How do I generate passive income

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He wants the benefits of passive income, but thinks that he can get them without any real work not understanding that in order to create the passive income, it takes a lot of work to earn the money or create the passive income stream. This is an illusion that a lot of people have, just usually not quite to the extent of this guy.

. . .making it an oxymoron. . .if you have to work to create passive income, then in reality, it's active income.

[disneysteve]

. . .making it an oxymoron. . .if you have to work to create passive income, then in reality, it's active income.

Exactly. There is really no such thing as passive income. If you are living off the interest generated from your savings, that certainly isn't passive because odds are you did a great deal of work to accumulate those savings. I suppose an inheritance would count as passive income since it is just given to you based on who you are and you didn't really work to earn it. But other than that, all income sources involve some amount of work or effort.

[simpleyme]

I have several rentals that require very little work and would almost be considered passive income, but it took many years of hard work to get it
we had to fix up the houses so they would not cause us much hassle to maintain and we also had to pay them off ;-) passive ? sure does not feel that way seems hard earned to me
but there are always those sitting on their butts on the sidelines with the "it must be nice " comment "

[disneysteve]

I have several rentals that require very little work and would almost be considered passive income, but it took many years of hard work to get it

Exactly my point. I have passive income from investments, but what about all the work I did to earn that money in the first place? That sure wasn't passive.

[jIM_Ohio]

Actually, it could be made serious if you twist it around from the obvious "I've got something to sell (MLM)" to an investing question.

Investing for income used to be really in but in the 80's and 90's, it was more "in vogue" to invest for growth.

Sometimes I think about constructing an entire portfolio on income and "easing" my way into retirement.

Let's figure for every $100,000 you have, you can average $5000/year on 5% interest. You just keep buying treasuries, muni's, CD's, and dividend stocks (utilities are good) and every year, your paycheck means less and less.

Now, before you poo-poo me, think about this for a minute. You get up to $500,000 and you now have $25,000/year in passive income. If you are a family that makes $75,000/year. . .you don't worry so much if you get a disability, lose a job, etc.

However, if it's in a Roth, well. . .it may as well be buried in a box in Fiji, right?

I often wonder if stuffing our retirement money in tax shelters (ROTHS, SEP's, 401(k)'s) just because the pundits tell us to do this is really the right idea. I mean, we all save and save and save and save, for that magic age of 65 (67.5 for my generation) when we can go on Medicare and we don't get to enjoy any of the fruits of our savings.

I'm not sure this entirely makes sense sometimes.

I'm always one to question the status quo and give a contrarian idea some due.

My mentor in my field just bought muni bonds, never had an IRA or any other shelter. While that was a conservative investment philosophy, esp. in the roaring 80's and 90's, when he became disabled, he had a lot of passive income from them (plus more than a little principal) and he didn't have to go raid or borrow from a Roth or 401(k).

Something to think about. . .although I know contrarian thoughts don't usually go over well here at savingadvice.com

I toy with a similar idea all the time.

Based on what others tell me, there are two flaws with getting a $1 M bond portfolio which yields 5%:

1) I have not a found a bond fund which yields 5%, so generating 50k of income from just bonds is tough to do year in and year out.
2) Retiring at 65 with modest 2% inflation will cut the spending power of the 40k or 50k yield within a decade or two.

That being said, my solution to the inflation problem is to use dividends (now I just need to find a fund which can yield 3% consistently). My top dividend fund currently yields about 2.5%.

My solution to the 5% yield problem is twofold:
1) I plan to use 4% yield for planning purposes. That way when I get 4.23% or something similar, I have some extra I can set aside (to generate more income) the following year.
2) My plan is to have 3 contributions to income stream:

dividends (2.5%)
bonds (4.25%)
managed payout fund (or annuity) 7%

Then I plug some numbers into a simple equation:

income needed=2.5%*d+4.25%*b+7%*a

Then I start plugging numbers in and thinking of the asset allocation and risks associated with the aa.

2.5%*500k+4.25%*500k+7%*500k for example is an income of $12,500+$21250+$35,000=$68750

with a 50-50 asset allocation (some people might call this 33-67 because the annuity is similar to bonds).

That income ($68750) can grow at slightly less than 1% per year. The 500k dividend position should average about 5% appreciation over long term (with 2.5% yield staying contant), so the dividend position increases by $625 per year.

So 1% is my inflation adjustment. Not good enough? overweight the dividends.

2.5%*750k+4.25%*250k+7%*500k for example is an income of $18,750+$10625+$35,000=$64375.

