Generating Passive Income in Retirement

Generating Passive Income in Retirement

April 17, 2023

The key to being able to enjoy freedom and comfort in retirement is to have a strategy to develop passive streams of income - and then implement this strategy intelligently.

Retirement should be a time of relaxation and enjoyment, free from financial worry. Many retirees, however, find themselves struggling to maintain their desired lifestyle on a fixed income. 

Preparing for retirement has become more demanding, given the increased risks and rising costs associated with healthcare, housing, and long-term care. As a result, retirees may need to seek other sources of income to supplement their retirement savings.

One solution that retirees turn to is generating passive income. Passive income can be an excellent way to earn money without working actively, providing financial security and stability during retirement. In this blog post, we will explore a variety of strategies to generate passive income in retirement, helping you achieve financial freedom and maintain a comfortable lifestyle. Here’s what you need to know.

What is Passive Income?

Generating passive income is a way to earn a steady stream of money with minimal daily effort. However, it's important to note that earning passive income is not a "get-rich-quick" scheme, as it requires some initial effort and investment. For instance, some passive income ideas such as creating a blog or an app may require significant time and financial investment at the outset. 

Nonetheless, if you take the time to establish a passive income stream, it could eventually generate income while you sleep. Some key benefits of passive income include:

  1. Financial freedom: Passive income can provide a stable and consistent stream of earnings, enabling individuals to achieve financial independence and freedom from traditional 9-to-5 jobs.

  2. Diversification of income sources: Relying on multiple sources of income can reduce financial risk, as it's less likely that all income streams will be affected simultaneously by adverse events.

  3. Time flexibility: Since passive income requires minimal ongoing effort, it allows individuals more time to pursue personal interests, hobbies, or other projects.

  4. Reduced stress: The financial stability provided by passive income can help alleviate stress and anxiety associated with living paycheck to paycheck.

  5. Geographic flexibility: Passive income sources often do not require physical presence, allowing individuals to work or live anywhere they choose.

  6. Building wealth: Over time, passive income can help accumulate wealth, which can be used for various purposes, such as financial security, philanthropy, or passing on to future generations.

Buying Real Estate

Owning rental properties can be an excellent way to generate passive income during retirement. As a retiree, you can purchase a rental property and rent it out to tenants, providing you with a steady stream of income. However, before diving into real estate investment, it's crucial to do your due diligence.

Firstly, it's recommended to pay off your home before purchasing an investment property with cash. Taking on debt to buy a rental property can be risky and may not be a wise financial decision during retirement. Additionally, owning a rental property requires effort and maintenance to ensure it remains a source of income.

When purchasing a rental property, it's essential to decide how you want to manage it. If you plan to manage it yourself, consider buying a property that is conveniently located for you to visit regularly. As an alternative, you can hire a property management company to handle the day-to-day operations, but this will come at an additional cost.

On the plus side, there are tax benefits to take advantage of. As a real estate investor that holds income-producing rental property, you can deduct depreciation as an expense on your taxes. That means you'll lower your taxable income and possibly reduce your tax liability. If the idea of being a part-time landlord doesn't interest you, there is another option to invest in real estate that offers passive income opportunities. Real estate investment trusts (REITs).

Invest in Real Estate Investment trusts

Real estate investment trusts (REITs) allow investors to pool their money with other investors to purchase properties. In essence, it's a mutual fund that invests in real estate instead of stocks.

REITs can be a good investment option for seasoned investors. However, if you're just starting, it's advisable to focus on building your wealth before investing in REITs. Although there are some reliable REITs in the market, there are still many that use debt to purchase properties, which increases the risk for investors.

It's crucial to seek advice from an investment professional, such as a Fiduciary Advisor, before investing in REITs. They can help you assess the risks and determine whether investing in REITs aligns with your financial goals and overall investment strategy. By working with a financial professional, you can make informed decisions and potentially generate passive income through real estate investing.

Take Advantage of High-Yield Savings Accounts

Aside from rental properties and REITs, there are other ways retirees can generate passive income. One such way is through high-yield savings accounts, which can help reach short-term financial goals and provide a source of passive income.

Many online banks and financial institutions offer savings accounts and money market accounts with annual percentage yields (APYs) ranging from 3-4%. This yield is significantly higher than the national average for savings accounts, which is only 0.37% as of March 2023 (according to the Federal Deposit Insurance Corporation (FDIC).

Online banks can offer higher rates due to their lower overhead costs compared to traditional brick-and-mortar banks. For instance, if you have a fully funded emergency fund of $25,000 in a savings account or money market account with a 4% APY, you can earn $1,000 in interest growth over the next year without doing anything. The more you save, the more interest you can earn.

It's crucial to compare rates and terms of different savings accounts and money market accounts and choose one that aligns with your financial goals and needs. While high-yield savings accounts may not provide as much passive income as rental properties or REITs, they offer a lower-risk and hassle-free option for retirees looking to generate additional income.

Invest in Dividend Stocks

Dividend-paying stocks are another excellent way to generate passive income. Many companies pay dividends to their shareholders, which can provide you with a regular source of income. Dividends are paid per share of stock, so owning more shares can result in higher payouts. 

However, selecting the right stocks can be tricky, and that's where an experienced Fiduciary Advisor can provide valuable guidance. They can help you find exchange-traded funds (ETFs) and mutual funds that align with your investment objectives. ETFs are a great option because they're easy to understand, liquid, and typically less expensive than mutual funds. 

By working with a Fiduciary Advisor, you can choose the right dividend-yielding stocks to help generate passive income with minimal effort.

  1. Peer-to-Peer Lending: Peer-to-peer lending platforms connect borrowers with individual investors who are willing to lend money at a specified interest rate. As an investor, you can diversify your investments across multiple loans, thereby reducing risk while generating a steady stream of passive income through interest payments. Keep in mind that there is still the risk of borrower default, so it's essential to carefully evaluate each loan and diversify your investments.

  2. Annuities: Annuities are insurance products that can provide a guaranteed income stream for a specified period or for life. While annuities can be complex and may not be suitable for everyone, they can provide retirees with a steady and predictable source of income that is not dependent on market fluctuations. However, not all annuities are created equal. For example, variable annuities typically lack liquidity and can tie consumer money down with prolonged surrender penalty periods. So always speak with your financial advisor before investing time and money in annuities.

  3. Bonds: Investing in bonds can provide retirees with a relatively low-risk source of passive income. Bonds are debt instruments issued by governments or corporations that pay interest to investors over a fixed term. By holding a diversified portfolio of bonds with different maturity dates, you can generate a steady stream of interest income.

  4. Create an Online Course or Write an eBook: If you have expertise in a particular subject, consider creating an online course or writing an eBook. Platforms like Udemy, Teachable, and Amazon Kindle Direct Publishing make it easy to create, publish, and sell your work. Once your course or eBook is created, it can generate passive income for years to come with minimal ongoing effort.

Remember, passive income isn't "free money" nor is it "risk-free". Every move you make with your money has risk involved, so once again, always consult with your financial advisor before making passive income moves. 

Final Thoughts

Generating passive income in retirement can help you maintain your desired lifestyle and achieve financial freedom. By diversifying your investments and exploring various income-generating opportunities, you can help create multiple streams of passive income that will support you throughout your retirement years. 

At Agemy Financial Strategies, our Fiduciary Advisors can work with you to create a tailored game plan that aligns with your financial goals. Having a Fiduciary by your side can help ensure that your needs are met on your road to retirement and beyond. By working with us, you can make informed decisions and help create a secure financial future for you and your family.

If you're ready to start the conversation, get in touch with us here today to schedule your complimentary consultation.