Below is the Financial Samurai passive income portfolio update for 2018 and for 2021. I'm revisiting this post in 2021 to see how far I've come.
Ever since landing my first job post college in 1999, I've been determined to build enough passive income in order to not have a job. A future that included getting into work by 5:30am and leaving after 7:30pm each day for decades seemed too brutal to endure.
In 2009, I decided that if I could earn about $80,000 in passive income, I would leave my job permanently and work on Financial Samurai while traveling instead. So I left work in 2012 at the age of 34. Once my wife decided to join me in 2015, also at the age of 34, I decided to shoot for $200,000 in passive income.
With $200,000 a year in passive income, I would have enough income to provide for a family of up to four in San Francisco given we bought a modest home in 2014. Now that we have a son, I'm happy to say that $200,000 indeed does seem like enough, especially if we can win the public school lottery to avoid paying $20,000 – $50,000 a year in private school tuition.
The Keys To Building Enough Passive Income
A passive income portfolio is vital for achieving financial independence. Here are the keys to building a large enough passive income portfolio.
1) Save until it hurts each month.
Most people think they are saving enough through their 401(k) or IRA, but they are not. Developing passive income requires an aggressive after-tax, after-401k/IRA savings amount each month because you can't draw from your pre-tax retirement accounts before the age of 59.5 without a 10% penalty.
You must sacrifice the pleasures of today for the freedom you will earn tomorrow. In my 20s, I shared a studio with my best friend from high school and drove beater cars worth less than 10% of my annual gross income. I'd stay until after 7:30pm at work in order to eat the free cafeteria food. International vacations were replaced with staycations since work already sent me overseas 2-4X a year. Clothes were bought at thrift shops of course.
2) Focus on income-producing assets.
Internet growth stocks may be sexy, but they provide no income. To build a large enough passive income stream to survive, you must invest in dividend generating stocks, certificates of deposit, municipal bonds, government treasury bonds, corporate bonds, and real estate.
You're free to invest in non-income producing assets for capital appreciation too. Growth stocks are preferred for those still aggressively trying to accumulate capital. You just want to earn reliable income when the day comes to leave your job.
My favorite type of semi-passive income was rental property because it was a tangible asset that provided reliable income. As I grew older, my interest in rental property waned because I no longer had the patience and time to deal with maintenance issues and tenants.
Online real estate became more attractive, along with tax-free municipal bond income once rates started to rise.
Every passive income portfolio should include online real estate like a blog, consulting page, merchandise website and more.
3) Start as soon as possible.
Building a livable passive income stream takes a tremendously long time largely due to declining interest rates since the late 1980s. Gone are the days of making a 5%+ return on a short-term CD or savings account.
I knew I didn't want to work 70 hours a week in finance forever. My body was breaking down and I was constantly stressed. As a result, I started saving every other paycheck and 100% of my bonus since my first year out of college in 1999. By the time 2012 rolled around, I was earning enough passive income (~$78,000) to negotiate a severance and be free.
4) Calculate how much passive income you need.
It's important to have a passive income goal, otherwise, it's very easy to lose motivation. A good goal is to try and generate enough passive income to cover basic living expenses such as food, shelter, transportation, and clothing. If your annual expense number is $30,000, divide that figure by your expected rate of return to see how much capital you need to save.
Unfortunately, you've got to then multiply the capital amount by 1.25 – 1.5 to account for taxes. For example, $30,000 / 3% = $1,000,000 in capital needed to generate $30,000 gross. But since you must pay tax on the $30,000 income, you really need closer to $1,250,000 to generate $30,000 in after-tax income at a 3% rate of return.
With the birth of our son in 2017, we raised our passive income goal to $250,000 a year. Then, with the birth of our daughter in 2019, I decide to shoot for $300,000 a year by 2023.
5) Make sure you are properly diversified.
Capital preservation is underrated. We saw a lost decade for tech stocks between 2000 – 2010 after the first dotcom burst. It actually took 13 years for NASDAQ investors to get back to even.
Investors in the Borsa Istanbul Turkey stock market index gave up 10 years worth of gains after they saw a plunge in their currency. This was partially due to increased tariffs by the US and no-confidence in the government. Your passive income needs to be properly diversified in order to take the hits.
Then of course we experienced the March 2020 sell-off and the global pandemic until today. Having a diversified passive income portfolio is important.
I currently have 10 main sources of passive income as you'll see in the chart below, with bonds as my largest source at 30.4% of total. I've worked through the 2000 and 2008 meltdowns, and don't plan to ever lose so much money again.
Passive Income Portfolio Review
In 2017, I sold my San Francisco rental home which had been generating roughly $60,000 a year in cash flow after expenses, but before taxes. Selling the house brought my passive income down to roughly $150,000 a year, which was a significant 28% step backwards.
Within six months of selling, however, I had reinvested the proceeds from the home sale and brought total passive income for 2018 back up to an estimated $203,724. Without a clear plan for reinvesting the proceeds, I'm not sure I would have sold the house since I'm bullish on the SF housing market long term.
However, because I did have a plan and the challenges of raising a newborn and dealing with rowdy tenants left me feeling a bit stretched, I decided to simplify and sell.
Interest Income ($7,620/year, 3.7% of total)
I've got a $185,000 CD generating 3% interest coming due. Although the return is low, it's guaranteed. The CD gave me the confidence to investment more aggressively in risk over the years. My online interest income has come down since I aggressively deployed some capital at the beginning of the year and again during the February market correction. You'll see these figures in my quarterly investment income update.
Don't underestimate the value of your cash and risk-free income, especially during times of uncertainty. The last thing you want to do is be a forced seller in a downturn because panic will be everywhere. Cash allows you to take advantage of corrections, pay for unexpected expenses, and worry less about your risk assets.
With rising rates in 2022, CD rates are finally more attractive again. My go-to bank for the highest CD rates is CIT Bank. And they've been offering some attractive CD rates on certain durations. For example, as of October 2022, you can get 3.5% APY on 13-month CDs and 2.75% APY on no-penalty 11-month CDs. (Rates subject to change)
Click on the link below to view the latest and greatest CD rates. It only takes 3 simple steps to open a CD account and start earning interest.
Related: How Much Savings Should I Have Accumulated By Age
Stocks & Bonds Income ($103,344/year, 50.7% of total)
In 2017, I ended up deploying roughly $611,000 into stocks and $604,327 into municipal bonds. The stock allocation should boost dividend income by ~$12,500 a year and the municipal bond portion should boost income by ~$18,000 a year after tax ($26,000 pre-tax). Therefore, total passive income gets a ~$38,500 lift, which recovers over half of my $60,000 loss from selling the house.
A good portion of my stock allocation is in growth stocks and structured notes that pay no dividends. The dividend income that comes from stocks is primarily from S&P 500 index ETFs. Although this is a passive income report, as I'm still relatively young, I'm more interested in building a large financial nut through principal appreciation rather than through dividend investing. As an entrepreneur, I can’t help but have a growth mindset.
With interest rates reaching two-year highs, I will be allocating more cash flow to short-term bonds and savings for the remainder of the year, thereby boosting passive income.
