Is it Actually Possible to Live off your Investments?

We’re all familiar with rentiers; the obscure term for someone who meets their financial needs from the interest, dividends or rental income they earn from their assets.

In previous centuries, this described the aristocracy. The ‘landed gentry’, as they were also known, owned vast swathes of land. They converted this into income by leasing it to farmers and residents. This provided a substantial passive income that enabled them to finance their grand stately homes and teams of servants.

In the modern era, the typical rentier looks a little different. You need to look no further than the retired community to see rentiers in the real world.

Not all pensioners are living off their assets successfully – many scrape by using the £185.15 weekly payment from the new State Pension. In fact, the trend is that more and more pensioners are dependent on the state handout to cover their basic essentials.

However, many retirees (including all early retirees) are living their best lives, using just the passive returns of their investment portfolio to provide them with a monthly or quarterly installment of cash. It’s certainly possible for you, and in this article we’ll explain how you can go about becoming a rentier yourself!

How to live off your investments

There are three steps to becoming financial independent:

Save the cash from income (such as employment, windfall or self-employment)
Invest the cash in a high-growth risk asset which is likely to produce higher returns over the long run than cash
Continue this process until you meet a wealth target that will produce enough passive income to more than cover your needs.

Saving cash from income

Becoming skilled at saving your money is one of the most important lifestyle tips and ticks you need to learn. The difference between mastering this skill and never giving it your attention is the difference between early retirement and potentially working into old age.

The stakes are as high as they get for any life decision; if you can find the willpower to defer gratification and invest money in your future self, you will never struggle with finances across your working life. You will be able to say ‘yes’ much more in the future and go on adventures knowing that you can fully afford them.

The best tips I can share for saving money are:

Automate the process of saving, so that you don’t rely upon constant willpower. A good hands-off approach involves setting up a direct debit to automatically transfer money into hard-to-access savings account the day after you are paid. This effectively takes the opportunity to spend it out of your hands and removes the need for internal battles of willpower.

Focus your attention on the big spends. It can be tempting to begin making tweaks and changes to your lifestyle to sacrifice consumables (e.g. by shopping at Aldi instead of M&S) to see immediate savings. These are important, but all of the big wins will come from your big-ticket items such as your house, vehicle and holiday choices. The great thing about big-ticket savings is that you only have to make a cost-conscious choice once, and the savings (such as lower rent or mortgage payments) will continue indefinitely, giving you a saving every month.

Invest the cash in high-growth risk assets

If you have a high-enough income, it’s entirely possible to save for your future using only a bank account. The issue is that it will take you much longer to get there. So much so that your success date may be way past the state retirement age.

Saving for retirement in cash makes life harder in two ways:

Your savings will grow at a slower rate, and therefore it will take longer to hit your savings goal

Your savings goal will need to be set much higher because interest rates are so low, that you need vastly more cash to produce the same income as a smaller investment portfolio.

That’s why all savvy retirement investors use a combination of equities and bonds whilst moving through their careers. There’s no need to become an expert before you begin – you can buy ‘all-in-one’ pension funds suggested by your employer as the default strategy for your workplace pension. Alternatively, if you’re setting up a UK stockbroker account yourself, you can seek independent financial advice on what to buy.

Wait until you hit your target passive income

Knowing when to stop is one of the most subjective parts of becoming financially independent. At what point can you truly feel comfortable in living purely off the interest, dividends and rent from your investments?

There is no hard-and-fast rule because nobody can predict the future. A number of factors could plague your income after you retire; dividend and interest rates could fall in an economic recession, cutting into your cash returns.

Therefore, smart savers will be aiming to have a ‘buffer’ above what they strictly need, to protect against income reductions or increases in the cost of living. Some people may be happy with just a 10% buffer, while others may only sleep at night knowing they have double what they need. It’s entirely a personal choice because everyone handles risk differently.

That is a quick overview of how you can live off your assets within your lifetime. It’s an exciting prospect that opens the door to you spending time exclusively on hobbies, trips and loved ones. Will you be able to manage all three steps?