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7 Strategies to Generate Passive Income for Your Retirement Golden Years

Most people work continuously to earn income. Some even live paycheck to paycheck which causes stress and leaves no margin of error in case of an unexpected disruption to their employment or paycheck (like a recession or other economic disruption).

Of course, after a lifetime of working hard, the majority of people also hope to enjoy some time in their retirement “golden years” to travel and have time to enjoy life.  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.

Unlike many working people, the wealthy tend to have created multiple streams of income. Indeed, many of them eventually have the ability to live very comfortably on just their passive income alone.  According to some sources, sixty-five percent of multi-millionaires have at least three income streams and about one-third of them have five or more income streams, some of which are passive. 

As billionaire investor Warren Buffett quipped, “If you don't find a way to make money while you sleep, you will work until you die”. This quote sums up a key attribute of passive income: You don’t have to labor to receive it. Indeed, you can make it even while you sleep. 

Generating passive income is an opportunity available to everyone if you are focused on the goal and know how to intelligently go about it.  Even by starting small and regularly adding to your assets with investments that produce passive income streams you can eventually accumulate a very significant passive income stream for your own golden years.

The key to successfully creating passive income is to have a solid plan, have savings to work with, and to intelligently pick up the right investments especially when they are available at bargain prices. 

Read on below as we reveal some key strategies and insights on adding passive income to your own portfolio.

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Strategy #1: Focus on Assets that Generate Income

In order to begin the process toward creating passive income, you will need to accumulate some assets whose specific purpose is to generate income. Just as a seedling grows into a large tree by routine watering and fertilizing, you need to look for and routinely add to your portfolio of passive-income producing assets.

Once you have one or more passive income streams, you can accumulate even more income generating assets by reinvesting the income you produce from those you already own.  Of course, while you are working and saving, making the effort to add additional money from your periodic employment or business income on a regular basis, such as monthly or quarterly, can significantly accelerate your progress towards a nice retirement income stream that you don’t have to work for in your later years.

Over time, with the infusion of new cash and reinvestment of ongoing income, you will find that the total income produced by your passive investment assets keeps going up. At some point, especially if you generate income from two or three different streams, your passive income may enable you to partially defray or even fully cover your living costs. This may be particularly important when you get closer to or ready to retire.

​Strategy #2 - Understand the Main Assets That Generate Passive Income

Some of the main assets that generate passive income are businesses (e.g. privately owned or public stocks), loans (for the lender) and income real estate (for the owners). The passive income generated from owning stocks includes the profits of the firm, often reinvested back into funding the firm’s growth, and and the dividends they distribute, which are usually derived from the businesses cash flow from profits.

Lenders who loan money usually receive their passive income in the form of interest payments made by the borrower who borrows the money.  The borrower also has to repay the original amount that they borrowed either over time (amortization) or at the end of the loan term (balloon payment).  Loans can be secured by assets (such as real property) or can be unsecured.  Bonds are just loans that are traded in markets.

The passive income received from real estate is called rent.  After expenses for property taxes, maintenance, management, and mortgages, the remainder can be distributed to the owners as their share of the profits.  Of course, buying real estate on a very small scale tends to be challenging to manage and often produces limited passive income streams.  Because of the work involved in managing single properties, this approach is hardly passive at all.  However, owning high quality income producing commercial real estate on a large scale can generate worthwhile streams of passive income as well.

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​Strategy #3 - Collect Stocks That Generate Profits and Dividends

Stocks represent ownership in a business. Businesses exist to provide something of value, usually goods or services, to the public and to earn a profit for their shareholders. Stocks, then, represent the way ordinary folks participate in the profitability of companies. Holders of stocks, called investors, buy them to earn a reasonable return because they can participate in the future profits and cash flows of the underlying business.

Let’s take AT&T as an example. Note that this is just an example and not necessarily indicative of a company that we would actually add to any particular client’s holdings.  We just chose this company as an example because it is large and known by many investors. AT&T is in the telecommunications arena. That means they provide the ability for people to speak and interact with one another using mobile phones, computers and other devices. Shareholders of AT&T participate in the profitability of this business and collect a generous dividend payment every quarter. Currently AT&T pays a dividend yield of 5.5%, not a bad passive return to receive while you sleep.  There are many other companies that pay dividends and some even pay monthly.

Over the long term, stocks have averaged an annual return of 8 to 10% per year.  Around 2 to 3% of this return is in the form of dividends that they have paid out over time.  Many successful long-term investors hold their stocks for years, without frequent buying or selling. Although the prices of their stocks fluctuate, their profits and dividends received and overall portfolio go up in value over the long term if they have been careful about buying the right stocks in promising companies and holding on to them while collecting their growing income streams.

Strategy #4 Invest in Real Estate For Income from Rents

Monthly rental collection from real estate forms a wonderful stream of passive income for many investors. Real estate is property generally consisting of land and buildings. The term derives from the fact that this kind of property is physical, immovable and tangible, i.e. “real”.

Homes, apartment buildings, agricultural acreage, timberland and other types of real estate can be lucrative investments for passive income generation. Everyone needs a place to live but not all people own a home. Those who do not own their dwelling place generally live in rental property. They pay a monthly rent to the landlord.

At Ridgewood Investments, unlike many advisors, we have substantial in-house experience in identifying and assisting those clients who want to own passive income commercial real estate as a portion of their portfolio to do so intelligently and securely and in a way that can throw off a stream of growing passive income for years in the future.

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Strategy #5 Access Interest Income from Loans and Bonds

Lending money is another way to generate passive income.  Most loans require borrowers to pay interest back to the lender each month which can give the lender a nice and reliable stream of passive income.  Loans can be short-term or even very long term.