Related: The Proper Asset Allocation Of Stocks And Bonds By Age
Real Estate Income ($43,080/year, 21.1% of total)
I've now only got a SF rental condo and a Lake Tahoe vacation rental in my real estate rental portfolio. Although I miss my old house, I certainly don't miss paying $23,000 a year in property taxes, another mortgage, dealing with leaks and managing terrible tenants. I drove by the other day and couldn't believe how much noisier and busier the street was than where I currently live. I wouldn’t be comfortable raising my son there.
In January 2018, I missed my chance of raising the rent on my new incoming tenants because it didn't come to mind until very late in the interview process. I didn't write about my previous tenant's sudden decision to move out in December 2017 after 1.5 years because they provided a relatively seamless transition by introducing their long time friends to replace them. I didn't miss a month of rent and didn't have to do any marketing so I felt I'd just keep the rent the same.
After these tenants move out, I'm thinking of just keeping the rental empty with furniture. It sounds stupid to give up $4,200/month, but I really hate dealing with the HOA, move-in/move-out rules, and maintenance issues. Given the condo doesn't have a mortgage and I have to pay taxes on some of the rental income, I'm not giving up that much. The condo can be a place for my sister, parents, or in-laws to crash when they want to stay in SF for longer than a week or two.
The Lake Tahoe property continues to be 100% managed by a property management company. It feels amazing not to have to do anything. I can't wait to bring up my boy this coming winter to play in the snow! I could go up this winter, but I want him to be able to walk and run comfortably before he goes. I've been dreaming of this moment for over 10 years now. The income from the property is highly dependent on how much it snows. Summer income is always very strong.
Alternative Income ($49,680, 24.4% of total)
Book sales ($36,000/year): Sales of How To Engineer Your Layoff continue to be steady. I expect book sales to rise once the economy starts to soften and people get more nervous about their jobs. It's always best to be ahead of the curve when it comes to a layoff by negotiating first. Further, if you are planning to quit your job, then there is no downside in trying to engineer your layoff so you can get WARN Act pay for several months, a severance check, deferred compensation, and health care.
What's crazy is that my book income is more than my SF rental condo income. Yet, I didn't have to come up with $1,200,000 of capital (minimum cost to buy my condo today) to create my book. All I needed to create my book was energy, effort, and creativity. I truly believe developing your own online product is one of the best ways to make money.
Venture Debt ($12,240/year): The first venture debt fund has returned almost all my initial capital so I decided to invest $200,000 in the second fund. I took a risk investing $150,000 in my friend's first fund, so I'm hoping there's less risk in the second fund given he has four more years of experience on top of his 12+ years experience running a venture debt portfolio for another company.
The whole idea of investing in venture debt is trying to get a mid-to-high teens annual return with less risk than private equity. Venture debt lends money to well-funded private companies with a 1-3 year terms. They go in and out, collect their interest and sometimes gets a warrant. They're higher on the capital structure as well.
P2P Lending ($1,440/year): I've lost interest in P2P lending since returns started coming down. You would think that returns would start going up with a rise in interest rates, but I'm not really seeing this yet. Prosper missed its window for IPO in 2015-16, and LendingClub is just chugging along. I hate it when people default on their debt obligations, which is why I haven't invested large sums of money in P2P. That said, I'm still earning a respectable 7% a year in P2P, which is much better than the stock market is doing so far in 2018!
Real Estate Crowdfunding ($9,600/year): Once I sold my SF rental, it was natural to reinvest some of the proceeds into real estate crowdfunding to keep sector exposure. I didn't invest a lot in some of my favorite REITs because I felt a rising interest rate environment would be a stronger headwind for REITs. But if I could be more surgical with my real estate investments by identifying specific investments in stronger employment growth markets, I thought I could do better.
In the summer of 2017, I first reinvested $250,000 into a RealtyShares Domestic Equity Fund. I already had $250,000 invested with them and I liked the projects they were choosing. After spending the rest of the year making low ball offers on SF real estate and losing, I invested another $300,000 in the fund in December 2017. Given 100% of my real estate crowdfunding are equity investments, there is no set monthly dividend. Each of the 12 investments in the fund have different timetables and objectives. I’m simply estimating that I’ll earn $9,600 for the year.
If my Fundrise investments achieves their objective blended return of 15% a year, I could earn a compounded $70,000 – $120,000 a year, which would really boost my passive income returns. However, I don't expect them or any private investments to achieve their target. Instead, I'm hoping for a solid 8% a year return instead.
Financial Samurai Passive Income Portfolio Update 2021
Below is my latest passive income streams. In 2018, I had roughly $203,000 in passive income. In 2021, I'm estimating at least $300,000 in passive income.
The reasons for the big jump include: 1) a huge bull market in 2019 and 2020, 2) more reinvested capital from my online income, 3) and more investments in real estate crowdfunding.
Because I now have two children (daughter came end of 2019), I'm more motivated than ever to build my passive income streams. Further, the pandemic shut down a lot of fun things to do. Hence, my focus to make more active and passive income as well.
My favorite investments are rental properties and real estate crowdfunding. Given rates are low and we're all spending more time at home, the intrinsic value of real estate is going up.
Feels Good To Simplify
It was easier recouping the lost $60,000 in rental property income than I expected. For so long, my primary mindset for passive income was rental income. Having $815,000 less mortgage debt, but still generating roughly the same amount of passive income with a much larger cash balance feels great. Further, my passive income portfolio got even more passive, which is good as a stay at home dad to a newborn.
In order to live off $200,000 a year in gross passive income in expensive San Francisco, we own a humble 1,920 square foot, three bedroom, two bathroom home and drive a car worth less than 1/10th our gross income. We never buy any new clothes and we take full advantage of all the free things the city has to offer during the weekdays.
$200,000 Passive Income Minimum
$200,000 a year might sound like a lot to you, but the median home price in San Francisco is roughly $1,400,000, or 7X our annual passive income. For a family of three in 2019, the Department of Housing and Urban Development [HUD] declared income of $105,700 or below as “low income.” Therefore, I consider us firmly in the middle class.
We will continue to save and invest in more passive income generating investments just in case our son doesn't win the San Francisco public school lottery. That's right. Even if you pay $20,000 a year in property tax for a decade, your child has no guarantee of going to your neighborhood's public school.
Although we forewent many luxuries since we graduated from college, there is not a day that goes by where we aren't thankful for being able to leave our jobs for good at 34. We could have made more money working, but we decided being free was more important. There's always another dollar to make, but never another second to create.
Real Estate Investing Suggestions
Once you've purchased your primary residence you are considered neutral real estate. Since you have to live somewhere, you will simply ride the real estate cycle. To be long real estate you must own investment property in addition to your primary resident.
If you're interested in a hands off approach to real estate investing, consider investing in a publicly traded REIT or in real estate crowdfunding.
Once I had my son in 2017, I decided to sell my PITA rental house and reinvest $550,000 of the proceeds into real estate crowdfunding.
My favorite two real estate crowdfunding platforms are:
Fundrise: A way for accredited and non-accredited investors to diversify into real estate through private eFunds. Fundrise has been around since 2012 and has consistently generated steady returns, no matter what the stock market is doing.
CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations, higher rental yields, and potentially higher growth due to job growth and demographic trends.
Both platforms are free to sign up and explore. I have personally invested $810,000 in real estate crowdfunding in 18 projects to diversify and earn income passively. I believe real estate is the best way to generate passive income for most people.
