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This story begins in 1997. I was a professional musician, age twenty-seven. I was making a full-time living just playing music—playing lots of gigs around the U.S. and Europe, producing people’s records, playing on people’s records, and running a little recording studio.I was even the musician and MC for a circus.

My bank account was always low, but never empty. I made enough money to buy a house in Woodstock, New York.I was living a musician’s dream.

The above paragraph is from the book Anything you want by Derek Sivers page4. As for the bold sentence in the paragraph, I'm not sure how to understand its meaning is the more appropriate way.

1, That means that the author was living a life which he dreamed of his being a musician.

2, It means that the author's dream of being a musician had come true already.

Which one of my understanding is correct？Or they may be all wrong.

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Your first guess is close, but not quite there.

"A musician's dream" means "the ideal life that a musician would want to have". If you were a musician, what would you want your life to entail? It would mean you would play lots of music, help other people with their music, etc. - exactly what the author states in the first paragraph that you quoted.

It's not what that particular person had dreamed of being in the past - in that case, they would have said "I was living the life I had dreamed."

"Living a profession's dream" means "living the ideal life of a profession."

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