Money makes the world go round, or so we’re told.
For many, what they earn dictates what they spend. As mentioned in Part 2 of this series, our spending didn’t really change even though we earned less than usual. Perhaps we’re not as good at this financial independence thing as we first thought!
But how much exactly did we earn? Let’s take a look.
For the purposes of review, I have split our income into two categories: work income and investment income. Both play a part in our overall picture and both provide good information going forward. Fair warning, there are quite a few charts in this post so if that’s not your bag, perhaps skip this post.
Work Income
In 2021, Poopsie remained a full time employee for the federal government. In 2022, he has moved into the private sector so his earning picture will look different this year (reduced superannuation contributions for one). His 2021 income was the same as always – possibly he had a slight pay rise, but certainly nothing that we noticed each fortnight.
I semi-retired in 2021 and spent the first six months earning no income. In January, I was on leave so received some income plus about $4000 in paid out l0ng-service leave. Certainly nothing to sneeze at but definitely not equal to what I’d usually have earned being employed for six months. In July, I commenced contract work for my former employer. Like most contractors in Canberra, this attracts a “daily rate”. I am only paid for the days I work, not for any sick leave or holidays. I had originally planned to work 3 days a week which in the six month period I worked should have been approximately 78 days. As it turns out, I only worked around 55 days.
My goal for my contract work was to earn enough money to pay our mortgage interest. Did I achieve that in my six months of part time work? Yes! Easily in fact with around $7k left over for other spending. Not too bad considering most years I will probably work the entire year (or will I?).
So with me working part time for only half the year, how did our income compare to 2020?
I’ve deleted the axis information as we don’t share our income, but this gives you an indication of our reduced income between 2020 and 2021. For context, our work income dropped by approximately 30%. I didn’t really do any sums on this prior to semi-retiring but I would have expected a larger dip. Considering I only worked 55 days for the year, this is pretty good. It also makes me think I could work even less in 2022 (more to come on that in Part 4).
Did our work income cover our expenses? Of course, in fact we even managed to save 9% of our work income. We are happy with this!
Investment Income
Like everyone in the financial independence community, we are investing for our retirement. We have almost always invested in index funds through Vanguard. For most of our investing journey, our dividends have been fully reinvested. However, at the beginning of 2021, I changed this so that dividends are paid directly into our bank account. I did this because I was unsure how my income would look for the year but also because soon we hope to use these dividends for our spending (as we won’t have jobs) so no time like the present to have them paid to us. All of these dividends were reinvested into the sharemarket by me, but not all of them went into index funds.
In 2021, I dabbled with some share trading. I did this with the help of a friend for some of those trades and others I did by myself. I came away with some decent profits, but that is mostly luck. I still think index funds are the best way to invest however, I think I will continue doing some trading with 10-15% of our portfolio. I enjoyed it and I learned a lot. If I was to lose all of the money I am trading with, I’d be very disappointed but it wouldn’t have a particularly big impact on our fiscal position. Some of the trades I made in 2021 are down but I’m sitting on those so haven’t realised a loss. So the trading earnings probably don’t paint a full picture but I’m not going to include the losses yet as they are currently just on paper and at least for most of them, I’m confident they will go back up (famous last words). These losses are reflected in our net worth calculations each month but I am only reporting investment income here.
Here are our three incomes for 2021:
And here it is with our investment income combined:
Even though you can’t see the axis information, it’s clear that the gap between our work income and investment income is a lot more than our 9% savings rate. Therefore, our investment income does not cover our spending. So how can we retire early? Well semi-retirement means we will still be earning income, so this isn’t too disappointing but there is more to our overall financial picture than is clear.
We have two large expenses that we don’t intend to have in early retirement: child support and mortgage interest. Child support ends in approximately two years time and we will not fully retire until our mortgage is paid off. We may both semi-retire before our mortgage is paid off, this is still something we are discussing.
So how does our investment income compare to our spending excluding child support and our mortgage interest?
Though it’s only slight, our investment income for 2021 covered our 2021 expenses excluding child support and mortgage interest. We were thrilled.
Is this repeatable? Well perhaps not. Dividends could go down and I may not be as successful in my trading in 2022. For these reasons, we are not ready to fully retire. Plus, we still have to pay both child support and our mortgage in the interim.
We are discussing our options at the moment. Some of the things we are discussing are paying off the mortgage asap, building up our investment income so it covers our mortgage and when Poopsie should also semi-retire. It’s also worth noting that we never necessarily planned to only live off of our dividends. We expected to draw down capital as well in line with the 4% rule. We go back and forth on all of these topics a lot and I’m not sure when we will come to decisions on them.
But in the meantime, life is very good. Our investments are doing exactly what we want them to be doing (covering our spending) but because we’re still earning work income, for now they’re reinvested and continuing to grow. We are in a great financial position and we’re very grateful for that and realise how privileged we are. We don’t take that for granted and we’re excited about the freedom and opportunities this position gives us.
Do you have any questions about our 2021 income? How do you think our early retirement journey is going based on the information we’ve shared here? Share in the comments below!