For more nuanced personal finance content, join 100,000+ others and sign up for the free Financial Samurai newsletter. Financial Samurai is one of the largest independently-owned personal finance sites that started in 2009. Everything is written based off firsthand experience.
145 thoughts on “Financial Samurai Passive Income Portfolio Update 2018 / 2021”
Your passive income numbers are truly astronomical, congratulations! It makes my $60k/year goal look like child’s play. :) You are inspiring me to push my ceiling higher – thanks for that!
Hi Sam. Thanks for being out there friend. This thread on passive income brought up a lot of questions for me. At 54 yrs old my partner (53) and I only have an estimated 250k in retirement accounts. 2 yrs ago, due to stress and burnout, partner resigned from a high paying medical job – leaving our rental real estate our sole source of income (We manage the real estate ourselves). We have extended mortgage terms and tightened up living expenses and are living simply. We owe $2.5million on an estimated $3.5million portfolio of residential real estate. After debt service, insurance and taxes our income is appoximately $80k. Rising interest rates have me concerned about our bottom line. The real-estate market seems stable in our home city of LR, AR. So I don’t anticipate falling value, though rents have stabilized due to the increase in new residential inventory. Would you have any advice for us? My partner would like to sell all the rentals (65 units over 12 buildings). I feel that this is unrealistic as it’s our sole source of income.
Thanks Sam. What stocks are in your portfolio that produce the dividend payouts? Also, how often do you rebalance?
New to the site as I now find myself in the same situation as Sam – a recently laid off financial service professional now seeking passive income in case I don’t make my way back into the corporate world.
I’m selling a piece of land which costs me $7k in negative cash flow due to property taxes, I wrestle with the idea of using the 1031 exchange and put the proceeds into a rental. In this manner, I would save $70k in capital gains tax, and turn my negative $7k in cash flow into something positive. The idea of being a landlord though pains me. Just don’t know if it’s worth the hassle; clearly not if I make it back to the corporate world.
So how did you start off? I’m 19 and only have about 1500 at the end of the month to invest. Would love to hear your advice! Thanks! Also, you could air bnb the place when you don’t have family there- no long term commitment and some extra money!
I started investing in stocks at about 19 years old with about $1000 from the money I made working at McDonald’s. Investing in the stock market led me to wanting to work on Wall Street.
Here’s my journey to $1 million.
You should really look at Real Estate Secured Notes. Very passive.
What was your income and living expenses when you worked?
This article is interesting and great, but doesn’t seem to apply for my situation. I’m curious about your starting conditions (salary each year, living expenses, college debt, etc.) so I can figure out how to scale your advice to my own situation. It would definitely help me understand how much “saving until it hurts” translates to for me.
I’ve got your article saved as a reminder for future reading as well.
For your return from stocks, do you mean total return or dividend return? Because s&P’s current dividend is <2%.
If you mean total return, then that money is not readily accessible, because stocks are highly volatile.
Dividend return. My goal since 2012 is to only spend the income and never touch principal.
I hope I can reread this and maybe may have to do it again but when I do I then I have questions- I would love for someone to be able to work with me who’s at rock bottom with extreme poor financial choices and still continues to go through a terrible vicious cycle. Currently I do have a secure full time job with many benefits however been on medical leave this year and falling behind – Christmas is around the corner and I can’t even handle back school! I have two savings accounts that I can’t save in and a checking account overdrawn – desperate need of help – you think come out of this hole and by next year and 1/2 can save that $80,000 – but I am in despair – pride to side – please consider charity case till money starts coming back in
What do you think about Fundrise?
Very impressive, but how do you make 10% on muni bonds. I would really enjoy that amount of return. Thanks and continued good luck.
I’d love to know too. I shoot to make only 3% – 5% gross a year with my bond position.
See: Investment Strategies In Retirement, for the various return profiles of different weighting compositions.
How do you return $103,000 a year in dividends and interest on a total investment of about $ 1.2 million in stocks and bonds? Makes no sense to me. Am I the only one befuddled by this? You even state a high percentage of those pay no dividends. What am I missing? A reasonable return on income generatimg stocks and bonds is closer to 4%. Even grossing up for net tax effect of munis does not get to anywhere near these returns,
Sure. The $1.2M is money that I reinvested From the $1.8 million I got from selling my rental house in 2017. Another five or $50,000 of the proceeds was invested in real estate crowdfunding. The $1.8 million is expected to generate about $60,000 and passive income.
I have much more than $1.2 million in stocks and bonds.
I came across your site a few weeks ago and love to read whenever i get some spare time. Your content is not only informative but relatively easy to understand (even though i have to sometimes read it several times) for someone that does not have a financial background like myself. My question is regarding muni bonds. Any simple rule to picking muni bonds that pay a dividend and are relatively low risk? I am working on building my passive income stream and am interested in low risk investments that can still generate a consistent passive income stream.
Also, can you explain why an increasing interest rate market is not a good time to buy muni bonds?
I’m wondering what else your bond portfolio constitutes of, and the size of it? 4-5% on munis is definitely a nice yield at a very low level of risk.
In general I found that senior loans, unconstrained bonds (typically EM-heavy) and preferred stocks of REITs were especially good diversifiers for an otherwise equity-heavy portfolio.
By putting 20% each in the three just mentioned asset classes, then 20% in high dividend stocks and 20% in low volatility stocks, I got to a portfolio with 5.2% income at 4.8% vol. But then senior loans are inherently risky and REITs won’t do great in the rising rates environment..
My e-product is currently in development, but I think it could reasonably bring in 1/25 of my income in the first year with minimal promotional effort. If it takes off, maybe 1/5 of my income. Building that up so that I could direct all the proceeds to paying down student loans is a great incentive. I need to focus there, but I also have a few other non-traditional digital products in mind. I need to test the market there before expending too much time or energy.
Nice photo! Was that taken in Santorini?
And I agree, it’s not always about maximizing returns. The older you get, the more you realize time is more important than money.
I really appreciate your nuanced view of not just maximizing returns but taking into consideration stress and quality of life!!
It becomes more and more about quality of life the older I get!
Hi Sam! Thank you for all the posts and writing you do, love getting your reflections when market dynamics change.
Would love your feedback: I’m in the process of shifting a $1.5M Bay Area property in a great neighborhood into the rental pool so I can downsize and have more passive income. But of course I know managing it will be stressful and I’m looking to reduce stress for health reasons.
The following factors are making me wonder if I should sell instead: market is still very high and inventory is even tighter than last year, but economy might change directions this year, rate hikes coming, I might be able to get the same cash flow from a REIT, and I have no intention of moving back in.
No right answers, just curious how you or others would approach this question.
It’s my only property. I”m living in an SF rental and biding my time for a correction to buy again (maybe). One other thing I do like about the house is that there is dry powder in it that I’m paying zero interest on and can pull out to buy another house. I don’t know a lot of other ways to achieve that. I don’t have a traditional job, so the house is my only source of loans currently which I’ve been using to fund my 4-yo company.
Hi Jess, can you share some background of what this $1.5M Bay Area property is and why you are renting something else? Did you pay it off or inherit it?
It’s boom time now, but things can change quick as we saw with the 11% correction in the stock market in February. Without knowing your net worth and how you acquired this property, it’s hard for me to say.