Of course, loans are only as good as the borrower’s ability to pay them back with interest.  This is why the better more secure loans usually have collateral, i.e. an asset of some substantial value (often real estate but could also be other assets) that back up the promise of the borrower to repay the lender.  If a loan has collateral, for example a valuable piece of real estate, and the lender legally secures that loan in the proper ways by establishing and filing their interest over the collateral, then if the borrower does not pay, the lender is said to have recourse by taking the underlying asset.

Banks and private lenders, including Ridgewood Investments, have expertise in finding and creating opportunities for our clients to generate passive income through secured loans that we find for our clients.  Participating in private loans like these can return high income streams from interest (often in the range of 4 to 8%) per year. 

However, bonds that are traded in the fixed income markets, such as treasury bonds, municipal bonds, corporate bonds, mortgage back bonds, and asset backed bonds are all just different categories of loans that investors can also tap into for passive income.

In today’s very low interest world, however, public bonds offer lower yields, currently in the 1% to 3% range, so using them in the right proportion can be supplemented by private loans that generate higher returns if you know where to look and how to add them to the portfolio.

​Strategy #6 Optimize Passive Income from Social Security

For most working families, their social security benefit which they accrue by working and contributing into the social security system for at least 10 years (40 quarters) is another valuable source of passive income.  Social security is a very valuable benefit because it is a life-annuity provided by the Social Security Administration with many other bells and whistles.  It is income “insurance” so those who pay in are the ones who later get a benefit.

If you are someone who has paid into the social security system, you used to receive estimated benefits statements in the mail annually.  In 2017, however, the Social Security Administration announced that it would stop mailing paper benefit statements to most eligible participants.  However, the social administration website has a Retirement Estimator that anyone can use to estimate the monthly benefits they would be projected to receive starting at age 62 (early) as well as at 67 (standard) and 70 (deferred).  Remember also that many couples have two individuals who work, both of whom may be entitled to their own individual benefit which should also be compared to the spousal benefit that they may be entitled to receive under their spouse’s benefit.

One of the keys to maximizing the value of passive income from the social security benefit you receive is to determine when to begin taking the social security benefit in the first place.  This determination is more involved than it may appear at first glance and doing it incorrectly can cause thousands in lost income.  Many inexperienced participants try to defer their benefit to 70 because the monthly income will eventually be higher, not properly considering the lost income in the first 3 to 8 years.

An experienced advisor like Ridgewood Investments can assist you to maximize the value of this passive income source as part of a solid financial plan.

​Strategy #7 Start As Early As Possible with A Sound Plan to Maximize Long-term Passive Income Opportunities

As the saying goes, “Rome Wasn’t Built In A Day” and neither are the best portfolios of passive income streams built overnight.  The power of working towards passive income regularly and over a period of years cannot be overstated due to the power of steady compounding.

The key to having a good plan is education on the various alternatives and how they all fit together.  Most people are very busy and lack the expertise to make all the decisions needed to find and assemble all the passive income opportunities together in a way that will serve them and their goals. 

One of the benefits to having a plan is that it also helps you avoid many common mistakes that can get you sidetracked from achieving your income goals as efficiently as possible.

To do all this well, you need to have time, read and research a great deal and become extremely knowledgeable in all these areas and more. Professional financial advisors such as Ridgewood Investments make the job far easier, because we have advisors with decades of experience and we do the heavy lifting for our clients. 

With very little extra effort other than that needed to schedule a conversation and speak with a good advisor who will help you get organized, you can have a tailor made plan and the expert guidance you need to get you well on your way to accumulating a very nice stream of passive income generating assets that can help you have a worry free retirement lifestyle.

Interested in exploring how this might work for you?  Ridgewood Investments has deep investment expertise to help our clients to accumulate portfolios in all the categories discussed in this guide - both in public markets as well as private investments including loans and real estate.  We tailor our approach to the needs of each individual client so the first step is to set up a conversation to go over your own unique needs and goals.

P.S.

Hopefully you enjoyed our article on the 7 main strategies of creating passive income streams for retirement freedom.  Note that these strategies are basic ones that lay the foundation, look for Part 2 of this series in which we will share some of our more advanced passive income strategies that we use for current clients, many that can ever further accelerate the growth and income benefits you can receive by positioning yourself to accumulate passive income producing assets.

About the Author

High Net Worth Financial Advisor New Jersey

Kaushal “Ken” Majmudar, CFA founded Ridgewood Investments in 2002 and serves as our Chief Investment Officer with primary focus on managing our Value Investing based strategies. Ken graduated with honors from the Harvard Law School in 1994 after being an honors graduate of Columbia University in 1991 with a bachelor’s degree in Computer Science. Prior to founding Ridgewood Investments in late 2002, Ken worked for seven years on Wall Street as an investment banker at Merrill Lynch and Lehman Brothers where he has extensive experience working on initial public offerings, mergers and acquisitions transactions and other corporate finance advisory work for Fortune 1000 companies. He is admitted to the bar in New York and New Jersey though retired from the practice of law.

Ken’s high level experience and work with clients has been recognized and cited on multiple occasions. He is a noted value investor who has written and spoken extensively on the subject of value investing and intelligent investing. He has been a member of the Value Investors Club – an online members-only group for skilled value investors founded by Joel Greenblatt, SumZero – an online community for professional investors, and has also written for SeekingAlpha – among others. Ken is active in leading professional groups for investment managers as a member of both the CFA Institute and the New York Society of Securities Analysts.