TL;DR: You’ve reached Ramen Retirement when your passive income covers your cost of living. Do this by growing passive income, or lowering expenses. There are a number of proven ways to do both, some of which many people don’t know of or never consider. Once you’re Ramen Retired, you could hang on a beach, but experience has shown that doubling down on life and sharing your gift will leave you more content and fulfilled.
Let’s start by defining Ramen Retirement – put simply, it is the point in time when your passive income exceeds your expenses (on an annualized basis). This is a straightforward calculation:
Passive income (after tax!) – expenses = savings or (burn rate)
If you want a manically detailed retirement calculator to help you assess where you stand on this today, check out this beauty of a Google Sheet here. To get access to a version of the calculator you can edit yourself, drop me a line at: email@example.com
If your after tax passive income exceeds your expenses, congratulations, you’ve made it to your Ramen Retirement. Time to crack open an ice cold Pabst.
But before you celebrate, let’s dig a little deeper. The devil’s in the details. How do you define passive income? And what do you include in your expenses?
Building passive income
Defining any sort of income as passive is really a subjective exercise. Income sits on a spectrum. Some examples include*:
*This is far from an exhaustive list of income sources… but it helps us get on the same page.
Ideally, passive income shouldn’t require any direct time or energy from you to keep it going. This is because to do Ramen Retirement right, you’re going to need that time and energy to discover and share your gift with the world.
Another important characteristic here is that your passive income is a robust and lasting source of purchasing power. It is ideally consistent and growing over time, and able to at least keep up with inflation (real inflation, not the phony government reported metrics). The best passive income will be:
- Easy to understand
- Stable and predictable
- Inflation protected
- Able to provide outsized returns
Some examples of great passive income sources include a diversified mix of dividend paying stocks, or various types of real estate equity investments. Some of you might notice that I’ve left off any form of bonds or debt – fixed income investments are vulnerable to inflation, and therefore don’t meet the criteria listed above. We haven’t seen it in decades, but periods of extreme inflation can happen (see 1970’s below):
During times of inflation your fixed income investments will fall behind, no longer meeting your cost of living needs. Given this, you can see why knowing the nature of your passive income is as or more important than the amount.
The other side of the coin is managing your expenses. I live a simple life, but I don’t deprive myself of things that truly add value. Certainly, there are ways to cut down on expenses in every category, but if you cut too deep, you run the risk of hurting your day-to-day enjoyment, or negatively impacting your productivity and potential impact. The key here is really about focusing on value, and getting clear about the things you spend on. If something is a great source of enjoyment for you – for example, road biking – then go ahead and spend a couple of grand on a great road bike. But if you find yourself blowing money on things that don’t really add to your life, then those are the things to cut.
With that preface, figuring out your rough expense level is pretty easy – just think through the following categories:
- Housing: Rent, or own? Mortgage or paid off? Include property tax and insurance!
- Utilities: Water, gas, electric etc.
- Technology: Internet, phone bills
- Transportation: Car payments? Insurance? Public transportation? Lyft?
- Healthcare: Get a quote from an insurance market – solid insurance from Kaiser starts around $1,000-$1,200 / month for a family of 4 – YMMV based on state and coverage levels
- Food: groceries & eating out
- Travel & entertainment: planes, hotels, other leisure and fun
Below are the details of what this looks like for a family of four living in San Francisco. One could nitpick these numbers to death based on a whole range of assumptions (quality of housing, location, level of health insurance, childcare, car payments etc.), but the reality is a manageable (not luxurious) life for a family of four in San Francisco will cost somewhere in the range of $150K (after tax!) a year:
Could you live in SF for less? Definitely. If you want to get surgical with it, you could downsize your housing and/or location (save $1.5K/month – $18K/yr), live near transit and sell the cars (invest money – net $4K difference), eat more modestly (save $4k?), and slash your T&E budget (save $5K). Doing all those things might save you $20-30K. But at that point you’ll be living a pretty simple life, and it begs the question whether it’s worth those sacrifices.
Perhaps the biggest takeaway from this exercise is that in a place like SF – housing is by far the largest line item on the budget. It’s so large that it makes those other expenses almost irrelevant. This is also another reason I’m such a fan of owning your primary residence. By owning and paying down the mortgage, your remaining living costs are pretty modest. This approach is also a great example of the barbell investment strategy that I prescribe to – which advocates making some very low risk investments, balanced with other higher risk investments with the potential for upside gains. By making some lower risk investments (like mortgage pay-down), you are capping your downside, which can give you the flexibility to take higher risk in other investments and career decisions – which can truly have an outsized impact on your lifetime earnings, happiness and success.
Bringing it all together & bridging the gap
With a good grasp on your passive income and expenses, you now know where you stand. If there’s still a gap, it’s time to start thinking through the different levers you can pull to reach Ramen Retirement. Generally speaking, making investments with the money you earn is the most common way of generating passive income. Yes, there are other ways to create passive income (small businesses, licensing creative works), but those are outside the scope of this discussion. So for our purposes, reaching Ramen Retirement is pretty straightforward (though not necessarily easy!) – make money, and invest it wisely!