Thanks for the post. Two questions on the passive income report. For equities are you only using the dividend yield? I think thats correct for income. And 2) are you using the YTW for the muni bonds or the cash yield which is a lot higher given most bonds are 5% coupon bonds but clearly trading at a premium in this rate environment.
Sam, what is your strategy for the muni bonds? I’m assuming you’re planning to hold until maturity, since the rising interest rate environment will reduce the price of the bonds, should you decide to sell.
I plan to just hold them to maturity and get back principal and earn the annual coupon for my individual holdings. For the bonfire and ETFs, that is a different decision all need to make later. But I’m comfortable holding bonds of these levels.
Interesting post. Really appreciate how open you are about all your investments.
It looks like you are defining passive income from stocks, bonds, and other investments directly as the income it produces (dividends, interest, rent, etc). What do you think about the 4% rule? (Using an assumed safe withdrawal to draw down income and principal instead of using the dividend or interest payment as a guide.)
Most of what I have read on reaching financial independence revolves around that topic. Just curious what your thoughts are.
I believe the ideal withdrawal rate in retirement touches no principal if you are under the estate tax limit.
Long time reader- really appreciate your transparency.
Do you include dividends from retirement accounts in your calculation?
You have one of the best financial websites on the web. Loved this post. Love that you post all the streams of passive income you have. Most of my money is in in stocks and CDs which generate about 70- – 80 k a year in passive income. My biggest mistake was selling a duplex in San Jose, my only other rental property besides my primary residence. Looking into the crowdfunding real estate.
I am in my 60s so now looking at derisking to preserve principle.
Always look forward to your posts.
Hi Mark, when did you sell your duplex? It’s not so bad if you reinvested the proceeds and made some good returns right? I know I’m gonna regret selling my rental house in 2017 years from now, but us because I’ll forget what a pain in the ass it was to manage.
I sold back in the mid 80s. We took a second from the guy who purchased it. He paid us 7% a year on the amount he borrowed. That was actually a good thing. In a couple years, he paid the loan off early but we had an early payment clause that paid us six months of interest. I invested the proceeds in the market which was hot at the time. So, that was good. It turned out to be a great investment. My only regret was for diversification purposes, and that guaranteed income stream. We had one section 8 tenant who kept the place spotless, and we could always count on the government to pay. Plus if I had a good tenant, I would keep the rents low but with section 8, it didn’t matter, the government paid most of the rent and increasing the rental didn’t affect the tenant that much.
But I agree with you on the pain to manage. We had one tenant, my biggest learning experience that trashed the place. We sued him in small claims and won, then he appealed. In small claims, you can bring an attorney on appeal. He did and the amt owed was reduced. He had purchased a house so we put a lien on it. Then he filed bankruptcy, and we received a letter from his attorney telling us to take off the lien. We did. So we received nothing. Our corporate attorney at work was advising me along the way. I always remember what he said when it was all over. ‘Chalk this up as a lesson in jurisprudence”
Thanks for sharing. Man… I having to sue someone is not the stress I need now as a father. I’ve really got to simply my finances more.
Keeping my condo empty once the existing tenants decide to move is feeling like a better and better idea!
Haha! When I read your posts, Sam, especially ones that divulge your finances, I feel worthless and weak. And that’s a good thing. My ego needs to be subdued. Thank you, sir.
Hah! Well hopefully you don’t feel worthless and weak, that would be counterproductive to the purpose of this post. I’ve bashed my ego down long ago. That’s why you don’t see monthly reports, selfies, and net worth reports!
Thanks for this post, Sam.
There are some numbers I don’t get though.
You said you have $185k in CD giving you a 3% return with a total of $7620, but this number would be right with a 4,1% return.
Same for the stocks & bonds, you said it gives you a 4-5% return, but with $103k a year of income from $1.2 Mill is more like an 8.5% return.
About your rental properties, for a $43k income, what’s the condo’s worth? Around 1Mill?
Basically, you have a net worth of around 2.4 Million that bring you a 6.5% return?
I’m currently with a $1.35 Million invested that brings me a monthly $4750 (approx 4% return).
Now, I’m gonna stop investing and start saving for a downpayment for a house (I’m still renting an apartment with a roommate….) But I’m scared about the market in California, I don’t see how the new law is NOT gonna affect the market next year.
A 4% return is great. It’s hard to calculate my net worth when I’m just highlighting passive income, excluding my business, and keeping other assets off the books. I think you’ve misread the CD portion wrong. Check out the chart again. Most importantly, focus on improving your own cash flow.
Remain Stealth Wealth If You Know What’s Good For You
Why Cash Flow Is More Important Than Net Worth
Thanks for a good over of your portfolio. I am kind of in the same boat – generating income from my portfolio. However, unlike you, I am mostly in stocks and related investments and very little in real-estate. Looking at your portfolio, two things come to my mind:
(1) You don’t seem to be into REITs much. Private or public traded. Personally I find high-quality retail REITs quite attractive at today’s valuations. One of my favorite public REIT today is Simon Property Group (SPG). IMO they are being short-changed by the market today – yielding nearly 5%. I am happy collecting dividends! Have you considered non-traded REITs? I have been intrigued by Blackstone’s BREIT (core real-estate). It looks like a very safe bet but I haven’t invested in it yet. I’d have to open a wrap-fee account with a broker to be able to invest in it.
(2) Since you have alternative investments in your portfolio, what about alternative investment managers like Blackstone BX. BX is yielding above 7% today. Their dividend will go up and down over time because of the nature of their business, still they are the bluest of the blue-chip in alt investment industry. I feel comfortable owning them too.
Because I had a huge position in physical SF real estate, I didn’t find it necessary to own a lot of REITs. SF real estate was my supercharged, highly concentrated REIT that performed handsomely since 2003.
I might consider buying REITs now withe the sell-off, but I wanted to own a smaller portfolio of limited partnership real estate projects around the country in strong job growth markets to hopefully gain a higher return. We shall see what my RealtyShares fund ends up returning in 4-5 years.
Enjoy reading these!
Thanks for sharing all the details with your readers. Motivating to read while still along my personal journey!
Feels like at each “level” when building wealth you gain some confidence and luxuries. I know I am a lot less stressed these days then when I was working the first job out of school and paying off student loans.
I might have missed it in past posts but what mortgages are you carrying on your properties if any at all? I know you had goals to pay off in the past. I am curious because I want to understand if it makes that big of difference to you mentally. Your PI is high enough that maybe it does not stress you out at all to carry the cheap debt?
This piece is something I often wonder about for myself when I am no longer working full time.
Nice update. It’s great to see a FIRE blogger that actually uses risk management and true diversification in his portfolio, as opposed to the bogelhead 3 and boilerplate bla bla bla. It’s also nice to see someone who doesn’t have to make “all the money” as opposed to enough money. The point of buying stocks bonds debt real estate (and yes commodities) is to buy the security they provide and understand the security they provide. Security is defined as “freedom from danger”. You buy security with money but you become secure by controlling risk. Maybe at some point you could write something from the point of view of risk management as opposed to overpaying for alpha with undue risk as the currency.
