses (especially about spending and taxes).

At 35, I'd shoot for a 3% SWR if you want to have the option to never have to work again. 4% if you're fine knowing there's a good chance you'll have to make some money in ER.

That means, since you spend, let's say, 4.5k/mo. (job generates 10k net, and you spend "well less than half that"). That means you need a stache of 1.35MM (4% SWR) to 1.8MM (3% SWR).

So you have a ways to go.  I'd work on getting those expenses down (54k/yr. seems like a lot). Are you planning on downsizing or moving to a cheaper COL area when you FIRE?

EDIT: I see in the second post you say 3k/mo. expenses, I was just going off the first post's "less than 5k". So in that case you need a stache of 900k (4% SWR) to 1.2MM (3% SWR). /END EDIT

As far as generating a return, there's a few methods people who first hear about ER jump on because they make obvious intuitive sense in generating money (dividends, rental income), but in essence you'll generate money by selling stocks.

In a total return method you build up a big enough stache, and once/yr. (typically) you sell some to generate the living expenses you need.  Typically (one hopes) the stache grows more than you sell. While some can't stomach this idea, 95%+ of the time, you'll end up with more than you started, so while it seems you are spending principal, you aren't - you're selling gains (just like spending dividends).

You're doing awesome so far, just a bit to go, possibly cutting some expenses, and some learning.  Best of luck!
« Last Edit: February 16, 2013, 08:04:33 AM by arebelspy »
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Baylor3217

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Re: How do I generate cash flow?
« Reply #5 on: February 16, 2013, 08:08:35 AM »
Thanks for the responses so far. Great info!

My monthly expenses in ER would be $3,000.

arebelspy

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Re: How do I generate cash flow?
« Reply #6 on: February 16, 2013, 08:12:42 AM »
Yes, I saw the 3k and edited my post, not sure if you saw the edit. :)

When you say "cash and other liquid investments 425,000" I'm hoping that means "cash (under 20k) and liquid investments in equities or the like (400k+)". You don't really have almost a half million dollars sitting earning negative real returns, do you?
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with two kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

Kriegsspiel

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Re: How do I generate cash flow?
« Reply #7 on: February 16, 2013, 08:19:43 AM »
IMO, taking it to the next level would be to desire less, and retire now! 

Baylor3217

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Re: How do I generate cash flow?
« Reply #8 on: February 16, 2013, 08:20:03 AM »
I have way too much in cash right now, probably $250,000

I've also been looking at town homes in the $350-450 range that I would live in for 2-3 years and then rent for about $2,400 per month.

arebelspy

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Re: How do I generate enough cash flow to achieve ER?
« Reply #9 on: February 16, 2013, 09:13:05 AM »
2400 rent on a 350-450k house is a terrible investment.  It's like a 3% return, with a lot more work and risk than other safe investments with the same yield.

Real estate isn't a bad idea though with that much cash, depending if you want to be a landlord or not (and possibly a long distance one depending on where you live).  If not, you can become a private money or hard money lender, and loan money to  real estate investors, and have your loan secured by real property.  You should be able to get at least 8% as a private money lender and 12-15% as a hard money lender (but with more risk in the latter, along with more "idle" time for the cash between HMLs, and more work finding them.. naturally higher returns = more risk and work).  Private money is probably the best return for the least amount of work/risk.  Or becoming the landlord yourself.  Or just skip that and DCA/VCA into equities.

Either way - don't let 250k sit, losing value daily!  :)
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with two kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

Baylor3217

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Re: How do I generate enough cash flow to achieve ER?
« Reply #10 on: February 16, 2013, 01:07:37 PM »
I agree. Problem is, my career has happened to coincide in the period most none of us hbe made any appreciable income via vanguard s&p DCA'ing the last 10 years or so.

Not only that you could have lost your ass if you didn't time things right.

skyrefuge

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Re: How do I generate enough cash flow to achieve ER?
« Reply #11 on: February 16, 2013, 08:11:25 PM »
Problem is, my career has happened to coincide in the period most none of us hbe made any appreciable income via vanguard s&p DCA'ing the last 10 years or so.

[citation needed]

"Vanguard S&P DCA'ing" describes my investing strategy pretty well, and my annualized rate of return over the 10 years preceding today is 7.65%.

arebelspy

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Re: How do I generate enough cash flow to achieve ER?
« Reply #12 on: February 16, 2013, 08:27:47 PM »
Agree with Skyrefuge.  When you take dividends into account, plus DCAing in during the crash, you're not doing to bad, if you've been faithfully sticking to the plan.

Not only that you could have lost your ass if you didn't time things right.

Trying to "time things right" is more likely how one would lose their ass.  The market doubled in the last few years, recovering from the 08-09 slide.  If you sold low because you were scared and trying to time the market, that's how you lose out. 

Continual investing with a long term outlook is the way to slowly get rich.

I'm not sure of a surefire method to do it quickly, aside from luck.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with two kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.