While there are an infinite number of things you could invest in, I’ve focused on the broad categories of investments that any non-professional investor should consider – as discussed in personal finance 101, most of us have no business getting too deep into specific stock or security selection, which is why all the public market funds I’ve listed here are passive, low-fee index funds. You’ll notice I include a number of real estate investment approaches, and while this takes a little more effort, I think you’ll find the potential returns compelling, and the effort to achieve them pretty modest – you still need to do your diligence and make sure the investment fits your criteria, but that sort of analysis is much easier than picking winning stocks. With that all said, here is a menu of investment options for consideration:
The two things to consider are the investment yield, and expected total return. For reaching Ramen Retirement, yield is the most important factor, as the cash is readily available to cover expenses for you, while you’re off figuring out what to do with the rest of your life. Of course, you don’t want to chase yield blindly without thinking about long term returns. Fortunately, you don’t have to! Here are a few insights after looking at the data:
- Real estate is compelling: If you take a look at the data here, you’ll understand why I’m such a big fan of real estate investments for reaching Ramen Retirement, and building long term wealth. Specifically, I’m talking about owning rental real estate directly, or investing in syndicated real estate funds. Both offer compelling yields in the 8%+ range, along with total return expectations in the high teens. Those sort of returns just can’t be found in public market investments whether you’re looking at stocks, bonds or REITs. Furthermore, when you factor in the tax savings from real estate investment, it can truly be the fastest path to Ramen Retirement!
- Bonds are for bozos: Another thing I hope you’ll notice is that bonds don’t make much sense. Yields aren’t that great, and total return is much lower. Add to that the fact that bonds get crushed in inflationary environments, and they’re not a great investment vehicle to preserve and grow your passive income and wealth. We are literally at the peak of a multi-decade bond bull market. Buying bonds today sounds risky to me
- Homeownership is underrated: Last thing worth noting here is the home ownership column – I included that to illustrate that owning your own home outright can be a really good investment that is both inherently inflation protected and does wonders for reducing your risk profile. When you don’t have a ‘mortgage’ to pay every month, the freedom and flexibility that brings can be life changing. The ‘yield’ portion of the return is the comparable cost of rent for something similar in your neighborhood. The total return includes that yield along with some modest 3-5% increase in home value over time
So, to boost your passive income, I would really only consider the homeownership, or real estate investment options. Buying stocks might be okay, but yields are still only 2.9% on the high dividend yielding stocks. Compare this with the 8-10% yields you get from real estate, and you’re talking about requiring 3-4X the amount of savings invested in stocks if you want to reach Ramen Retirement. This is not to say that I don’t own stocks – I do. Quite a bit. I’ve got a whole bunch of stocks in my retirement accounts I’ve accumulated over the years, and I hold a good chunk of my after tax money in stocks too. This is good for diversification. My point though, is that if you’re trying to reach Ramen Retirement and generate passive income today, the fastest way to get there is through real estate investments.
Reaching Ramen Retirement
If you find you’ve reached Ramen Retirement, that’s really just the beginning of your journey. The goal is not to spend the rest of your days on a beach or playing backgammon. The goal is to free up your time and energy so you can discover and share your gift with the world. Pursue one of your passions and go deep. Dial up your risk profile and start that business you’ve been dreaming of, write that screenplay, or produce that song that’s been bouncing around your head for years. Whatever it is you choose to do, do it with energy and passion. If you’re stuck on what to do next, just take the free time and space to find which things you gravitate towards. If you had a Saturday afternoon all to yourself, what would you do? Somewhere in there is probably something you’re uniquely good at and interested in, and that’s as good a place as any to search for the gift you have to offer to the world.
Reaching Ramen retirement will be an inflection point in your life. After that, you have much more power to say no to the things you don’t want in life. You can go on offense. In doing this, I think you’ll find yourself doing the best work of your life and uncovering opportunities you would never have found. After reaching Ramen Retirement, you can bet on yourself and capture the upside of your efforts, helping to realize your dreams and have a greater impact.
If it seems like Ramen Retirement is still a long way off, don’t get discouraged. Get motivated. You’re in the right place and asking the right questions. The rest of this site is dedicated to helping you find your own path to Ramen Retirement. Bounce around from post to post, check out the most interesting topics, or follow the navigation links at the top to walk through the different stages of the journey and figure out which one is most relevant to you. The broad strokes focus on:
- Investing in yourself
- Building your wealth
- Making your money work for you
… and then… using your new found free time and resources to discover your gift and share it with the world – take the risks you couldn’t or wouldn’t before, pursue things you’re passionate about, while living an honest, authentic life
Take a read, share your thoughts, and remember – enjoy the journey!