Here’s a post that’s related to your request: The Main Types Of Risk Exposure To Be Aware Of
Hey Sam, I always enjoy these updates. Your passive income portfolio is very inspiring. I’m 26 and still have a long ways to go to reach FI. We purchased 2 rentals in 2017 in order to start building our semi-passive income. In 2018 I believe we will focus on debt pay down and putting more into our after tax investment account. Were also saving up in a MM account for the next real estate purchase.
Thanks for all the free content you continuously put out. Also, the podcast has been great.
When you say you’re in growth stocks, do you mean you own individual stocks or a particular index fund? I just finished reading A Random Walk down Wall Street and it drove home the point enough for me to more or less put everything into indexes.
Both individual index funds and growth stocks like: FTEC, Amazon, Netflix etc. I use an index plus strategy where most of my positions are from index funds, but then I’ll choose about 20% of the names in individual stocks that I think are most promising.
Makes sense. Thanks for responding so quick! I’ve been reading your blog for a bit but just posting for the first time. I have similar aspirations to move my family over to Oahu. Currently living in “the city” like you. :) Godspeed, man.
Definitely interesting to read!
I am also trying to set up passive income streams, but I am focusing on more online-based ventures, mainly due to low start-up costs and hopefully quicker scalability.
Real estate is definitely interesting, but California prices are intimidating (as are rental horror stories!)
Off topic: Bulldog Gin growth 32% in Q4. The sale to Campari was a little premature for the angel investors. (I work in the spirits industry)
That’s a beautifully balanced passive income portfolio Sam. I’m pretty much all stocks at the moment – the Fully Franked dividend kind with bonus franking credits.
Would you consider producing another book or similar product? I know you’re trying to slow down a bit, but pretty amazing that your income is so steady from that without having to ‘sell’ it. I’d assume with your background and audience there are a few other great books you could produce and sell successfully (without having to ‘sell’ too much)?
I think you are doing very well, but would you like to write about your monthly expenses? How much do you spend in one month? I live in Europe myself so it would be nice to hear about this side too. Could you write about your expenses and about average persons expenses. How much do you spend for food, gas, parking etc in one month?
Hi Sam – Thanks for sharing.
Thinking about it, since everyone and everyone’s situation is different, what would help is this:
A table showing Age Group, Expected NW (broken down by allocation), and expected passive Income from each allocation.
I know its hard. But it provides an idea where one should be.
For e.g. I am not a multi-millionaire to be invested in Bonds to generate $60K in passive income (your focus is on capital preservation).
Expected passive income, when broken down by each source (asset allocation), within each age group is highly desirable to know as a benchmark.
Sounds good. If you’d like to create a chart and do a guest post, let me know As there are many permutations to consider.
Great post! Always enjoy reading your opinions and approach to investing.
One thing – you are generating 5.1k/month for ~60k+/yr on your bond portfolio. But if most are in munis yielding 4-5%, this implies you have ~1.2m invested and not just 600k? Seems as if you added 600k this year to bonds.
Just wanted to confirm because it reads as if you are returning 10% on munis! Heck if you are returning 10% Id like to know how :-)
4-5% are gross yields for apples to apples as all income is gross.
I do plan to be more aggressive in municipal bonds this year. I’m really happy with 5% gross yields.
Great job redeploying the money. I need to do this with our rentals. I screened 20+ prospects for my rental condo over 10 days. It was nuts. I’m so happy the place is rented now. When this tenant moves out, we’ll sell it off.
Really great job getting the passive income > $200,000. I thought you’d have a much harder time with it than you did.
Congrats on finally getting a tenant! What a pain in the ass. Three months right of looking? I looked for two months and couldn’t find anybody decent last summer so I sold the house.
That’s the price of rentals. Lots of headaches. We’re planning to sell our rental once the tenants leave too. It’s time to simplify our live. Life is just too short.
I will tell you that after 8 months of not having my SF rental, I am feel really good not having to pay those property taxes and tend to maintenance and tenant issues. Even if prices go up another 20%, I don’t care. Time is way too precious now that I’m over 40.
Way better to be super fussy and have a vacancy than compromise on tenants. Stressful to deal with but way worse with soso tenants.
Fantastic update and congrats on being over $200k. That is solid! I also like how you have multiple streams and are diversified. The one thing the last downturn taught me was not to have all my eggs in one basket. I’ve been doing my best to build multiple streams of active and passive income myself too. Passive is the preferred choice of course. :)
Muni bonds could be a big loser in real terms down the road. Default risk and real interest rate risk.
Cool. Are you forecasting economic collapse in various parts of the country? If so, which parts are you concerned about the most? How are you structuring your passive income portfolio?
The default rate on double and triple A muni bonds has been 0.1%. But you never know about the future. I’d love to hear your forecast.
Debt loads will become unserviceable if rates rise too much. If rates are capped or dropped to below zero bound then the pensions will fail. The markdown is likely to come in the currency markets as Fed comes back with large scale asset purchases.
The Eastern bloc lead by China and Russia is well underway in setting up an alternative trade settlement system.
Got it. It will be interesting to see how existing muni bonds default on their agreed upon interest rates. You think that a good economy would generate more tax dollar revenue, and rising interest rates are a reflection of a stronger economy. But perhaps not. If you default rates will double from 0.1% to 0.2%. You never know.
How old are you and where are you and your financial journey? Where have you invested your money? Thanks for your guidance. It’s always good to know something about the reader to get some context.
Rates can rise from default risk. This is probably why foreign creditors stopped sterilizing US deficits a few years ago. The rest of world stopped accumulating US treasuries as reserves. Now China wants to print yuan for oil like the US has since Nixon closed a certain window in 71 and Kissinger set up a petrodollar recycle with the Saudis. March 26th the Shanghai RMB crude futures go live.
Saddam tried to sell oil for Euros. Ghaddafi tried selling oil for something which must not be named. look what happened to them. China is too big to bully. This is going to happen. USD hegemony on the wane.
Thanks for your guidance. How are you investing your money and where are you in your financial journey So I can have some perspective on where you’re coming from?
Powell will testify the next few days. The key concepts to watch for are “real rates”. Rates may rise nominally but will always be kept negative in real terms. Bond holders will be crucified in real terms.
What asset does well in negative real rates? Research Barsky-Summers. Realize the US government has been trying to suppress this natural tendency as part of macroprudential repression, but eventually the mismatch between assets and liabilities on the Fed balance sheet will have to be reconciled.
Can you share your background? Otherwise, everything you’re saying has no credibility. For all we know, you’re a 28-year-old guy with little assets and still working, annoyed that you missed out on a great bull run.
Andrew, I think you nailed it ;)
High net worth I am. An old fart who has seen some cycles and has been a student of history.
I would realize some those gains if I were you and leave the table. Mother Nature has been forestalled for a bit but when she comes back…
It’s interesting how you take a side of doom and gloom despite a high net worth and getting to invest in the biggest growth market of all time. Why is that?
Interest rates have been coming down for 35 years now, and therefore bonds have been going up for 35 years as well.
What makes you so gloomy?
Ever heard of the Long Wave?
Taking some profits after a stellar bull run knowing a reversion to the mean will come at some point is not bad advice. Reinvesting during some of these low cycles of a secular bull market is also a good idea. Sticking your money under your mattress because of the fear of a doomsday scenario or forecasting the negative perfect storm from all of these bear prognosticators who continue to be wrong but like broken clocks may get to be right at a point in time of which no one knows for sure, is somewhat irrational. Much depends on your risk tolerance, time horizon, personal financial goals/objectives and another reason to be well diversified.
