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Investing in VTI for Passive Income

For the early retiree physician it’s helpful to have some money invested in a private brokerage outside of retirement accounts. Retirement accounts require a little more math and work to access before age 60 while a private brokerage is as simple as clicking a button. For those who value simplicity I would like to talk about investing in VTI.

 

Overview of an ETF

An ETF, exchange traded fund, is traded on a stock exchange – hence the name. This is unlike a mutual fund which doesn’t fluctuate in price like a stock does and cannot be bought in individual shares.

ETF can be bought and sold as easily and quickly as an individual stock. Unlike an individual stock it is made up of multiple assets such as multiple stocks or bonds.

An ETF such as VTI tracks the broad US stock market – from the small cap to large cap and from growth stocks to value stocks. By owning the VTI ETF you would be owning a weighted portion of approximately 3,600 stocks.

 

VTI’s Appeal

I’m a personal finance hobbyist. I enjoy the process of budgeting, saving, investing, minimizing taxes, and maximizing returns.

In the personal finance community, specifically the early retirement community, passive income from index funds are all the rave. And from above you can see that the VTI ETF is just a trimmed down version of an Index Fund.

I hold VTSAX in my retirement accounts which as an index fund. But an index fund, especially one held in a retirement account, is a major boner killer. VTI is sexy – you can trade it like an individual stock.

Why VTI?

I’m only choosing VTI because it’s what all the other big brokerage houses are modeling based on Vanguard’s success. More importantly, it’s not which ETF you hold but the characteristics of the fund:

  • what individuals assets it holds
  • its expense ratio
  • its availability
  • the quality of the company offering it

Here are some alternatives to VTI which are probably just as good if not better than:

  • SCHW by Charles Schwab
  • IWV by iShares

 

Choosing an ETF

Choosing an ETF is like choosing any other investment which is based on your risk tolerance and your expected returns.

You wouldn’t invest in real estate and hoping to turn a $100,000 property into $1,000,000. It’s more realistic to flip a home and make a 15-20% profit.

Sticking with that example, if you invested in a rental income property then you could expect an annual return of around 5% on your investment. This can vary quite a bit obviously.

With VTI you are investing in the broad US stock market – equities in particular. Just as there are expected returns in real estate investing there are expected returns in the US stock market which are estimated at somewhere around 4-9% depending on your source.

 

Buying VTI

Let’s start with your checking account where you have $15k lying around. You don’t need it for anything because you already have a buffer in your budget and you have an emergency fund.

You can transfer that money to a brokerage account such as Etrade or Fidelity or Vanguard and start investing it.

From the screenshot below you can see how easily I can type in the symbol VTI and buy 100 shares of it on my ETrade platform. Because it’s a trade done on the exchange I will have to pay $6.95 for the trade.

 

Monitoring VTI

If you are familiar with buying an individual stock then you already know how to buy, sell, and track an ETF such as VTI.

Above is a screenshot comparing 2 investments for the past 5 years – one is VTI and the other is CVS. I just picked CVS at random but you can see that they have performed differently over the years.

The same way you’d monitor your CVS stock you would monitor VTI or any other ETF you hold.

 

Buying Within a Brokerage Account

So you have a private brokerage account where you transferred your $15,000 and bought some VTI. A couple of years go by, you really want to get those ass implants and so you want to pull out some money.

Let’s say you invested $15,000 in 3/2013 and bought each share at $81 – for a total of 185 shares.

It’s now 3/2018 and each share is worth $139. Your portfolio should be sitting at around $32,538. The extra income is from the dividend yields.

Even though you didn’t invest any more money, you likely reinvested the dividends which means that those initial 185 shares are now at 234 shares.

You could sell 30 shares and you would be able to take out $4,170 to get those ass-plants. You would still be left with a portfolio value of $28,300.

 

Passive Income From VTI

The whole point of investing in an ETF such as VTI is so that you can make your money grow. This will then give you passive income which you can spend.

From the example above, if you had spent $1,000/year from your initial $15,000 VTI investment starting back in 2013 then you would still end up with a portfolio balance of $25,500 mostly because those 5 years were good years for that fund.

A $500k Portfolio

Imagine that back in 2001 you had invested $500k in VTI. What could be your passive income from such a portfolio?

During this 17-year period you could have withdrawn a gross amount of $20,000/year and still ended up with a portfolio balance of $850,000. That’s $1,700/month of passive income.

What if you decided to sell $40,000 worth of shares every year for those 17 years? You’d do fine. Your portfolio balance would end up at around $430,000. Not bad for allowing you a $3,300/month income.

 

Simplicity of Passive Income

Investing in VTI is like having a checking account – well, one that can fluctuate in value. However, buying and selling is as simple as depositing and withdrawing money.

In fact, you can automate your investing so that you buy, for example, $400/month worth of VTI. That would take your initial $15k investment to nearly $300,000 in that 17 year time span – just from investing $400/month!

When you want to withdraw money then you decide how many shares you want to sell. Once the sale goes through you’ll have money deposited inside your brokerage account which you can transfer to your checking account.

Voila! You have money in your bank to spend to your heart’s desire.

2 replies on “Investing in VTI for Passive Income”

I’m investing in VTI as well as two other vanguard ETF’s. Would it be efficient just to hold VTI, or invest in all three?

That answer requires a lot more information from you which I wouldn’t know how to gather nor what to do with. I invest in other funds besides VTI. For some VTI would be more than enough and for others it wouldn’t be right without a better asset allocation.

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