Author Topic: I just need guidance. Dumb question, but where does the money come from?  (Read 4242 times)

BAMxi

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Hey there. So I'm not necessarily a new MM reader, but I'm new to investing in things other than my savings account. I have embraced buying Vanguard stocks (currently own about 6k in the Vanguard Tech fund), I have read a ton on investing in dividends (seems like a ton of money needs to be invested in order to generate a small return).

My question for those of you who are FIRE or who understand how FIRE is possible, is how do you physically plan to get the money out of your investments? I know this is a very basic question, but for those of you who have invested in ETFs or index funds, do you just plan to sell a certain amount of your investment each month (or quarterly?) to cover your regular expenses, and hope you are selling high? Is there some automated way to do this, or some type of account I can setup? I looked into the Vanguard distribution options, but of course they all say I need like $700k invested to make like $1100 per month...which doesn't seem right to me. And, I like the idea of dividends, but just don't feel like they offer a comparable rate of return as ETFs and other investments. I've been getting frustrated because this seems like I can understand lots of higher level things but get hung up on tiny details like this.

Note...if you don't want to do a bunch of extra reading, go no further and just answer the above, please. Extra reading/venting below, if you care:

I'm 28 years old, married. I'm good at many things, but have yet to find any career that I actually enjoy, or much of anything that I'm passionate about other than spending time outside in nature with my wife. Currently working as a sales manager (good at sales but hate it). Current income (pretax) is $55k per year from my job, plus between $1500 to $2500 per month in side income (will not get into the details of the side income, but it is basically passive but not guaranteed to sustain forever). Wife is between jobs but has her master's in social work (terrible terrible career field which pays nothing and difficult to find jobs in that field). She might just stay home if we get pregnant this year, as working in a mental hospital with a baby inside of you is incredibly risky. Currently have about $40k just sitting in a savings account until we find a house to buy. We have no outstanding debt. We sold our house a few months ago and moved from a higher cost of living area to a lower cost of living area, and are staying with parents for free until we find a place to live. Our only monthly expenses are car insurance, health insurance through my job, food, gas, and cell phone bill (shared family plan with my parents, our portion is $54 per month). We are currently banking pretty much all of what I make each month, however we will not be able to stay living here for free forever.

I live in a relatively low cost of living area (Missouri), where we could realistically buy a "forever" house to raise a family in for between $100k and $150k. Possibly less if the stars align and we get lucky finding the right place.

My plan is as follows: Find suitable house and pay it off as quickly as possible (with $30k down on a $100k house, our payments would be very low, even if we did a 15 year loan, so we could feasibly live off of just our passive income. However that income is not stable enough for me to feel 100% safe doing so, especially with both of us and some potential kids). Wife could stay home to raise theoretical kids while I either keep working full time or we both find part time jobs that we don't hate doing to make some additional income. We have family nearby, so that's free child care, however the goal would be to retire as early as possible so we can actually raise our own kids (I know, crazy, right?!). I honestly feel like we are frugal as hell while still living a good life, I just can't wrap my head around working for even another 10 years and missing so much of my hypothetical kids growing up. A lot of my concern about the future comes from me just never finding a purpose in life (so far). I know my purpose is not to go out and build someone else's dream by working for them forever, and I am relatively entrepreneurial, yet somehow have become very risk averse since discovering MM and realizing that every mistake I make could equal years and years more enslavement to a job. So, I'm just trying to figure out how my investments would turn into cash flow without depleting them. Do I just cash out the amount I need each month, and hope I'm selling high at that time? As far as a part time income, I LOVE the idea of running a web based business with residual ad revenue, but honestly feel like I don't have anything of value to contribute that would be better than the experts already blogging on that topic, or generate clicks (Plus, I've read you should never start a blog with the intent to make money).

Anyway, even if nobody reads this, I feel a little better just getting it all out there. Sometimes I feel like I'm trying to finish a puzzle with a blindfold on. I have a pretty good idea what the puzzle should look like when it's done, but I just cant see all of the pieces yet. Thanks for listening, sorry for the rant.

chasesfish

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Re: I just need guidance. Dumb question, but where does the money come from?
« Reply #1 on: December 28, 2014, 01:32:02 PM »
Your mutual funds hold individual stocks, the first thing you do is to let your dividends pay in cash.  This is around 2% and already gets your halfway there.  I think most people in ER carry a cash cushion and sell as they feel it's necessary.  Additionally, the amount of the dividends increase each year for most companies.