I look at it as a Talebian strategy. It won’t pay off as central banks maintain control of these Potemkin markets. But when it does payoff it will make the gains seen in the markets since 2009 look small in comparison.
So an investor has a choice to make. Make phantom gains now or be patient and wait for the inevitable reconciliation. We’re probably with 3 years of it. It’s all how you view time. Either be a unpopular macro guy acknowledging drivers undiscounted or a performance chaser sitting on unrealized gains looking in the rear view mirror.
That’s the key. You haven’t made anything until you exit the position.
I am an old fart too. After nearly 50 years in the real estate market, riding it up and down, but always up and to the right longer term, and same with stock market, I always stay in the market but I have a long term view and am prepared for ups and downs.
Just renewed two mortgages at variable rate with 30 year amortization. I contemplated going fixed rate but am predicting no more central bank increases in Canada for a good while. First time in 12 years I considered going fixed. Anyway, stretching it out as long as possible in order to keep payments low and live the good life.
Interesting you say 50 years. What’s coming is something that happens once in a lifespan. The last people to have experienced it have died. Sovereign defaults are coming.
Be careful with LT debt. Mortgages can be readjusted in favor of the banks after a devaluation.
@Working on my Tan
I agree that mother nature will strike again. Actually with low unemployment rate and the arrogance of silicon valley wearing off, it is time to normalize…..Big Gov regulations against Big Tech combined with higher interest rates for another 18 months and reserved asset sales by the Fed means another reset is being planned.
Recession in 2020~2022.
BUT this time money has nowhere to go….real estate AND high tech are in the SAME bubble!
Bankers are working the government to make sure they get bailed out. SMART money is spiking the market so they can exit at the top before taking net short positions…..if you are a trader about to lose your job, why not do a hail mary to make enough bonus to retire?
2023…governments will roll over private defaults into soverign debts. The question is can sovereigns take it all in? Look at Japan.
No the world is not going to end. But the rest of us non-UHNW (<$50M in assets) will work harder for less comforts. Until the next WAR to sort it all out.
Great diversification of passive income. I’m holding off on adding to passive income streams right now because I’ve still got a full time job and am already paying more than enough in taxes. It seems like a good strategy to focus on mortgage pay down and capital improvements to my existing rental property, and buying more growth stocks, then wait until after retirement or semiretirement to move things around with the goal of generating more passive income.
Makes sense. Tax management is huge, is why I have been investing in equity projects In real estate crowdfunding that has 3 to 5 time frames, rather than debt.
What I learned from reinvesting the proceeds of my house sale is that generating passive income is actually very easy, or easier than you think if you have the capital. It’s simply a transfer of assets.
Long-time reader, thanks for the excellent content!
On your Stock Passive Income numbers, is the annual $41,472 strictly from dividends? Does that include any principal withdrawal?
No principal withdrawls. That would be cheating :)
My goal is to never withdraw capital and only spend the income. With the estate tax rising to 22 million per couple, there’s even more incentive not to withdraw principal.
I agree with never withdrawing principal but I do that in effect by liquidizing some gains and reinvesting the majority of the gains, and so increasing my capital every year. The compounding of capital gains is much better than focussing on dividends and paying tax on those every year.
Continuing to increase passive income is definitely a marathon and requires patience. However, it’s nice to see that you still have a good amount of growth stocks as you mentioned. We are all living longer and at the same time, it’s important to have investments that will continue to grow at a steady pace rather than just provide income.
Great post, Sam! I always get so inspired on this site and this is just what a Monday morning called for. :)
Good morning Sam,
My husband and I have proceeds from a house sale that we would like to help generate passive income and we have limited knowledge in munis, keeping most of our liquidity in CD’s and MM accounts. Is there a good online resource for investing in munis?
“In fact, I will probably reinvest 70% of my $185,000, 3% CD into municipal bonds that now pay 4.5%-5% gross yields.”
Do you buy individual munis from a broker or do you recommend any muni funds?
Thank you for specifics that you write about as it helps educate a lot of us that do not have the experience and knowledge that you have acquired. I have been practice writing a travel blog about our upcoming month long trip to France with the hubby and two sons ages 12 and 10 and your site constantly gives me little boosts to keep working toward this goal!
I buy a combination of specific municipal bonds in California because that’s where I reside in where I can not pay state income taxes on the dividends, I also have a California municipal Bond fund, and a nationwide muni bond fund.
Here’s an article you can check out that has some instant graphs and data: https://www.financialsamurai.com/the-allure-of-zero-coupon-municipal-bonds/
Thank-you for the response and the in depth article on the muni’s. Will def use as a resource learning tool.
I had $43,000 last year in passive income. I’m 100% in stocks, broad market ETFs covering the US, developed markets, and emerging markets. I think of it as about 12,000 income streams, so the risk is low.
With your rental generating $60,000 a year, and a value of $2.74 million, your ROI is only about 2.2%. That seems low for the amount of work you had to put in with dealin. With tenants and maintenance.
With the S&P having a historical return of 6-7%, it seems like you would have been better all along with stocks instead of real estate.
With the amount of work and the returns so low, what is the case for owning a rental property?
Check out: BURL: The Real Estate Investing Rule To Follow
I made a decision to sell partly due to valuations being extremely high and rents falling. I’ve reinvested the proceeds in what will hopefully be higher yielding, higher returning investments. Related: Why I’m Investing In The Heartland Of America
My investment case in 2003 and 2005 when I bought the SF rentals was I saw tremendous upside potential. SF was 25% – 30% cheaper than Manhattan, but lifestyle was so much better and the business opportunity was just as good.
But now, things feel overly expensive and congested, so I took down risk.
See: Why I Sold My Rental Property
I guess I stay away from real estate because I just don’t understand it. It requires more psychology knowledge: knowing what people want, where, what drives property values and rents.
Stocks clicked with me in 5th grade when I learned about the stock market in school. I guess that’s why I’m 100% in stocks, and I plan to stay that way forever, even in retirement.
Cool. Whatever works for you. I suggest at least getting neutral real estate by owning your primary residence. It’s not that difficult to manage if it’s just you and your family. In 10 years you’re going to be wishing you had locked in your fix payment cool. Whatever works for you. I suggest at least getting neutral real estate by owning your primary residence. It’s not that difficult to manage if it’s just you and your family. In 10 years you’re going to be wishing you had locked in your fixed payment Bc rents just continue to go up.
I own my home. I have two more years to go on the mortgage. I still wonder what my net worth would be if I had put the money into the stock market instead.
Once you build expertise in an area, it’s hard to switch (applies to changing preferred asset classes but also switching careers) which causes a certain lock in. Even if you could switch, you would have lose all of the expertise that you built up.
Have you ever wondered what would have happened if you had started with a different preferred asset class? E.g. instead of real estate, you were mostly in stocks, or bonds, or bitcoin, or collectible Beanie Babies (pretty much the same as bitcoin).
Ah, that’s good. I haven’t really wondered because I have investments in so many different asset classes.
