8 Helpful Insights: What Does Living off Investments Day to Day Mean?

8 Helpful Insights: What Does Living off Investments Day to Day Mean?

In a world that's quickly moving to all things digital, using the stock market to your advantage can be a significant benefit when paying your monthly bills.

Living off Investments
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Living off Investments requires you to leverage mutual funds, bonds, and equities to your advantage, helping you sustain your bank account or allow you to accomplish some non-bill-related goals you've set.

Knowing how to take full advantage of the markets, which are currently bearish and great for short-term investors, is the first step in creating a day-to-day financial plan for you and your family. Here are some of our favorite ways to live off your investment portfolio.

1. Rule of 100

The idea behind the rule of 100 is that, as an investor, you should hold a percentage of your investment portfolio in stocks based on your age.

You subtract your age from 100, giving you the percentage of stocks that should be part of your investment strategy.

This concept works well for creating a diversified investment plan to keep you flush without jeopardizing all your investments if the market has a bad day or your stocks suffer a loss.

2. Dividends

A dividend is the distribution of a company's earnings allocated to shareholders. Determined by the company's board of directors, these payouts can be withdrawn in cash or reinvested in additional stock.

As one investor found out, however, reinvesting can sometimes cost you more. After several rounds of reinvesting their dividends, this person discovered that they had a higher tax bill and learned a ‘valuable lesson.' They recommend spending the dividends first before selling off stock if you still need funds.

3. 4% Rule

While recommended for your first year of retirement, this rule states that you should be able to live off of 4% of your investments each month for that first year.

Then you'd increase or decrease that percentage based on inflation and how the markets are fairing. So if markets are doing well, you withdraw a little more, and if you've had a bad year, you may take out just enough to cover your bills and then get a part-time job to cover any discretionary spending as a backup.

4. F.I.R.E.

Financial Independence, Retire Early (FI/RE). This saving model depends on living frugally and investing most of your income to be used when you eventually retire. The sooner you start implementing this investing model, the sooner you'll likely be able to retire.

There is a word of caution here, however, as one individual noted. Because this model depends very heavily on the stock market being sound, you'd need a backup plan if it didn't perform well for an extended length of time.

Relying solely on the markets to keep your income afloat only works if the markets are doing well. Instead, you'd need to consider a passive income stream or even part-time work should the markets have an extended period of volatility.

5. Bucket Strategy

One savvy investor notes that while her family's strategy is “a bit different,” it works well for them and allows her just 15 minutes of ‘money matters' planning a month.

Her system is simple. She has ‘buckets' for spending, earning, and investing. In her ‘investing' bucket or brokerage account, she and her husband have about seven years' worth of investment, which she says is about 3% of their liquid assets.

They have about five years' worth in a mutual fund or their ‘spend' account. And about three years in a bond fund.

Splitting their assets like this allows them to move money where and when needed and still have a “smooth money” process that works well for their family.

6. Passive Income

Instead of stocks, one person uses rental real estate to fund what their family uses. At $5500 each, this person uses two L.L.C. companies that transfer the money directly to their bank account.

One nice thing about passive rental income is that even though this would be much like a monthly paycheck, passive income is rarely taxable.

The L.L.C. angle might change that, but the tax break is a huge benefit for most people using a passive income stream, especially when discussing retirement or day-to-day living from investments.

7. Annual Payouts Over Monthly

One investor likes taking care of everything upfront, including dividends and taxable accounts. This individual gets those ‘out of the way' first and then uses a “cash ladder” system to either reinvest in the bond market or rebalance their portfolio to have some extra cash.

At retirement, this person intends to switch to their Social Security benefit, an excellent pension fund, and some set aside annuities, making their ‘cash-on-hand' issue “less of a thing.”

8. To Reinvest or Not to Reinvest

Reinvesting your dividends can seem like a cut-and-dried decision. For one person, however, it turned into a hassle.

Because dividends can be taxed, this person found that they opened themselves up to higher taxes by setting their dividends to reinvest automatically.

After turning their automatic reinvestments off, their taxes decreased, and their investments became more predictable.

Risk Vs. Reward When Living Off Investments

As with any investment in the stock market, give enough weight to market fluctuations, and while you can make serious gains, there's just as much chance that you can lose money as well. These insights will give you more information to make meaningful investment choices for your retirement.

This thread inspired this post.