Our 2016 Passive Income Report: Dividends Leading the Way!

Welcome to our first-ever passive income report! This report is designed to measure our progress towards reaching financial independence and being able to retire early.

That’s our ultimate financial dream: to retire early and live off of passive income for the rest of our lives.

To reach financial independence, our goal is to accumulate 25x our projected annual spending in income-producing assets. Then, we can expect to withdraw 3-4% from those assets to cover our expenses in forms of passive income.

These streams of passive income will do the hard work for us. We’ll have the option to retire from our corporate jobs and concentrate more on living a happy life, one without alarm clocks and going from meetings to meetings all day. Our goal is to be able to buy our time back and every day that passes by gets us closer to the finish line.

Aside from the fact that we’re learning as we go, we hope that this can inspire you to reach your financial independence goals as well as pursue an early retirement if you desire.

We’re going to unveil our numbers but remember that at the end of the day, it’s not about how much we’re making but how much we get to keep. We hope that by showing you how we’re making our “sauce”, you get an idea of what might or might not work for you in reaching financial independence.

Classifying Passive Income

Before we dive into the numbers, it’s good to point out that the Internal Revenue Service categorizes income into three broad types: active (earned) income, passive (unearned) income, and portfolio income. For the purpose of these reports, we’ll only focus on passive and portfolio income as classified by the IRS rules.

We also left the real estate income from our rental property out of this report, since we reported that income as part of our housing expenses last year.

A note on portfolio income

Types of portfolio income

We get income from our portfolio in two ways: through dividends and capital gains when we sell at a profit.

Last year, we decided to sell some of our mutual funds and allocate that money into short-term reserves since we are building the stash needed to fund our first five years of early retirement.

As a result, we incurred some capital gains and will need to pay taxes on that. We’re not in the game of timing the market, so we only sell if our plans change and we need to reallocate our assets accordingly to meet our investment strategy.

Taxes on portfolio income

Taxes on capital gains are paid during the income tax year that investments are realized (sold). However, taxes on dividends are reported and paid for on the income tax year they are distributed, even if they are reinvested.

Our Passive Income Streams

Passive Income StreamAmountComments
Credit Card Rewards$395Tatiana manages the credit card rewards programs.
Dividends$12,201Index fund investments (mostly 401(k)s)
Interest  $833  Savings/CDs
Long-Term Capital Gains (realized)$7,319Index fund investments
Short-Term Capital Gains (realized) $330Index fund investments
Total PI for 2015 $21,078 

Our passive income streams covered 66% percent of our living expenses from last year. The goal is to reach 100%, which would mean that our passive income streams could cover all of our living expenses, and we would officially be financially independent!

2016 passive income

Building passive income streams is the way to go if you want the freedom to use your time as you please. We’re looking to obtain the biggest luxury item that money can buy: time   

A closer look at our dividend income

One thing about investing is that you have to start somewhere. All it takes is the discipline to start saving, then continue that journey and let the snowballing effect take place.

Tatiana and I didn’t have much when we came to the United States. We arrived right before our teenage years and I didn’t know a word of English. We had to work hard to get to where we are.

We started investing around the same time before we met. I re-entered the corporate world in 2006 after trying the entrepreneurial path and she started working a year later, right after college. This is the first time that we looked at our investments to track all the dividends since the beginning of time.

The graph below reflects our commitment to continue saving and investing. Notice the upward trend that started to take place in 2011-12. That’s after we met, and I started to pay off all debt, leave the spending path behind, and we both started maxing our 401(k)s to get on a path drenched in true happiness.


Hey, your plan sounds great but how would you tap into your 401(k) plans funds after early retirement?

You can’t touch that until you’re 59.5 years old, you know!

There are ways to tap into your 401k assets early without penalties. Keep following our journey and see how it will all unfold!

How was 2015 for you? What passive income streams are you building this year?


José worked at Vanguard for 12 years, helping create electronic and print educational materials for 401(k) participants. He retired at 44 from corporate America and loves to spend time with his wife and daughter, discovering new adventures or just sharing a meal in their backyard.

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