I invested the maximum I could in San Francisco real estate, it has done well. My regret was not buying Manhattan real estate in 2000, but I barely had Enough and the.com bubble is bursting and I was moving to San Francisco. If I bought the $800,000 apartment, it would be worth over 2.3 million today. It was a double balcony, 39 a square foot, apartment on 23rd and Madison with a view of the Chrysler building.
I know I would not be as wealthy if I had just invested in stocks, because there was no leverage, and there was a last decade when real estate performed tremendously between 2001 until the financial crisis.
Agree with primary residence. I have done the spreadsheets for renting, owning, stocks versus real estate, and it always comes out in favour of real estate by a huge margin, especially home because of leverage and tax free capital gains (but it will depend on the city). I am 100% in stocks in my portfolio, which provides cash flow for travel and is still growing. If we have a big crash I am okay with my rental and pensions and selling stocks for travel until the market recovers.
I guess it is the gross income. How much would be the taxes on that? As we all know the tax impact makes a massive difference.
Tax rates are different for different types of income streams. For $200,000, you can expect to pay around a 20% effective tax rate. But the tax rate also depends on your active income. I have purposefully invested in equities, and not so much income generating assets because of taxes.
How about you? How is your passive income portfolio coming along?
Was curious as living in the UK and the tax system is different. Here in the UK, up to GBP 10k gain a year there is not tax on gains from stocks, bonds.. after it s added at the top of the normal income. By selling smartly, it s possible to maximise the tax brake.
Then having some other investments mainly in real estate, where the tax rate is about 20%.
In total it brings me about GBP 20k a year after tax without taking into account the cryptocurrencies.
Is the 20% effective rate you mentioned only looking at federal taxes? Just out of curiosity, do you also have to pay CA income tax on your passive investments or is it free from state income tax?
Right now, we live in WA. So we don’t have to worry about income tax. Just sales tax.
Some I do pay CA income tax, some I don’t like my CA muni bond portfolio.
Some rental income has a non-cash tax shield (amortization).
I’m estimating about 20% effective rate all in.
Thanks for the explanation. I think a 20% overall rate is probably pretty good considering how high your passive income is.
Great overview Sam! You’ve also managed to cover the missing real estate income from other sources, which is great.
You say that you’re cautious with REITs due to the headwind caused by the rising interest rates. I’m with you, but at the same time earlier you said that you don’t expect the 10yrs yield to go over 3% for a long time. Now we’re nearly there. Does it mean that REITs become more attractive for you (like I see it), or you’re still cautious for some reason?
Yes, REITs and fixed income are more attractive now than six months ago. I plan on accumulating more fixed income this year. Let’s see if we breach 3% and stay there this year.
Hi Sam – Started reading your posts last year when I stumbled upon your website. Great stuff! I’ve also started investing in RealtyShares based on your recommendations. Just curious why all equity, when there are several debt offerings in the 8-9%+ range that only tie up capital for 12 months or so? I haven’t yet gone the equity route for this reason. Appreciate your thoughts.
P.S. Agree about LendingClub. Disappointing.
I’m no longer interested in generating much more passive income because of my marginal tax rate, even though it has come down due to tax reform. Hopefully when I do my 2018 taxes in 2019, there will indeed be a cut in small business pass through income as promised, but who knows until then.
In a sense, I’ve been trying to throttle back my income or at least shift the income to the future through equity investments when my energy and business income fades. So far they hasn’t, but it’s always good to plan for the future.
I’ve been working with my accountant on the new tax law and yes it does look like you get a straight 20 percent deduction on S corp income right off the top. Because of this I’ve lowered my W-2 income and the rent I charge myself to try and shift more income to my S corp.
On the downside, the travel and entertainment deduction has been eliminated. No more deductions for taking customers to football games or on fishing trips. Also I lose the 50% food deduction (business lunches) my wife and I enjoyed. Some entertainment can be reclassified but on a whole that deduction is pretty much gone.
If you average it all out I’m still coming out ahead as are all my employees.
Thanks for the feedback. So let’s say you make $100,000 in operating profits. How do you exactly calculate the 20% deduction? Is basically only $80,000 worth of your operating profits taxed at a new lower tax rate?
I’ve got to go through a detailed example myself. Thanks
That’s a perfect example. I couldn’t believe it’s that simple, but that’s the way it now works.
Sam, it’s actually incredibly complicated if you have high income. The tax law counts all of your income, not just qualified business income, in determining if you qualify for the deduction or not. Given you have over $200,000 in passive income your situation might be very different. For high income earnings you start having to pass specific tests that limit the amount of deduction you can claim. Specifically you can only claim a deduction up to 50% of the W-2 wages your business pays or 2.5% of the assets of the business. With an online business you probably don’t have PP&E so the 2.5% doesn’t help you and you probably aren’t paying out W-2 wages to any employees either. I would consult with your accountant because unfortunately if you make enough money you might not get a deduction at all.
If you have time, this is the most detailed dissection of the law I have read:
My bad, I guess that’s why tax advice over the internet is free. After reading RE comment I called my accountant for clarification. He is 100% correct. In my personal situation I do get the 20% deduction on all of my S Corp qualified businesses income because I’m able to pass the W-2 litmus test.
Turns out the “simplification”of the tax code will be a boom for accountants!
Sam – Thanks for the update!
Is it safe to assume that you don’t consider the other money you earn from your blog (advertising, etc.) to be passive? So that’s why you don’t have it listed?
No way. The only online income I consider truly passive is book sales. But man, writing, publishing, business development, etc takes work. If it didn’t, I wouldn’t have experienced burn out in 2017 with FS.
I’m really happy that my passive income portfolio has gotten more passive this year. The only semi-passive stream is now my SF rental condo. Fingers crossed my tenants don’t move for at least a year.
For somebody with burn out, you still write and post vastly superior posts compared to any of the other blogs I drop in on occasionally. Glad you are still going and will miss you when you quit.
You continue to do really well with your passive income. This is the first year that we will cross $100K so that is kind of fun.
Great recap and post. I had a feeling this would be a recent topic, Sam.
This weekend, I revisited your past post on ranking the best passive income streams, and I noticed you updated your respective income stream table for 2018 and 2019.
The 18 years it’s taken to reach your current passive income level is impressive.
On your question, our stream is growing slowly but nicely. We’re focusing on diversity among our account types as well as income distribution frequency. Building out our taxable account income is key right now, as about 95% comes from retirement accounts.
Thanks, but donno how impressive it is taking 18-19 years! Sounds like an eternity when I read that. It’s often good to not know how long it takes, otherwise, one might never start. Or, one might get motivated to start ASAP given how long it takes.
Good job building your after-tax portfolio. That’s what’s really going to give you the confidence to be free way before 60 if so desired.
My passive income portfolio is going well. I have my dividend income which is covering roughly 50% of my expenses for the year. So hopefully it continues to creep up over the years as I pour more and more into it :)
Yeah, just takes time! 50% is a great coverage ratio for your age. In 2012, I could cover 100% of my lifestyle expenses comfortably, but not 100% of both my wife and mine. But by 2015, our passive income could cover 100% of both of our expenses no problem. Just takes time!
Thanks for your posts! I love reading about your 2% CDs examples since I prefer to keep minimal in the public equities market. (Max 20-30% investable assets)
Most investment plans keep referencing 60-70% into equities. But I would not sleep well at night with that!
