Passive Income Goal Calculator

The two numbers that define a passive income goal

Capital needed is the target monthly income multiplied by twelve, divided by the yield. That is the whole calculation. A 5,000 monthly target at a 4% yield needs 1.5 million; the same target at 8% needs 750,000; at 3% it needs 2 million. Halving the yield doubles the capital, which is why the yield box deserves more thought than the income box. Most people know what they want to spend. Very few know, with evidence, what their portfolio will actually pay them.

Yield is an input, not a fact

This calculator deliberately holds no yield data. Published yields move with interest rates, valuations and credit conditions, so any figure printed here would be wrong within a year or two. The place to find a defensible number is the factsheet of the fund or asset you actually hold, which states its current distribution yield, and for property the net yield after maintenance, letting costs and vacancy rather than the gross figure on the listing. For a longer view, the Rate of Return on Everything dataset covers total returns on equities, housing, bonds and bills across 16 advanced economies from 1870 to 2015, which is the sort of evidence base a long-horizon assumption needs. Note that total return is not the same thing as yield: a large part of equity return arrives as price growth you would have to sell to spend.

Where the 4% figure comes from, and why it is not a yield

The familiar 4% safe withdrawal rate comes from retirement studies that allowed the portfolio to be sold down over a fixed horizon, usually 30 years, with the balance permitted to run low at the end. This calculator does something different: it assumes capital is untouched and only income is spent, which is a stricter test. A portfolio can support a 4% withdrawal made partly from sales while yielding far less than 4% in distributions. Entering 4% here says the assets themselves pay out 4%, which is a claim about what you hold rather than a rule of thumb about drawdown. Withdrawal-rate research is also drawn largely from a small number of long-running markets, and results are weaker across a broader set of countries, so treating any single percentage as universal overstates what the evidence supports.

Worked example

Target 3,000 a month, current capital 200,000, yield 4%. The annual target is 36,000, so capital needed is 36,000 divided by 0.04, which is 900,000, leaving a gap of 700,000. The existing 200,000 throws off 200,000 x 4% / 12, or 667 a month, covering 22% of the goal. Moving the yield assumption to 3% pushes the requirement to 1.2 million; moving it to 6% drops it to 600,000. That spread, 600,000 to 1.2 million for the same lifestyle, is the honest measure of how much the yield assumption is carrying.

Inflation moves the target while you are aiming at it

A 5,000 monthly target in today's money is not 5,000 in twenty years. At 3% inflation the same purchasing power costs about 9,030 a month by year twenty, and 5,000 by then buys what roughly 2,770 buys now, a loss of about 45%. Two ways of handling that both work: state the target in future money and use a nominal yield, or state it in today's money and use a real yield, meaning the nominal yield minus inflation. Mixing the two, a target in today's money against a nominal yield, understates the capital needed. A 6% nominal yield at 3% inflation is a real yield of about 2.9%.

What the calculator leaves out

Tax comes first. Investment income is often taxable at ordinary rates outside sheltered accounts, and 36,000 of gross income at a 25% marginal rate is 27,000 in hand. Grossing back up to a 27,000 net target means 48,000 of gross income and 1.2 million of capital, a third more than the headline figure. Then there is what the model cannot see at all: a poor sequence of returns early on, reinvestment risk when today's yield is not available in five years, concentration in one high-yielding holding, and the pull the arithmetic itself exerts. Campbell and Sigalov show that imposing a sustainable spending target leads investors to reach for yield, taking more risk precisely when safe rates fall, which is the behaviour this calculator can quietly encourage if the yield box is treated as a dial rather than an assumption to be justified.