Spondulix

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Re: I just need guidance. Dumb question, but where does the money come from?
« Reply #2 on: December 28, 2014, 02:16:23 PM »
Couple thoughts regarding the personal stuff...

Has your wife ever considered teaching or tutoring? Having a Masters Degree (even if it's not in education) might open up doors there. Is she considering quitting to have kids because she hates her job, or because you guys are really ready to have kids?

Having a sense of purpose... I've been reading a lot the last couple years about a life crisis that a lot of people in our generation are having in their early 30s (I'm 34). 100 years ago, we got married for survival (this was before home, car or medical insurance - if something happened to you, you needed family and others to survive). 50 years ago, we needed spouses for companionship, and we made money for survival. Now, we are looking to our jobs and spouses for self-actualization, or personal fulfillment.

The problem our generation is having is that we're willing to sacrifice security for fulfillment. We're choosing to be entrepreneurs (whether it's being a musician or graphic designer, selling crafts on Etsy, Uber driver, whatever) because it feels empowering - except fulfillment doesn't necessarily pay the bills or prepare for the future very well! Do you know anyone who has quit a good paying job to pursue their own company (a passion project) but without planning for it? I think that's why our generation has the lowest savings rate ever, and there's going to be a massive retirement crisis in the future because we're missing out on these critical years of saving.

The thing about careers (that I'm just coming to discover myself) is that it takes a good ten years in a field to really feel like you know what you are doing, that you have a support network in colleagues, or even to feel like you could move around to another job or company with some freedom. It takes time to have the experience necessary to have control over our careers, or to get to the job or path we set out for. Working in our 20s can be inherently dissatisfying. That's the case whether you stay in sales or start your own company - it's just going to take time.

So, I think it's a matter of perspective here. You don't like sales, but it is steady income, allowing you to save for retirement, and support starting a family (50 years ago you probably would have felt fantastic for being such a great provider). In 2014, you want to start your own company, follow a passion and have control over your future - which there is nothing wrong with that! You're at a great point right now where you don't have kids yet, you're not tied to a mortgage, or a career that would be hard to backtrack out of. You have the added benefit that the skills you are gaining in your current job will totally benefit you running your own company.

IMO, its totally worth pursuing the new company, but consider it a goal to work towards and not a life choice you need to have today. Do it in a smart way. Don't quit your job until you can step into your new company established and earning money. Use your sales job as motivation to get your new company going, and do it in your free time.
« Last Edit: December 28, 2014, 02:19:06 PM by Spondulix »

thedayisbrave

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Re: I just need guidance. Dumb question, but where does the money come from?
« Reply #3 on: December 28, 2014, 02:33:48 PM »
Your heart is in the right place, but I do think you're putting the cart before the horse.  You're worried about how take money out of your investments, when in reality you don't have enough of an investment portfolio to take anything out of.  Currently you are in the accumulation phase of your life - and you're already worried about de-cumulation.  Put aside the de-cumulation for now and instead focus your energy on accumulation and increasing your income (so that you can save more and get to your goal faster).

So far you're in a good place with no debt and living frugally.  Now, you need to work on your income and your purpose.  It is VERY wise that you are living off your side income and banking the rest.  But it doesn't seem like your numbers accurately reflect that... if the $40K in savings comes from the sale of your house, where is your salary going each month? Now, honestly, how much do you save each month? You don't mention where the side income comes from - is that something you could scale up and turn into a larger income stream? Can you take ask your employer for an extra project in a different department to try to get a feel for whether or not you'd like another role better? What are some productive things (besides walking with your wife) that you enjoy doing?

