So much of FIRE blogoland is devoted to “passive income”. Often the passive income isn’t so passive. You write a blog and grow it into an “income stream” but you’re stuck writing and marketing the blog. You buy some duplexes and are stuck with the tedium of running a rental business. You sell Herbalife and loose all your friends because when they see you coming they head the other way. Maybe you buy preferred stocks or dividend stocks. Maybe you buy an annuity. In days gone by when you could lend some money and get paid some interest, you bought CD’s lived off the interest, or you started a rock band and made and sold CD’s
In retirement the goal is adequate income. It’s a different portfolio goal than what you did during the working years. During the working years your risks were covered by your work and your employer. During the retired years your risk is covered by SS and your portfolio. In my Grandfather’s day he was covered by SS, a pension, and interest from a CD ladder. When my grandmother died at 88 she had about 60K in assets left to her name. My Great Aunt (same generation as Granny) who died at 90 had maybe only 30K left beyond SS. In my now 91 year old Mom’s case she has IRA, annuity and SS income and a fairly robust portfolio. I recently had to move Mom into assisted living and her portfolio readily pays for that though she is slightly cash flow negative she has more than enough to live 2 more decades. Granny lived in their retirement house and would not have been able to hack assisted living, financially unassisted. Auntie and her husband FIRED in the 1960’s. The bought a resort property on Lake Michigan and rented cabins half the year and then lived in a trailer in FL half the year. At some point they sold the resort and moved full time to the trailer. No way could Auntie afford anything more than the trailer.
This is a picture of 3 retirements over 120 years of life. Granny was greatest generation pension based retiree at 65. Auntie was greatest generation entrepreneurial based FIRE retiree. Mom is silent generation investment based retire at 67. I’m boomer generation investment based retire at 66. Each of these have generational approaches to retirement which used the instruments of their time like fixed income v annuity v pension income to in at least 2 cases just barely realize the goal of not running out of money before running out of breath. Every family has this generationally historical approach to the dilemma of retirement using the tools available to the generation. Greatest generation had little access to stocks, some access to bonds and debt instruments and some access to real estate. Stocks were typically too expensive to own in small quantities, unlike today. The modern brokerage account has been around less than 20 years. I’m a boomer and extremely dependent on the financialization and government intervention of the investing environment. My children are Gen Z. To them investing will be the result of the creative destruction of decentralization and digitalization.
Each of my parents and grand parents failed to embrace the next generation’s style, preferring rather to embrace the relative “comfort” of their generations investing style, a style that petered out as each generation petered out. That’s the conclusion I reach. Investing styles are marketed. As a generation embraces it’s marketed style that style reaches a peak and then dies off as the generation dies off. If you want to beat the odds, you must embrace the style of the 3 younger generations ahead of you at some level elsewise your money may peter out before you peter out. It’s clear this means you need to develop some intimacy with crypto before your generations style, what ever generation that is, becomes anachronistic. This is especially true if you belong to the bogglehead version of reality. There is no place in boggle head lore for crypto. It is anything BUT a cheap diversified index fund. Boggle head lore is Gen X’s generational investing style. Nothing more, nothing less. It will see it’s zenith same as every other generation’s style and then will be left to decay in the scrap heap of time while the adherents skid to their eventual demise.
If you can, take some time to analyze the strategies of the previous generations in your family and their efficiency and effectiveness, and analyze in the context of the financial regimen of their generation. In 1980 Vanguard was dinky and had 1 or 2 funds. Fidelity was huge and sold loaded funds but sold the funds at a discount compared to companies like American Funds. Most of Fidelity funds were 3% load and American was 5.25%, they were all offered through some kind of local broker (salesman) who got his cut as well. The model was a bunch of small shops selling product instead of the internet based digital marketplace of today. Marketing gimmicks were employed like FDIC insurance. FDIC is great for a single bank failure. Do you think it really protects you against the FED’s moral hazard?
I’ve started playing around in some small measure with the products which will constitute what is being marketed to my kids. In no small measure they are throwback to Grandma’s generation. I’m staking Ethereum and it pays me interest in Ethereum. The amount I make in dollars is dependent on the Ethereum price. It is effectively a bond, but a intermediate term bond that pays 5% interest. It has volatility as well. At today’s Ethereum prices I make about $16/day. If Ethereum doubles I’ll make $32. $16/day pretty much pays my utility, cable and cell phone bill. If I owned USD coin, I could lend it at a fixed 4% rate. The terms cover the value of the principal, in other words my USD coin is backed up dollar for dollar. This works the way gold did back in the early 1900’s when you could exchange your dollars for gold at a fixed rate. USD coin exchanges 1:1, coins:dollars. What passbook account pays 4% interest? This means if I own 100K in USD coin as emergency fund money I can make 4K/yr or $11 per day, every day. Pretty much pays for our food. When my SS kicks in full force next year it will pay us $146/day tax free based on the tax bracket we will be in at that time. So let me see 146 + 11 + 16 = $173/day, every day ($1211/wk, 62,972/yr) . Eventually when my bride turns 66 and 10 months $146/day will become $171/day for a total of $198/day passive income assuming Ethereum doesn’t increase in price. My investment was about 5.5K on the Ethereum at about $100/coin in March of 2020 and if I owned it, $100K of the USD stable coin (I presently don’t own any) virtually tax free because SS is taxed at 85% leaving 15% of the SS money to passively cover taxes. If I bought the Ethereum at todays prices it would still be only about a $220K total investment. My SS is high because I spent so much of my 35 years paying into the trust at the highest amount, and I’m not claiming till I hit 70. I also understand how to maximize my wife’s benefit. Our SS has built in inflation adjustment. This money machine runs itself, no tenants, no blog posts, no orders to Herbalife and my friends generally don’t run the other way when they see me. Eventually the Ethereum stake will go away and I’ll have to figure something else out. By then the Gen Z-ers will be in their prime and the Gen-Apha will be breathing down their necks. I’ll likely be dead by then but my wife, she has a 30% chance of 30 more years and I’ll do my best to see she is funded come hell or high water.
This is a true granular view of how to think about passive retirement income. It starts with understanding the historical, and considers what is generationally marketed, trying to avoid the generational myopia that causes, and looks forward to the future. It’s hard to run a bunch of duplexes if you happen to stroke out or get Parkinson’s. It also limits greed. It’s less about trips to Europe and more about daily bread forever. The Gen-X 4% narrative is simplistic and requires perfect execution of the assumptions, because it’s a mean reversion strategy.