I think every working soul dreams about making passive income. For years, we grind away at our day jobs, contemplating the days when we can be on the beach with our nice retirement checks coming in. “Life will be great,” we tell ourselves.
When the workforce moved away from pension plans and into defined contribution (401k) style retirement plans, it put our futures square into our hands. Most of us did not know how to plan for this future.
Enter the 401k to save the day. If we can tuck money into our 401K’s, we will be fine— won’t we? Well, the true answer is- kind of. For all the ease of getting money into our 401K plans, figuring out how to take it out is much more complex.
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You see, when you have a huge lump of cash, let’s say $1 million, sitting in an account at age 60, you now have to decide how to liquidate your savings. The idea is to take only enough out so that the rest can keep earning for you in the stock market. The amount tends to be 4% annually— hence the 4% rule you may have heard about when reading financial material.
Using the 4% rule, our $1 million will net us $40,000 a year. So not too bad. Then at age 66, we can request our social security checks. If our monthly social security check is $2,500, we could be looking at $5,833/month of passive income.
$6,000/month is not a bad haul at all. My wife and I could live off this reasonably easily. Now, to address the elephant in the room. Most Americans will have nowhere near $1 million in their 401K, even with employer matching. Most Americans are going into retirement age closer to the $100,000-$200,000 range in 401Ks.
The 4% is not perfect either. Remember, your 401K trades on the stock market. The mechanism that made you huge gains, compound interest, works against you when withdrawing. When you are accumulating cash, dollar cost averaging buys more shares when the share price is down. However, when you withdraw your $40,000 in a down market, you will have to sell more shares to receive the same amount of cash. When the market recovers, you will have fewer shares to enjoy the growth of the share price.
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It will only take one or two years, like 2009 or 2020 (if you withdrew in March), to put a permanent hurting on your 401k accounts. On top of all this, social security is still an unknown factor. I believe that it will still be present when I retire (I am currently 40 years old); however, in what form?
This information is a lot to take in, and the conclusion is that no matter what, you will need financial education to survive. If you need financial education at some point, you may as well start learning now. The number one concept that everyone should understand is passive income.
Yes, passive income is a concept, not a noun. We realize the idea of passive income via knowledge and hard work. Passive income does not just create itself; you have to build something with the end goal of receiving passive income from your creation.
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Passive income is the notion of building, creating or purchasing assets that will pay you money any time of the day or night. While obtaining the investment, you are working hard to best position the asset for future returns. Once the acquisition is performing, you move into more of a maintenance role. Let’s take a look at some of the types of assets that can produce passive income.
Passive Income from Retirement Planning. This category would include income from military pensions, 401K, Roth IRAs, traditional IRAs, Social Security, and disability. Once you have these coming in, they should pretty much be hands-off. Most people only operate in this sector for their retirement.
Passive Income from Investments. This category includes dividends from dividend-paying stocks, capital gains from growth stocks and index funds, and interest from bonds. Going deeper, you can use individual stocks, REITs, MLPs, BDCs, closed-end funds, municipal bond funds, ETFs, and preferred shares to fill out your portfolio. That is not even including options trading and commodities.
Passive Income from Real Estate. This category includes everyone’s favorite rental income. You can build rental income from single-family housing, multi-family, commercial, self-storage, farmland, raw land, etc. However, real estate also includes other methods to receive passive income, including real estate notes, tax lien certificates, hard money lending, private money lending, and raw land sales.
Passive Income from Business. This category is very diverse, so that I will plug just a few. The most passive of business income is royalties. Royalties are income from a creative product (or invention) that you release into the world— this can be a book, blog, music, or video. Once you have astable of products, you can build a following that purchases your products.
Business income also income residual business income. Residual business income means you own a business run by someone else. You are the owner and receive profits. The company can be automated, out-souced, or out-managed. The idea is to put everything into motion and slowly turn it over to a competent authority.
Why is passive income necessary? Passive income allows you to take control of your financial future. You can control how much you make, how many assets you hold, and how much time you spend managing or creating your passive income streams. Your mindset shifts from “how much total money do I need in my retirement account?” to “how much money do I want my assets to produce?”
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Okay, Okay, how are you making $50/day in passive income? Sorry, I had to explain the world of passive income before telling you how we make this amount in passive income. We exactly make a lot more than this— I am just sharing one of our income streams. People who have read my content before know that my favorite income stream is… wait for it…. Renting rooms!
My wife and I bought a home in 2020 that had two huge, luxury master suites. One has an enormous rain shower that can hold at least eight people. Don’t ask me why they made it that big. The other has a ton of charming windows overseeing our wooded three acres. Don’t get me wrong; we would love to live in these rooms one day. But today is not the day. Today, we earn passive income that will fund our lifestyle in retirement and more.
We rent each room for $800/month. That equals a total of $1600/month free and clear. It may not seem like much, but let me tell you, this is money that can make you rich. I am talking about becoming rich extremely fast.
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$1600 divided by 30 days equals $53 a day. Can you imagine waking up and someone giving you $53? Well, that is what receiving this money feels like. It never gets old receiving a nice handful of $800 cash. We have used this money to build our empire. All this money goes directly into the stock market to purchase dividend-paying stocks.
Dividend-paying stocks and other securities will allow us to be utterly passive throughout retirement. So when we decide to move back into our master suites, we still have passive income coming into our pockets.
Did I mention that renting rooms was only one form of our passive income streams? Yes, there are even more. However, this article is running long. I wanted to give everyone an idea of why passive income is essential and how they could start, literally today, building passive income streams. For us, looking at our investment account go from $850 two years ago to $100,000 today is proof that these methods work. Plus, the freedom that this has allowed us is incredible, and it has made us even closer as a couple. We are indeed a power couple. Hopefully, this provided some value to you.
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Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
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