I think you are getting overwhelmed because you are looking at where you want to be, and being frustrated because the goal/dream seems so far off and almost unachievable.  What may be helpful is to break it up into smaller goals/milestones to hit along the way, so that once you do, you can feel accomplished and that will spur you to keep going - instead of feeling like you're never going to get there.  It's a marathon, not a sprint.  Map out where you want to be (financially and professionally) in 1 year, 2 years, 3 years... it may seem sophomoric and yes these goals may change.  Write some down anyway.

To answer your first question, yes some people who are retired sell some of their investments each year for income.  Some have large enough portfolios that they can live off the dividends.  You are correct in that $700K invested in a low cost index such as Vanguard Total Stock would pay out about $1100/mo in dividends (that's pro rata - mutual fund divs are paid quarterly), which equates to about 1.8%1.9%.  That's just yield though... what matters is total return, which is dividend yield + capital appreciation.  If you Google these terms you can read a lot more about them.  So you're thinking is correct, but missing some things.  I would also recommend J. Collin's Stock Series (http://jlcollinsnh.com/stock-series/).




Spondulix

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Re: I just need guidance. Dumb question, but where does the money come from?
« Reply #4 on: December 28, 2014, 04:37:12 PM »
I think you are getting overwhelmed because you are looking at where you want to be, and being frustrated because the goal/dream seems so far off and almost unachievable.  What may be helpful is to break it up into smaller goals/milestones to hit along the way, so that once you do, you can feel accomplished and that will spur you to keep going - instead of feeling like you're never going to get there.  It's a marathon, not a sprint.  Map out where you want to be (financially and professionally) in 1 year, 2 years, 3 years... it may seem sophomoric and yes these goals may change.  Write some down anyway.
This really sums up what I see in my age group... looking for gratification now, and sometimes making bad decisions out of impatience. So, that is great advice.

BAMxi

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Re: I just need guidance. Dumb question, but where does the money come from?
« Reply #5 on: December 28, 2014, 05:31:03 PM »
Your heart is in the right place, but I do think you're putting the cart before the horse.  You're worried about how take money out of your investments, when in reality you don't have enough of an investment portfolio to take anything out of.  Currently you are in the accumulation phase of your life - and you're already worried about de-cumulation.  Put aside the de-cumulation for now and instead focus your energy on accumulation and increasing your income (so that you can save more and get to your goal faster).


Thanks for the replies, all. I was/am definitely feeling overwhelmed by everything. The wife has been really pushing to start having kids ASAP, so that's been a big factor in trying to figure out what the hell I'm doing with my life, and how we're going to get there.

In reality, I don't feel like I'm putting the cart before the horse, but just trying to understand how these things work in general (but I can definitely see how I came off as such). Obviously I do want everything, including early retirement, sooner rather than later, but I was mainly just trying to understand the whole income cycle for someone who is retired and living solely off their investments. I'm the type of person who seeks first to understand, etc etc...so I just want to feel educated about the subject of investing in all regards, and it was just one of those obvious things that I never saw explained on here or elsewhere (because it is such a basic, obvious, noob question). I am planning to read the link you shared, so thanks so much for that. As for the $40k savings, that definitely did not come from the sale of our house (which was a losing endeavor by all accounts), but the result the side project from a time when it was more profitable, while we were also both working decent paying full time jobs (sadly this was also a premustachian time where a lot of that money was spent/wasted on unnecessary things like lunches out everyday and I paid cash for a BMW 3 series, soooo.....just a lot of wasted potential all around). Like I said, I don't really want to get into the details of the side project, but just suffice it to say that I have built a large distribution network that pays me a little bit without really any ongoing involvement on my part. It definitely could/will be scaled up (again) to pay much more (my best friend's parents are making obscene amounts of money in the same biz), however the wife and I are working through some issues with that biz that are too complicated to mention here, and may take quite a while to rebuild it to a level that could replace a two person income. And even still, I probably won't ever consider it to be a truly "passive" income where I could just sit back and watch the money come in.

Couple thoughts regarding the personal stuff...See my responses in red

Has your wife ever considered teaching or tutoring? Having a Masters Degree (even if it's not in education) might open up doors there. Is she considering quitting to have kids because she hates her job, or because you guys are really ready to have kids? Yes, she's actually always wanted to work with kids, however any job related to schools around our area is very hard to come by. This is an ongoing pursuit for her. She is not currently working because she left her previous job as a Psychiatric Social Worker when we moved from Kansas City to Central MO.

