[CASE STUDY] Why You Should NOT Have a Side Hustle

In our last blog post, Why You SHOULD Have a Side Hustle, I laid out the case for why I personally have pursued the side hustle and why I think you should too.

However, let’s be honest here. A side hustle isn’t for everyone and I’d like to build a case for when you SHOULDN’T have one.

There’s two basic schools of thought when it comes to building wealth.

First, the side-hustle people come from the camp of creating multiple streams of income by buying assets. They usually emphasize owning businesses, real estate, or other assets to generate wealth. The idea here is that you have replacement income that can provide what you’ll need in retirement.

In contrast---  the alternative, traditional way that most financial advisors emphasize is the “piles of cash” mentality where you try and build a net worth in stocks, bonds, mutual funds, and other financial instruments. The idea here is to have $1 million or $2 million or $3 million and draw a 2% or 3% or 4% annual withdrawal rate from those assets.

The latter of these two methods can allow you to avoid a side hustle if you understand what your number is.

The Case Studies

Let me lay out 3 case studies for you.

Let’s meet Joe Blow and Dr. Jim Income and Dr. Roger Expenses.

They all want to retire by 2048 or sooner….. which one(s) could do that?

You might remember Joe from the last blog. Joe works a great white collar job at MMM. He makes good money, $120,000 pre-tax. He is saving $7,000 a year in his 401k. On top of that, he is saving another $3,000 a year in his bank accounts. His taxes are around $30,000 and his living expenses are around  $80,000 a year.

In comparison, Dr. Income is an orthopedic surgeon. He makes amazing money, $500,000 pre-tax. He is saving $100,000 a year between retirement accounts and in the bank. His taxes are $250,000 per year and his living expenses are $150,000 a year.

Finally, we have Dr. Expenses, he’s also an orthopedic surgeon. He makes amazing money, $500,000 pre-tax. He is saving $170,000 a year between retirement accounts and in the bank. His taxes are $250,000 per year and his living expenses are the same as Joe’s --- only $80,000 a year.

Now, I realize that they could be getting a 401k match. I also realize that there are taxes and rates of return on their assets and this and that. On other hand, there’s inflation.

Just bear with me, okay?

Let’s look at these simple case studies:

Case Study# 1: Joe Blow--- $120 Salary, $10k/year savings, $80k/year living expenses

Case Study# 2: Dr. Income--- $500k Salary, $100k/year savings, $150k living expenses

Case Study# 3: Dr. Expenses--- $500k Salary, $170k/year savings, $80k living expenses

So---- big tables with quite a few numbers.

Here’s the bottom line for their hopeful retirement date of 2048….

About Joe

Joe Blow only has assets of $300,000 with average living expenses of $80,000. If he starts drawing on his assets, he needs 26.6% a YEAR just to maintain his assets.

My friends--- that is NOT going to work. He needs far, far more in assets.

He’s either going to need to lower his expenses and/or increase his income.

About Dr. Income

In comparison, Dr. Income has living expenses of $150,000 and assets of $3,000,000. If he starts drawing on his assets, he only needs 5% a YEAR to maintain his assets. This sounds much more possible.

A safe withdrawal rate is generally thought to be 3% to 4% in a piles of cash mentality--- so he’s slightly above where he needs to be. He should look at lowering his living expenses in retirement to $90,000 to $120,000 to make this sustainable and able to weather various economic storms.

About Dr. Expenses

Finally, Dr. Expenses has living expenses of $80,000 and assets of $5,100,000. If he starts drawing on his assets, he only needs a mere 1.56% of his assets.

Heck, if you look 10 years earlier with retiring at 2038 with a projected $3,400,000 of assets, he only needs 2.3% on his assets. This should be sustainable!!

Final Thoughts

As I’m sure you know (but I’m forced to say it)--- these are EXAMPLES and reality is always different than a simple example.

However, the big lesson here is how LIVING EXPENSES are such a huge driver to determine when you can retire. Imagine if Joe Blow had living expenses that were $30,000 or $40,000 instead of $80,000. He’d save much more and be able to possibly retire at the age he wants.   

What do you think? Do you need a side hustle? Or are you good?

Send me an e-mail at dave@daviddenniston.com and let me know.

Material discussed is meant to provide general information and it is not to be construed as specific investment, tax, or legal advice. Individual needs vary & require consideration of your unique objectives & financial situation.

Please consult with your accountant or tax advisor for specific guidance.