Author Topic: Living on Passive Income: How Does it Actually Work?  (Read 1153 times)

DavidN

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Living on Passive Income: How Does it Actually Work?
« on: August 03, 2018, 10:18:41 PM »
I'm still really new to everything investment and finance related, so please forgive me if this is a dumb question. I've been reading a ton of material and always enjoying making my way through the blog posts in chronological order.

One thing I keep seeing pop up is Mr. Money Mustache and others online talking about getting to the point where their living expenses are lower than their passive income, which means they can retire early. Obviously real estate rentals are a large part of some people's passive income, but what else is typically included in this? I see a lot of talk about prioritizing 401k and Roth IRA, for example, but both of those can't really be touched easily until you're 59.5 years of age, right?

Is all of the other passive income that people are talking about, and presumably withdrawing to pay for expenses if they retire before 60, from taxable investment accounts? Those always seem to be on the bottom of the investment priority lists out there, so I'm just trying to wrap my head around how people are doing this. Maxing out a 401k and one Roth IRA per spouse would $29,500 per year and it seems the recommendation to invest in taxable accounts only comes once you've done that.

Thanks again for any help clearing this up and sorry if there is a big stickied post on one of the boards.

mjr

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MDM

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Re: Living on Passive Income: How Does it Actually Work?
« Reply #2 on: August 03, 2018, 11:24:04 PM »
I see a lot of talk about prioritizing 401k and Roth IRA, for example, but both of those can't really be touched easily until you're 59.5 years of age, right?

Thanks again for any help clearing this up and sorry if there is a big stickied post on one of the boards.
Like this one? :)

How to withdraw funds from your IRA and 401k without penalty before age 59.5

joonifloofeefloo

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Re: Living on Passive Income: How Does it Actually Work?
« Reply #3 on: August 04, 2018, 12:37:41 AM »
Under "passive income" some would also include businesses or royalties that no longer require the owner's activity; disability pensions; renting out rooms in one's home. Probably some other things, too, that I'm not thinking of.

DavidN

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Re: Living on Passive Income: How Does it Actually Work?
« Reply #4 on: August 04, 2018, 10:45:19 AM »
Thanks a lot for the replies!

I had no idea about being able to move around and withdraw funds from IRA and 401k before age 59.5 That's great information to have.

Found another thread from a poster that was confused about similar things:

https://forum.mrmoneymustache.com/investor-alley/slightly-overwhelmed/

This is all rather overwhelming at first, but I'm sure it will begin making more sense the more time I spend studying the topic.

joonifloofeefloo

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Re: Living on Passive Income: How Does it Actually Work?
« Reply #5 on: August 04, 2018, 10:54:21 AM »
This is all rather overwhelming at first, but I'm sure it will begin making more sense the more time I spend studying the topic.

Definitely :)    Really, just keep hanging out here -and asking specific questions like you had here- and things will click.

freeat57

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Re: Living on Passive Income: How Does it Actually Work?
« Reply #6 on: August 04, 2018, 11:07:55 AM »
First, a disclaimer; I was FIRE before I ever heard of MMM.  My path to FIRE was not really planned or strategic, just financial laziness on my part and good childhood training.  Here's how it worked for me.  I got a great education, mostly paid for by scholarships.  Through a couple of unlikely events, I got a highly paid job at a megacorp and kept it for almost 20 years before being downsized.  I have always lived frugally (the "childhood" part). 

After a few years at the megacorp, I was maxing out my 401K and had paid off my inexpensive house.  Extra money piled up in my checking accounts and I occasionally sent off a big check to Vanguard.  The match in the 401k was company stock and I also got stock options and grants (bonuses in the form of stock) along the way.  On the options, I would let them lie until the expiration date approached and then I would do a cashless buy and hold if they had any value.  The stock split twice while I was at the company and it pays a good dividend, which I always reinvested. 

So, the bottom line is that my after tax investments now yield slightly more in dividends than my frugal annual budget. Just looking at my annual income and expenses, I appear to be a normal guy living a bit above the poverty level.  However, if my 14 year old car were to blow up tomorrow, no sweat!  I'll just go buy another one with cash.  C'est la vie!