This is a guest post from Pauline of InvestmentZen.com
When it comes to planning for retirement, two things are sure: you need a lot of money, and in old age, you don’t want to have to work for it. So how can you build a passive income portfolio that will make you live your golden years in financial peace?
Retirement income from your business
If you started a business, be it online or offline, come retirement you have a few options. You can sell your company, and receive a lump sum. That is assuming your company has intrinsic value without you operating it. And entry barriers are high enough that someone who wants in is better off buying your business than building their own from scratch. You can then invest that money and receive interest and dividends to live off in retirement. The risk being if it doesn’t sell for a while, you would need another source of income.
Another option would be to keep your business, but retire from operations. You will need someone you trust to manage it, and that person’s salary will reduce the money paid out to you every month. If the board decides to reinvest all profits one year, you may not receive anything. And you would still be somehow involved in the company, even though you are not working there every day. We are not talking about a fully passive solution. But having a monthly income from your business is a good way to keep it going, and if it grows, so will your monthly check, and its value if you decide to sell later on.
Retirement income from rental property
Being a landlord is a romantic dream for many. If you invest early, with a 25 or 30 year mortgage, by the time you retire, the property is paid off and you just need to collect rent. Right? Well, it’s not that simple. If you can afford to hire a property manager, most of the maintenance and tenant turnover headaches will be taken care of, but you’ll still need to do your taxes, and liaise with the manager once in a while.
If you manage the property yourself, it will need repairs at some point, tenants will leave, some might cause trouble,… it can get stressful. Rental properties are great because there are many ways to make money when you buy a rental. You can renovate the place and earn instant equity. You can sell it 10 years from now and make a profit. You can get a positive cash flow and a monthly stream of income. But it takes a lot of work to look for a property that will appreciate and cash flow nicely. If you want a passive source of income, investing might be a better option.
Retirement income from investments
Investing can be as active or passive as you make it. But many studies have shown that you should make it passive rather than active. Why? Because we are human. We get emotional, we make mistakes, and we can end up picking the wrong stocks time and time again. Worse, we can stay too long with a losing position, or exit a profitable trade too early. Having a look daily at your brokerage account can be a recipe for disaster. I read a study from a broker saying their most profitable accounts were those of people who had forgotten about their accounts, and left them dormant for years,… or had passed away.
Warren Buffet has been known to prove that most actively managed funds do not offer better returns than the S&P500. The index has returned over 8% on average during the past 30 years. That is pretty solid, and pretty hard to beat. So unless you are a hardcore fan of charts and love reading financial reports every morning with breakfast, why not leave the markets do their things and do your part by saving hard and investing every penny you can spare?
Pick a low fee broker, invest regularly in order to dollar cost average your position, and spread your money over a few different index funds. Yes, it is boring. There will be no thrill like if you had picked Tesla some years ago. But for every Tesla trade, how many losing trades would you have done, investing in shiny startups that would not last two years?
Aside from index funds, you can pick a few dividend stocks, always sticking to what you know. What products do you use every day? Coca Cola, Mc Donald’s, Procter & Gamble,… are a few examples. They are represented in index funds, but you can always buy a few more specific stocks if you like that particular company. That would take us away from passive investing, which is the whole point of the story. But it is a safer bet than penny stocks.
What is your passive income plan for retirement?