I’ve been procrastinating on updating my income target goals but I finally decided to get it done. What are the numbers? Read on to find out!
Making predictions of future income growth is hard; especially when not only are dividend amounts increasing but there’s a variable amount of new capital being added through the year. Purchases made early in the year will also have much more impact on yearly income than those made towards the end.
And the longer the timeframe of predictions, the more inaccurate any projection is likely to be. So I decided to plot out a conservative / realistic growth estimate showing what I need to do to achieve Financial Independence by the age 65.
And here it is, including my progress as of last year in red.
The upper gray line represents current yearly living expenses based on my Budget. I reduced spending last year, but keeping a lid on it is getting hard as I’ve incurred a number of medical expenses this year. So I’ve projected a 2% annual increase going forward. On the other hand my income has increased more than 2% a year so that’s not necessarily a bad thing.
The black line represents my yearly target; it’s calculated by using an estimated 3.5% yield based on estimated portfolio value after new contributions and capital growth. I’m confident on being able to add $24,000 per year and will adjust that 2% each year. As for capital growth I’ve estimated 6% although the last two years have been under that level. Maybe 2016 will reverse the trend. In reality, I’ve been able to add more than the $24,000 estimate in previous years so a lower capital growth hasn’t really had much effect.
You could also calculate the projected income based on dividend income and expected dividend growth. I prefer to use total market value and calculate income as a percentage of that.
The chart makes visible the two levers of Financial Independence – Income (in black) and Expenses (gray). Lowering Expenses moves FI that much closer.
You can find the actual numbers on my Goals page; but here’s a summary of the progress so far.
Higher contributions in 2012-2015 were mostly from existing money being re-purposed for my Income Fund, plus work-related bonuses that I don’t assume to receive.
I calculated the actual growth value as the difference between the market value and the prior year’s total + change in cost basis.
The minimum goal
Here are the projections for last year and next year.
I beat my original 2015 target dividend income quite comfortably with end of year income of $6,792 vs a target of $5,850. That means I have a big head-start to meet the original 2016 target of $7,020.
However I decided to aim higher and go for 2.0x my monthly income as a stretch goal – this would be $7,800 or an increase of $1,000 over my 2015 income. I think this result is achievable based on my estimated dividend payments this year.
I’ve updated the blue sidebar on the blog with the new target and status information as of February 2016.
Why an income target can be bad
One of the things I don’t like about setting a particular dollar amount as a goal is that it can lead to chasing yield in order to meet that goal. I’m using this number only to track my progress towards Financial Independence; it’s not something that must be beaten at all costs. If I achieve the minimum goal of $7,020 then I’m on track for FI at age 65.
On the other hand, If I beat the target, then I’ll be reaching my FI date earlier than planned which is my real goal since I’m contributing all spare money to my Income Fund. I fully expect to be able to reach the FI cross-over point before I’m 65; I just don’t know how much sooner it’d be at this point. But I like keeping the original target values to (hopefully) see how much I over-achieved rather than continually re-adjusting the plan.
Quote of the Day
I try not to get involved in the business of prediction. It’s a quick way to look like an idiot.