The inflation adjustment is 1.5% in this case.

Because income went down in second example, I would either need to work longer and save more than 1.5 M or adjust spending downward 4k per year relative to normal expenses.

A traditional spend down plan (4% SWR) would be 60k, so both examples exceed the traditional 4% guideline.
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edit:
In addition to dealing with the math, the other issues associated with bond investing includes inflation risk, interest rate risk, duration risk, tax risk and also principal risk.

I have mentioned inflation already (yield will not increase, yet prices will).
Interest rate risk- I could plan for the 4% yield all I wanted- if I had a bond maturing now and needed 4% from it, with todays rates that might be hard to find.
Duration risk- retirement is for 30-40-50 years. Treasuries can be purchased for a 30 year duration, so there is risk that the duration of the bonds might not be long enough to constantly guarantee the income stream for the timeframe desired.
Tax risk is the interest on the bonds is taxable (at marginal bracket rates). Dividends are taxed at a rate less than this. So in second example the income looks to be 4k less, but the reality is the tax bill (using todays tax code) is much less, such that a 100% dividend portfolio might have a better after tax spending income than a 100% bond porfolio.
Principal risk- just because a person puts 100k into a bond yielding 5% does not mean they will get all 100k back. If a person needs to sell the bond to raise cash, if rates have gone up, the value of the bond will have decreased, erasing principal from the portfolio.

[Staceyy]

You could buy rental income and write books and collect the royalties. Both are hard work until they become passive.

[kork13]

passive income... that's basically having a huge pot of money invested and living off of the interest, correct?

So it would seem that the simplest way by far would be to trick one of the nation's major universities into signing over their endowment to you, then let their millions provide you a healthy sum to pay for your pool-sitting, beer-sipping pleasure.

No complicated math necessary

[BCHGRL]

Become a trophy wife, trophy husband, or kept lover. Or become Paris Hilton. There ya go! Party for a living and let people pay you to do it.

[mrpaseo]

I get a lot of weird questions. Believe it or not, some worse than this one and what I've found is that if someone ends up emailing me directly, they are usually serious about the question. They really have nothing to gain when they email other than have their questioned answered or ignored. Unfortunately, I believe that the person was serious, although having a huge misunderstanding of what passive income entails.

He wants the benefits of passive income, but thinks that he can get them without any real work not understanding that in order to create the passive income, it takes a lot of work to earn the money or create the passive income stream. This is an illusion that a lot of people have, just usually not quite to the extent of this guy.

I use the scooter principle to explain passive income:

passive income is like riding a scooter, first you must work really, really hard at propelling yourself forward, then you retire the effort and allow the momentum of your hard work.....work for you.
You must work hard and save/invest your earnings, and then you retire your efforts, and let your money work for you.


Ray

[Gailete]

I have done things that I call passive savings. Once I sign up for automatic payments for some things or handling accounts online I started saving about $25 a year each for different things. I'm always looking at ways to chop off spending without having to think about it ever again but I guess that isn't passive income. I've never heard of anyone through the use of passive income getting to sit by the pool and drink beer all day. Usually anyone who can do that inherited money or is being a leech on someone else.

By the way for those who think that once you get to 65 and can have Medicare you won't have medical expenses, think again. You have to pay currently about $90+ a month for Medicare and then anywhere for $300+ on up per month for a supplementary insurance to cover what Medicare doesn't and then you have to pay $25-100+ a month for your drug supplement. For me on disability it runs about $500 a month our of my disability check. Then the SS cost of living increase usually equals the Medicare increase so you aren't any further ahead and many are actually sliding back (have less money to live on each year as Mediare/supplements take the entire raise plus).

Gail

[QueenOphelia]

nevermind

[Like2Plan]

Gee, what happened? You posted this on 6/21:




Seems like you are turning into your son. Maybe you need meds as well.

QueenOphelia,
I think the administrator posted this question on behalf of someone who sent him an email. That is why there are different situations posted under the Questions id.

[KellyJef]

I could probably live on the interest I earn in savings, if I lived in a modest paid for house and only owned one car! I am making about $65 a day which is $23,725.

If it's not too pesonal, can I ask what kind of savings you have to accumulate to generate $23,7525 in interest?

[kork13]

$800k in a simple online savings account getting 3% would earn $24.3k per year. $450k getting 5% will pull $23k per year as well.

Really, you CAN generate a 'passive income' pretty easily if you have the assets behind you. that's just the pivotal point.... having the assets behind you. Heck, with $2Mil, you can easily get $80k-$100k/yr just from interest.