You just reminded me to start locking up more of my cash into fixed income again.
The CD has a 3% interest rate, and I plan to plow a majority of it back into municipal bonds generating now a 4.5% – 5% gross interest rate. Feeling blessed rates have gone up for my risk-free/low-risk money.
What munis are offering 4.5%-5% rates? The best I see is AAA at 3.5%
Gross rates if you were to apply a 25%-30% tax rate to the net rates. Trying to keep things apples to apples with my CD 3% gross yield.
The “can I sleep well at night” test is the same one my husband and I use to determine our stock/bond asset allocation. Our max comfort level is 30% stocks / 70% bonds (or other fixed rate investments). You do have to be able to sleep at night! We don’t need to make a killer return, just keep ahead of inflation.
I am almost 50 years old and have invested during the dot.com and the 08/09 bear markets. I spent over a decade having my portfolio stay the same as what I had put in originally. At this stage I am fine with more fixed income and I also keep my extra properties empty or allow my adult kids to live there. I really enjoy using my assets to do some good for those I care about. I probably get more joy from that than just seeing the net worth build up.
Better to have your portfolio stay the same for ten years rather than be down 50% or more during that same time frame. :)
This is really interesting. What made you decide on a 60/40 ratio for stocks/bonds? I know you guys are retired, but from reading the Trinity study/ERN a bit, it seems the 75/25 split produced higher survival rates. I’m guessing it’s because the alts are considered even riskier stocks? So it’s really a more of a 70/30 split?
When you invest in munis, do you pick specific ones or invest in a fund? I’m going through and reading the 5 blog posts that popped up when I searched “muni bonds financial samurai” on Google. Every time I’m here I learn something new! I should really marathon your site one of these days!
Asset allocation is a personal preference. Remember, everybody’s financial situation and goals are different. I’m happy with earning a 8.7% historical rate of return a year on my capital.
What is your asset allocation recommendation for me? What do you think I should shoot for and how much risk I should take?
Where are you in your financial journey?
I don’t really have a rec, I was merely curious why you picked the allocation. I find it best to ask questions of people who are ahead of me and see what their answer is :). They’ve gone through more than I have and they’re more experienced :).
Currently three years in so a bit more to go! I like reading this blog because it’s not all index funds all the time and there are more “tax arbitrage” posts that I find fun.
Cool. I was 25 years old once and I’m always trying to learn and be alert for something I’m missing.
Desires, needs, and goals change over time. But you only know the changes by going through them yourself. There will be a lot of mistakes and winsalong the way. Good luck on your journey!
You’ve set yourself up nicely Sam!!! There’s nothing more truthful than the last paragraph.
“I could go up this winter, but I want him to be able to walk and run comfortably before he goes. I’ve been dreaming of this moment for over 10 years now.”
Awwww that’s so so cute! Hope your fam have lotsa fun when that day comes! My to go family related day dream is going to Japan and eating omakase at an old sushi bar (one of those that only seat bars) with a mini me. My only requirement is they have to have teeth. I just picture the scene in my head and it brings me smiles, guaranteed.
Ha! Yes, teeth are a good idea. Teeth generally come anytime between 6 months – 13 months. The best sushi in Japan is amazing. All types of cuisine in Japan are amazing. In fact, I think the best Italian food I’ve ever had was in Japan.
It’s really fun when dreams come true. But it takes so much patience and willpower.
Thanks for the post Sam. I always learn something new stopping by here. Why don’t you ask a property manager to look after your condo as well? It seems that would alleviate a lot of mental attention to the rental while keep your income coming in.
It’s definitely something I’ve considered. I really dislike the building property manager. They are the worst ever, so it would be nice to have a property manager deal with the property manager. But I like the idea of finally letting someone I care about there live in the condo for free, or a highly subsidized rate. That would make me happiest.
I plan to keep the property for the next 25 years, just in case my son decides to live and work in SF. I fear how darn expensive SF will be by then!
What a great plan to keep your condo empty of tenants but full of furniture! You will have so many options for family related use in the future: 1) hosting out of town family visitors long or short term, 2) relocating parents to live close by if the need be (assuming you don’t relocate to Hawaii), and 3) having a place for your offspring to live semi-independently. You can probably think of many other options also. At your income level (passive and active) who needs the increased tax liability and headaches / hassles / work effort required to generate a positive cash flow? Better to spend that life energy playing in the snow with your son!
Absolutely! Those are my thoughts. No longer am I so hungry for income and passive income like I was in my 20s and 30s. Life is moving quick. I really want to focus on living it to the best.
Vacation property was a terrible purchase, but it’s such a small percentage of whatever and now I’m just so happy to use it and produce new memories!
Keeping it empty — not a bad idea, especially to save taxes. I am thinking of living in my bigger unit for lifestyle and tax reasons. But check with your insurance company. Sometimes the rates and coverage are different for vacant property, and there are requirements for regular inspection. In my city, there is also a local property tax fee for holding vacant rental property due to the housing shortage.
As for passive income, when I went FIRE 12 years ago now, I was totally obsessed with passive income, but for same reasons as you have mentioned I soon changed my mind. I am now obsessed with taxes and income/capital gains that does not require me to work. It is all about deferring taxes as long as possible while having enough income for lots of travel (living it up, haha). Besides rental income, my passive income includes 3 small pensions. So I am paying annual taxes on that too. Together rental and pensions are enough to live on comfortably.
I had a rental condo, and found it a pain even with an excellent property and property manager, so I sold it and put the funds into stocks. My dream is a penthouse with a fabulous view, but I simply can’t stand dealing with the condo apparatus. Next home or maybe rent something or just travel more.
While I can understand the advantages of having the property empty “just in case” you want to use it for friends and family, I would suggest hiring a property manager.
You will remove all tenant headaches, repairs, late phone calls, even searching for tenants and negotiating rent increase. The manager does it all for you, for a small percentage.
Surely 3,900 per month and zero headaches and the occasional email is better than 4,200 per month with massive headaches, and better than 0 per month with an empty property?
Re: “better than 0 per month with an empty property”
Don’t know. Depends upon how often you have family and or friends visiting who need a place to stay. ;)
Good update, I think the simplification will help a lot at freeing up time. Have you ever considered investing outside of the US?
I have a relatively sizable position and Chinese Internet stocks and FEZ, the EuroStoxx50 index which felt Was too much of an underperforming versus the United States several ago.
Chinese Internet starts have been really since I published this article in 2013. https://www.financialsamurai.com/should-i-invest-in-chinese-stocks/
Thanks, I checked the post, Tencent is all the craze but there is some other gems as well. EEM is also a nice ETF to buy for broad exposure.
I checked your comments as well, very good to track the relative performance hope the investments have met your goals (I see SINA has had a good run).
I would add 3 more “keys” to have $200K/year in passive income. 1)Do not have a major sickness or let anyone else in the family have one, 2) absolutely do not get divorced and 3)do not lose your job. Piece of cake!
I see no mention of inflation anywhere–do you even consider that most important piece in any of your calculations or considerations for the future? For example, a 3% return with 2% inflation is really only a 1% return. $200K/year today might be fine, but 15 years from now that same amount could be relatively worth close to 50% less.