It matters to understand the scale of the money needed to reach a certain passive income.
The simplest equation is
X / 4% = Y
Where
X = the yearly passive income you want.
Y = the amount of money you need to get such passive income.
4% = annual return of investment after fees and inflation. (conservative estimate)
Example
To simplify things, say you want $5,000 per month as a passive income.
1 month income = $5,000
Yearly income = $5,000 x 12 month = $60,000
→ X = $60,000
Going back to the equation:
X / 4% = Y
$60,000 / 4% = $1,500,000
→ Y = $1,500,000
Your total investment account should hold around $1,500,000 for you to receive $60,000 yearly, for it to become $5,000 monthly.
Please note that this is just an indicator. It is not fixed of course and yearly returns differ depending on the economic situation at the time.
Why 4%
This is all assuming you are invested in a low cost index fund. For example, the average return of the S&P 500 is 8% a year. But that doesn't mean you get all if the 8%.
Why you ask? There are fees and there is inflation.
Fund management fees for low cost index funds are small (less than 0.1% for some funds). But not all countries have the same opportunities. So it is a factor to consider depending on what options you have where you live.
Inflation is the origin of what is called the Four Percent Rule. Inflation is usually set at 2-3%. Through some calculations of assuming inflation after you start withdrawing, 4% is the general rule of thumb to calculate returns.
Note
4% is lately considered conservative number. Some people say 5% is fine. But now you have the equation, tweak it and see what you get.
→ What If The 4% Rule For Retirement Withdrawals is Now the 5% Rule?
The simplest equation is
X / 4% = Y
Where
X = the yearly passive income you want.
Y = the amount of money you need to get such passive income.
4% = annual return of investment after fees and inflation. (conservative estimate)
Example
To simplify things, say you want $5,000 per month as a passive income.
1 month income = $5,000
Yearly income = $5,000 x 12 month = $60,000
→ X = $60,000
Going back to the equation:
X / 4% = Y
$60,000 / 4% = $1,500,000
→ Y = $1,500,000
Your total investment account should hold around $1,500,000 for you to receive $60,000 yearly, for it to become $5,000 monthly.
Please note that this is just an indicator. It is not fixed of course and yearly returns differ depending on the economic situation at the time.
Why 4%
This is all assuming you are invested in a low cost index fund. For example, the average return of the S&P 500 is 8% a year. But that doesn't mean you get all if the 8%.
Why you ask? There are fees and there is inflation.
Fund management fees for low cost index funds are small (less than 0.1% for some funds). But not all countries have the same opportunities. So it is a factor to consider depending on what options you have where you live.
Inflation is the origin of what is called the Four Percent Rule. Inflation is usually set at 2-3%. Through some calculations of assuming inflation after you start withdrawing, 4% is the general rule of thumb to calculate returns.
Note
4% is lately considered conservative number. Some people say 5% is fine. But now you have the equation, tweak it and see what you get.
→ What If The 4% Rule For Retirement Withdrawals is Now the 5% Rule?