I've been fortunate for the past few years to have a very high-paying job. Over that time, I've put myself in the following financial situation:

  • I own my personal home outright
  • I own (also outright) a residental rental property that brings in about $1000 per month in profit
  • About $100k in retirement savings, spread across Roth and SEP IRA accounts
  • About $200k in a savings account
  • My household's non-discretionary monthly expenses (property taxes on our home, insurance, utilities, food) total about $1500

I will soon be changing careers. My income will drop from about $300k annually to around $50k.

My main financial goal before changing jobs is to use the assets I've built up over the past few years -- especially the $200k in cash -- to build more passive or near-passive income streams.

Although I have no intention of stopping working anytime soon, I'd like to put myself in a position where if I lost my job, I would not have to worry much because I'd have enough passive income to support my family without dipping into any savings. Having this type of financial peace of mind and safety net is more important to me than maximizing my net worth.

I'd also like to have the option of retiring in about fifteen or twenty years if I choose, using the passive income streams to support my family until the IRA withdrawals and social security kick in. (That will take a while; I'm currently in my early thirties.)

I'm looking for advice on how to achieve these goals. One thought is to use the $200k to buy more rental property without mortgages in order to generate good cash flows. The downside to this approach is that rental income is not really passive income.

My other thought is to put the $200k in stocks. I'd reinvest the dividends as long as I don't need them, but could spend them if I end up in a position where I do. The downside I foresee to this strategy is short-term market volatility: If the stock market happens to take a big dive at a time when I am out of work, the income generated by dividends would decrease, and I might be forced to dip into principal in order to cover my expenses. Depending on how long I am out of work and how long the market takes to recover, I could potentially end up losing a lot of the principal.

I'd welcome thoughts on which approach is better, or alternative ideas for achieving my goal.

  • "If the stock market happens to take a big dive at a time when I am out of work..." - an important thing to worry about, especially since these two events are often correlated! – James Fennell Apr 14 '18 at 14:44
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    To me 200k isn't nearly enough to provide a passive income without a lot of leverage and or a lot of risk. Real estate seems like the option that will provide the most leverage with the least amount of risk. My advice would be to hold onto the money and patiently wait and prepare for the next recession so you can jump on any bargains. – kweinert Apr 14 '18 at 14:51
  • @kweinert I agree that 200k is small for a creating a passive income but he already has a passive or almost passive income of 1k per month and only really needs 1.5k. It might be possible to get a $500+ income per month from a rental properly costing in that region (although this might be hard). – Steve Smith Apr 14 '18 at 15:17
  • (1) Hypothetical: Buy SDY which duplicates the S&P Dividend Aristocrats Index. About 3% yield. If the market dives (see 2000 and 2008), not likely dividends are cut much. But can you live off of $6k per year, ignoring taxes? You could double the yield with investment grade preferred stocks ($12k). Your bigger issue is that you may "be forced to dip into the principal investment in order to cover my expenses". Then, you're no longer receiving $6k to$12k per year. $6 to $12k per year is fine for add'l income but insufficient to survive on without a pay check. (2) Cut expenses if possible – Bob Baerker Apr 14 '18 at 15:28

You have a lot of options and congratulations on setting yourself up for financial prosperity!

If I was in your shoes, I would definitely maneuver the $200k out of low yield savings account (1% is what my savings is yielding today) and diversify it a bit. At 1% you are not beating average US inflation.

Keep $36k (2 years of non-discr. exp) in savings as emergency. Take $64k and place in stock market. I'd recommend something like SPY that just tracks S&P500 index and maybe 25% of the 64k into bonds. Take the remaining 100k and purchase 2 new homes using 50k for 20% downpayment. Then let the tenants pay off the rentals with monthly cash flow. In 15 to 20y - when you are ready to retire, you could refi these loans and generate good monthly cash flow. Rent homes/Cash flow/Local market vary by location therefore consider the outcomes before taking anyones advice on rentals. I'm in Houston, TX and rental market is hot and cash flow on a property is quite easy if you pay the right price for the home.

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