passive income | Funny about Money

No grass grows under this old lady’s feet, that’s for sure. Just sent out a résumé for a sweet part-time job that would be a great hoot, and e-mailed my book-length curriculum vitae to the English department chair at a nearby community college.

Hey! We’ve only got nine months here to find a new job! Better get to work.

Truth to tell, I believe I could do either of these p/t jobs on the side, while wrapping up the deconstruction of our office. We know I’m capable of teaching the equivalent of four bloated sections of freshman comp for juniors and seniors while supervising an editorial crew; after that, two sections of real freshman comp whose size is limited to normal NCTE guidelines should be a piece of cake.

Far more appealing, though, is the prospect of serving as p/t gofer and sidekick for an editor (and friendly acquaintance) at my favorite local press. This is the outfit that pays me to read detective novels. Mirabilis! Some of the novels I’ve had the privilege to read have been pretty entertaining. If you enjoy detective fiction and thrillers, you should take a look at their booklist. I know I can do this job to a T, and it sure would be easier than teaching freshman comp. Not only that, but once I walk out the door, it probably would provide the income I’ll need to keep from starving.

Yesh. I scared the bejabbers out of myself, along about three in the morning (as you can imagine, I enjoyed about 2 1/2 hours of sleep last night, between 4:30 and 7:00 a.m.), by loading Excel and massaging some figures. Didn’t take long before I was asking myself the Great Dark-of-Night Ontological Question:
What on earth was I thinking when I imagined I could support myself on Social Security and investment proceeds?

Wait! I remember: at the time, we all actually had some investments.

I was horrified to find that what with the 12-fold increase in healthcare premiums that Medicare will represent plus the need to take my share of the Investment House mortgage out of cash flow, my expenses will exceed my present net income, in the highest-paying full-time job I’ve ever held!

To get by, I’ll need to earn an extra $19,000 to $21,000 a year, above and beyond investment returns and Social Security. This will be a trick, since you’re allowed to earn a grandiose $14,000 before Social Security starts docking your benefits.

Not having the mortgage payments wouldn’t help a lot: even without those, Social Security plus proceeds from my total savings (including the money set aside to pay off the Renovation Loan and the savings fund to buy the next car) will not cover my expenses, post-layoff. Check it out:

Projected Expenses

Projected Net Income from Social Security and Investments

Oops!

And oops, indeed: take a close look at what it’s going to cost me to live in blissful bumhood. And consider that my net income today is $39,000. I live like an ascetic: don’t travel, don’t own a cell phone, don’t subscribe to cable, satellite, or any other pay-per-view TV, don’t play computer games, rarely eat out, never buy more than the basic clothes and shoes, drive a 10-year-old car, don’t run a tab on the credit card, don’t even go to a freaking picture show! And I use up all but about about $2,000 of that each year. We’re looking at a $4,560 increase in my expenses once I’m on Medicare! Meanwhile, my income drops into the poverty range.

Clearly, I’ll have to work: either get a job or cultivate several income streams. The candidates are part-time teaching, growing The Copyeditor’s Desk, and monetizing Funny about Money.

Community colleges around here pay part-timers about $2,000 a course. The universities now pay about $3,000. Typical income from a freelance business is about $10,000 a year; I would be surprised, rusticated as we are in the middle of the Sonoran Desert, if Tina and I could generate much more than that, apiece. And what would FaM earn? It’s anybody’s guess. So guessy as to be negligible.

Hiring out to teach two courses from the community college district and two from the Great Desert University each year and ramping up our freelance business so that it pays a consistent 10 grand a year will produce something that looks like this:

Twenty thousand extra dollars would do the trick, in theory. But that exceeds the Social Security earnings limitation by $6,000. Have the temerity to earn more than $14,000 a year, and you get your Social Security benefits axed. So, I would have to earn significantly more than 20 grand to end up with enough income to cover the bloated expenses of retirement.

If I’d had the prescience to sell my investments in the spring of 2008, today I would have plenty of money to live on, between SS and investment income. Too bad we didn’t all have crystal balls, eh?

Well, I felt a lot better, anyway, having sent out a couple of job feelers. Even if they come to naught, just doing something other than hunkering in the headlight while waiting to be run down feels like a positive move.

For most of us, the goal in building wealth is to reach the “crossover point,” where passive income from investments equals the amount you need to live on. The sooner the better: early crossover point = early retirement.

It’s times like these, though, that give me pause about that idea. To retire with little risk of a gigantic cut in living standards, you would need to have so much money invested that, unless you’re an entrepreneurial wizard, it would take an entire lifetime to accumulate it. Most of us will never manage to do so. The amount needed to support you reliably through an extended retirement would have to far exceed the actual crossover point.

Why? Two reasons:

Inflation
The vagaries of the stock market

Either of these can destroy the purchasing power of your investments; since high inflation and unstable market conditions often occur together, you can expect that sometime during your retirement, you’ll watch both of them sit down side by side to the dinner table that is your life savings.

That’s the case right now. At the end of March, my total investments came to about $583,000. Today, with the belated 403b statements from TIAA-CREF and Fidelity finally in hand, the total comes to $551,700, a loss of $31,300. Meanwhile, costs for food and gasoline are pushing my daily expenses past my budget.

What Dependence on Passive Income Would Mean to Me

If I tried to live on 4% of savings (the amount recommended as a safe drawdown) plus Social Security, I would experience a 35% pay cut. Not that it would matter, because I couldn’t live on 4% of what I have in savings anyway. Four percent of $583,000, the pre-stock fall amount, is a grand $23,320. Add my projected Social Security payments of $16,608 to that, and you get a munificent income of $39,928: a $22,072 cut in pay at retirement.