Having a sense of purpose... I've been reading a lot the last couple years about a life crisis that a lot of people in our generation are having in their early 30s (I'm 34). 100 years ago, we got married for survival (this was before home, car or medical insurance - if something happened to you, you needed family and others to survive). 50 years ago, we needed spouses for companionship, and we made money for survival. Now, we are looking to our jobs and spouses for self-actualization, or personal fulfillment.

The problem our generation is having is that we're willing to sacrifice security for fulfillment. We're choosing to be entrepreneurs (whether it's being a musician or graphic designer, selling crafts on Etsy, Uber driver, whatever) because it feels empowering - except fulfillment doesn't necessarily pay the bills or prepare for the future very well! Do you know anyone who has quit a good paying job to pursue their own company (a passion project) but without planning for it? I think that's why our generation has the lowest savings rate ever, and there's going to be a massive retirement crisis in the future because we're missing out on these critical years of saving. I actually am/was one of those people. I just recently started working again as a sales manager after living off of my side income for over a year and a half. It was generating more at that time (about $4k per month), so I just walked from a very good paying sales job that I had prior to pursue that biz, as I was certain I would be making a hefty six figure income by now, if I put all of my attention into it. Unfortunately, the opposite happened, and that side income has started dwindling due to a few factors that are (hopefully) able to be corrected. Regardless, I also have since started reading MM and realized that no matter what, I need to be saving to avoid a potential crisis down the road, as you mentioned. So, that additional income is good as "bonus" money, but I just can't feel comfortable living off of it and not banking anything during these years of my life. Especially, as I've seen, that income is subject to falling due to factors beyond my control.

The thing about careers (that I'm just coming to discover myself) is that it takes a good ten years in a field to really feel like you know what you are doing, that you have a support network in colleagues, or even to feel like you could move around to another job or company with some freedom. It takes time to have the experience necessary to have control over our careers, or to get to the job or path we set out for. Working in our 20s can be inherently dissatisfying. That's the case whether you stay in sales or start your own company - it's just going to take time.

So, I think it's a matter of perspective here. You don't like sales, but it is steady income, allowing you to save for retirement, and support starting a family (50 years ago you probably would have felt fantastic for being such a great provider). In 2014, you want to start your own company, follow a passion and have control over your future - which there is nothing wrong with that! You're at a great point right now where you don't have kids yet, you're not tied to a mortgage, or a career that would be hard to backtrack out of. You have the added benefit that the skills you are gaining in your current job will totally benefit you running your own company.

IMO, its totally worth pursuing the new company, but consider it a goal to work towards and not a life choice you need to have today. Do it in a smart way. Don't quit your job until you can step into your new company established and earning money. Use your sales job as motivation to get your new company going, and do it in your free time. And thank you. I definitely struggle with patience when it comes to things that I am focused on, and I completely agree with what you're saying. I also don't really view traditional "jobs" the same way it seems the rest of the population does. I just don't get any fulfillment out of giving all of my time to an organization in exchange for dollar bills (I wish I did, it would make things much easier). I honestly don't hate my job, I just don't really agree with the leadership that is steering my company many times. I'm still pretty new in that position, though (only 4 months in), so I think a lot of the dissatisfaction comes from still learning what the hell I'm doing and adjusting from being self employed to back to working for someone else. And, Mark Cuban says if you are good at sales, you can do anything, so I definitely take comfort in knowing that! And everything you said was well thought out and makes good sense, and I thank you for it. I need to just take a step back and pace myself, no matter what course I find myself on. I definitely think we'll see this trend a lot more, as many of my colleagues who are of similar age are going through the same thing right now, and I'm seeing them filling the void by just constantly increasing their spending. At least I can take comfort that mustachianism will pay off in the long run, no matter what.
« Last Edit: December 28, 2014, 05:37:55 PM by BAMxi »

Spondulix

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Re: I just need guidance. Dumb question, but where does the money come from?
« Reply #6 on: December 28, 2014, 06:01:30 PM »
"At least I can take comfort that mustachianism will pay off in the long run, no matter what."

