How Much Passive Income Do You Need To Retire Early?
Posted On March 3, 2021
How much passive income does one really need to retire early and live a comfortable life? I don’t know about other people, but surely I can find the answer to that question for myself and my family of three. In the process, hopefully I can provide some guidance for finding your own.
First, it’s important to remind ourselves that comfort is relative and highly subjective. There are many factors at play and this is a whole nother topic on its own. Specifically when it comes to how much passive income you need to retire early, the decisions for where and how to live translate into numbers representing expenses in a budget table. Usually people prioritize what is important in their life and create their living environment based on that. Although, it’s perfectly alright if you haven’t created yours yet. Budget for your current lifestyle, and re-calculate if your living situation changes dramatically.
At this point in time, as far as my family is concerned, a comfortable living environment means a small-to-medium sized home with two bedrooms. Preferably, it would be situated in a nice quiet neighborhood, within a good public school district. It would also be within a 45-minute commute to the office and a similar distance from the closest international airport.
Calculating living expenses
To find out how much passive income my family would need to cover living expenses once we retire, first we’d need to identify and estimate these expenses. Luckily, we have been using Mint.com to automate tracking of our spending and budgeting over the last several years.
Taking a look at the historical monthly data on Mint for the last year, it seems that our average combined spend between my wife’s and my account is about $5,000/mo ($3,000 of which goes to pay for rent and utilities). It’s important to consider that the above number is from 2020 which was a year we basically just stayed home. Therefore, a more realistic figure would be closer to $6,000/mo.
Additional Future Expenses
In addition to the data above, I’ve put together the following table to try to estimate other expected future expenses.
There is probably more that should be in this table. Plus, I’m sure at least a few of these numbers will change as our son grows. To be on the safe side, I’m adding a buffer for miscellaneous or unforeseen expenses. With that, I’m allocating a total of $4,500/mo in addition to our historical spending gathered from Mint. Then the grand total becomes:
To be able to cover the monthly expenses calculated above, we’d need to generate somewhere in the neighborhood of $15,000–$17,000/mo in passive income because of taxes.
Current passive income
Now that I have roughly estimated my family’s expected living expenses number, the next step is to see how much we’re currently earning in passive monthly income. Unlucky for us, that’s a mighty quick calculation that shows the following:
A hundred and twenty dollars per month! Before taxes!!
I foresee having to keep a close eye on our expenses and budget if both my wife and I were to retire and live the FIRE (financial independence, retire early) life on passive income alone. Since I’d rather our family not be under financial stress, I’m aiming and budgeting for a bit more than what would likely be enough to live comfortably off of.
Not working a full-time job we’d have to keep life interesting so we don’t get bored too quickly. Adding a few extra trips per year to explore the US national parks for example would be great! I’m trying to start planning for retirement early, so hopefully we’re more financially and mentally prepared to enjoy life when the time actually comes.
To get there, we would need to somehow increase our passive monthly income to at approximately $15,000–$17,000/mo. But how do we reach that number in the next five years? I try answer that question in my next blog post.
Chris (the Finance Squirrel) is a personal finance blogger on a journey to learn about building enough passive income to retire early. He has been working in corporate America for over 15 years and has been able to (and still does) save a significant portion of his earnings while living well below his means. Having accumulated cash which he has not invested well is one of the main reasons for him to start this blog and share his experiences as he learns. Chris is a family man and has a baby boy whom he would like to spend more time with. This is the other main motivation behind this endeavor to improve his financial education.