I can’t live on that. I’m barely living on what I earn.

In fact, as we speak my week-to-week budget is again in the red and about to go deeper therein: this afternoon the pool repair guy will clip me for $105, leaving me $4 in the hole against a budget supposed to last until the sixth. Today is the first. Thursday I have to go to the doctor; that will be a $20 copay, putting me $24 in the hole. If I have to buy prescription meds, add another $20 to that: $44 in the red. That means that even if I buy no food, no dog food, no gasoline, no toiletries, no cleaning goods-if I buy absolutely nothing-I will start next week $44 short. And this month I’ve had no extraordinary expenses, unless you call this afternoon’s overdue routine pool maintenance extraordinary.

I can’t let the pool ride until next week, because the pump and filter have slowed to the point where they’re not driving the system efficiently enough to keep the pool clean in an Arizona summer’s extreme weather conditions. Letting your pool go green is a violation of the law; the county flies over the city in helicopters, checking pools from the air. The fine for neglecting the pool would demolish my budget permanently.

The costs of gasoline and food are now so high that my budget will not cover all my routine needs. That’s while I’m earning $22,000 more than I will see during retirement, when about two-thirds of my income will be based on an optimistic projection of investment income.

These needs will never change: I always will have to eat, I always will have to maintain the dwelling I occupy, I always will have to transport myself around the city to purchase necessities.

You might say I simply haven’t reached my crossover point. I would reply that for most people, there is no crossover point.

What This Means for All of Us

The longer you work, the more you appear to earn: inflation alone pushes your salary higher through cost of living increases, and if you have a decent employer, you get occasional merit increases. But the more you earn, the more it takes to live. Even though my salary is high in absolute terms (the median income for a four-person family), the truth is that relative to the cost of living, it is the same or even lower than it was a year ago. So, probably, is yours.

Lower, indeed: since May 2007, when I started the weekly budget plan, I was consistently in the black until the March/April 2008 cycle. Every budget cycle ended in the black overall…until inflation ticked up and income stayed static. Since April, I’ve been in the red almost every week. Because state employees received neither COLAs nor merit increases this year, costs have risen but my income has stayed static. Remember, if you retire when you reach the crossover point, income always stays static.

Let’s imagine, for example, if I were retired and would never see another merit pay increase; if the only increase I would see would be an occasional cost of living increase in Social Security, not necessarily granted every year; if every time the stock market dropped, I saw a cut in pay. Add to that the ever-increasing cost of Medicare.

If I work until I’m 66 and we grant that I need about as much as I’m earning now to stay where I’m living and not be forced to move someplace cheaper, then the crossover point that would allow me to remain in my paid-off home would require income-generating savings of $1,134,800, and that amount would have to increase annually to keep up with inflation! In other words, the recommended 4% drawdown from life savings of over a million dollars combined with Social Security would not suffice to provide a person with enough income to live in my current modest (some would say “ascetic”), debt-free style.

Thus I would argue that unless you are part of a married couple, both of you are earning in the six figures, and you live frugally, stay out of debt, and save exuberantly, you are unlikely ever to see a real crossover point at which your passive income will cover your expenses for the rest of your life. This applies to most people who think of themselves as members of the middle class: teachers, midlevel administrators, shopkeepers, sales staff, police officers, fire fighters, most people in the trades, most government employees, just about anyone who inhabits a cube…virtually all of us.

What Can Be Done

If you are a young person, get out of debt, stay out of debt, and save every penny you can. Max out your employment-related savings plan, fully fund a Roth IRA every year, and put everything else you can into non-tax-deferred savings.

Angle to get yourself into a decently paid job that’s not too obnoxious, so that you can contemplate working until death do you part from your employer without wincing at the very thought of it.

Why not simply plan to work until you drop dead and just spend everything you earn? Because few of us will stay healthy long enough to work until we die. Because we live in a culture that abhors age and discriminates against the elderly, and so few of us are likely to be able to hold a decent job until we die. Even though you probably will need to work well into old age, you had better have enough savings to live on between the time you can no longer land and hold a job and the time you shuffle off this mortal coil.

If you are my age (born during the Cretaceous Period): do not even think about retiring unless you have well over a million dollars per person to generate passive income.

I’m now planning to work until I’m 70 and to bank after-tax Social Security income starting at 66 1/2, when I’m eligible for the full amount. If I can hold my job that long, I can maintain my lifestyle for a while longer. If I die before then, at least I won’t have had to choose between going hungry or moving to cheaper housing in a ghetto for the elderly. If I live that long, the number of years remaining to me will be few enough that a larger draw-down probably won’t consume my entire savings before I die-and maybe I can even stay in my home.

2 Comments left on iWeb site:

frugalscholar

The crossover point from YMYL is based on absolute certainty of income: the book recommended Treasury Bonds, which at the time paid a guaranteed 8-10%.Those days are long gone.

YMYL also said not to be afraid of inflation: I am tracking this right now.

Tuesday, July 1, 2008 – 10:31 A

IMHO not to fear inflation is to wear blinders.

My father thought he had plenty to carry him and my mother through a long and comfortable retirement. Then came the 1970s and double-digit inflation. His formerly generous savings, which indeed were invested conservatively, bought him a poverty-level lifestyle.

Tuesday, July 1, 2008 – 12:51 P