Amen to that! I also transitioned from a freelance life to taking a job that's pretty blah and unfulfilling this year, and I keep having to remind myself that it's about the journey and not where I'm at at this moment. Better things will come if you stay on course, you know?

pbkmaine

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Re: I just need guidance. Dumb question, but where does the money come from?
« Reply #7 on: December 28, 2014, 06:29:00 PM »
Many fee-only financial planners (I used to be one) recommend keeping at least 2 years of expenses in cash at and after retirement. That way you don't have to take money out of the market during a downturn. So, say you retire and the market tanks the next day. You have two years in expenses in cash and use that for the next two years. After two years, you start taking money out of the market again, gradually rebuilding another two year cushion. I personally have 3.5 years of our income needs above DH's pension in cash, since DH is 66.5 and I do not plan to have him take SS until he turns 70. We do not have to take a penny out of the market until he starts drawing from SS.

BAMxi

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Re: I just need guidance. Dumb question, but where does the money come from?
« Reply #8 on: December 28, 2014, 08:05:14 PM »
"At least I can take comfort that mustachianism will pay off in the long run, no matter what."

Amen to that! I also transitioned from a freelance life to taking a job that's pretty blah and unfulfilling this year, and I keep having to remind myself that it's about the journey and not where I'm at at this moment. Better things will come if you stay on course, you know?

That's exactly where I am, too! I definitely have a hard time enjoying the process.

Many fee-only financial planners (I used to be one) recommend keeping at least 2 years of expenses in cash at and after retirement. That way you don't have to take money out of the market during a downturn. So, say you retire and the market tanks the next day. You have two years in expenses in cash and use that for the next two years. After two years, you start taking money out of the market again, gradually rebuilding another two year cushion. I personally have 3.5 years of our income needs above DH's pension in cash, since DH is 66.5 and I do not plan to have him take SS until he turns 70. We do not have to take a penny out of the market until he starts drawing from SS.

Congrats! And that's great, thanks!

TerriM

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Re: I just need guidance. Dumb question, but where does the money come from?
« Reply #9 on: December 28, 2014, 08:05:56 PM »
Your heart is in the right place, but I do think you're putting the cart before the horse.  You're worried about how take money out of your investments, when in reality you don't have enough of an investment portfolio to take anything out of. 

Actually, now's a great time to be asking.  You wouldn't want to put a million in and not know how to get it out in 30 years.

BAMxi

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Re: I just need guidance. Dumb question, but where does the money come from?
« Reply #10 on: December 29, 2014, 07:36:17 PM »
Your heart is in the right place, but I do think you're putting the cart before the horse.  You're worried about how take money out of your investments, when in reality you don't have enough of an investment portfolio to take anything out of. 

Actually, now's a great time to be asking.  You wouldn't want to put a million in and not know how to get it out in 30 years.

Haha my thoughts exactly! I mainly wanted to make sure I was putting it in the right place!!

lizzie

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Re: I just need guidance. Dumb question, but where does the money come from?
« Reply #11 on: December 29, 2014, 07:53:39 PM »
I'm really glad you asked this question. The mechanics of how it all works at the back end are kind of a mystery to me. I appreciate the tip about keeping several years' worth of expenses in cash. It would really be a bummer to lose years' worth of savings by making basic mistakes after retirement.

Eric

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Re: I just need guidance. Dumb question, but where does the money come from?
« Reply #12 on: December 29, 2014, 10:00:26 PM »
The short answer is that your investment dividends, passive income (if any), and active income (if any) will add up to a certain amount.  If that's short of your yearly spending, then you'll sell investments to make up the shortfall.  I think most people will do this calculation near the end of the year so that they can then maximize their tax space for converting tIRAs to Roth IRAs or tax gain harvesting.

This will be variable based on your own situation, spending, income sources, and the like.  However, as a pretty good example, check out the Drawdown Series from Dr. Doom's blog.  He has 5 very good posts in this series.  Here's the first one:

http://livingafi.wordpress.com/2014/05/09/drawdown-part-1-the-basics/