Passive investment is an asset that provides regular financial returns to the investor. To be classified as passive, the investor does not need to regularly work on the asset. In other words, these assets tend to generate capital rewards while the investor is busy doing other things. In this article, we will look at some of the most common passive income opportunities that are available for retirees.
Why invest in passive assets
Before we look at the top passive assets, let us look into some of the main reasons why you should consider investing in them for retirement.
- People are living longer. The life expectancy rate in the US has risen from 70 in the 1950s to almost 80.
- Inflation is rising. While the official numbers point to stagnant inflation, in reality, the prices of most items like college and cars are rising.
- Accidents and disability. Passive income assets help you generate income in case of a major accident that leads to disability.
- Extra income. These assets will help you generate additional income to complement your other investment assets.
Real estate is one of the most dependable passive investments in the world. Precisely, this refers to rental real estate, which involves buying apartments and other types of projects for rental purposes.
The idea behind this is relatively simple. You build or buy a property and then lease it to tenants. These tenants will then continue paying you rental income on a monthly or quarterly basis. At the same time, since the demand for houses will always rise, the value of the land underneath the property will keep rising.
Therefore, as a retiree, you will benefit from the passive income that your property will generate and the overall rise in your net worth because of the value of your property.
Rental property is not the only way that real estate will give you free and recurring income in your retirement. For one, you can invest in publicly traded real estate investment trusts (REITs). These are firms that are mandated by law to distribute most of their annual income in the form of dividends to their shareholders.
REITs are the simplest method to invest in real estate since all you need is a brokerage account from companies like Robinhood and Schwab. You should then analyze the REIT you want to invest in based on their industry and financial performance. If you make a good selection, you can be sure of receiving healthy dividends in your retirement. You will also benefit from the overall performance of their share prices.
Stocks or shares refer to a partial ownership of a company. Therefore, if you have 1,000 shares in Amazon, it basically means that you own a small portion of the company. As such, you are guaranteed to receive beneficial privileges if the share price rises or when the company distributes its dividend.
Investing in stocks can give you an excellent source of passive income during your retirement. Furthermore, in the long-term, stocks always move in an upward direction.
For your passive income basket, we recommend that you create a good portfolio of good quality companies that pay dividends regularly. For this, we suggest that you focus on companies with a good credit rating from the top credit agencies like Moody’s, S&P Global, and Fitch.
While these firms don’t offer substantial returns, they are often dependable. We suggest that you avoid high-risk companies that offer high returns. That’s because these firms often have some underlying issues like slow growth and high debt.
Further, we recommend that you set aside some of your cash invested in high-growth companies. While these firms will not offer you the cash flow that you need in the form of dividends, they will expose you to some of the companies of the future. This, in turn, will help you make a substantial return in the longer term.
Bonds are loans offered to governments, companies, and other institutions like municipalities. These entities use bonds because it is the most affordable method of raising cash. Bonds have a fixed duration and pay a coupon at a specified period. There are short-term bonds and longer-term bonds that go up to more than 30 years. These funds payback interest periodically, often annually, or after six months.
For your long-term investment, we recommend that you invest in safe corporate and government bonds. These are those bonds that have a good credit rating from rating agencies. Like stocks, these funds won’t have excellent returns. However, since you are mostly focused on capital preservation, you will be assured of regular payouts.
Still, you can add a small portion of your portfolio to the so-called junk bonds, which offer higher returns and higher risk. In total, bonds should account for a relatively small part of your portfolio since their performance tends to lag behind that of other assets like stocks.
Annuities are popular investment assets that are popular among retirees. Indeed, more than 80% of Americans say that they are open to the idea of having an annuity in their portfolio. Ideally, an annuity is a financial product where you enter into a long-term contract with an insurance company.
In it, you simply invest a certain amount of your income either at once or in an extended period. In exchange, you receive guaranteed income every month from the insurance company. The period when you start receiving the payments is known as distribution time.
There are three main types of annuities, including fixed indexed annuities and variable annuities. The biggest risk for annuities is if the insurance company you are using goes bankrupt. In the past, however, such situations have been rare. Some of the best-known companies for annuities are John Hancock, AIG Life, American National Insurance Company, MetLife, and Mutual of Omaha.
Retirement planning is an essential part of securing your future. We recommend that you start preparing for this time earlier by coming up with a set of passive income streams. In this article, we have looked at some of those assets, but there are more. Those that we have not mentioned include writing a book, creating a YouTube channel, and investing in collectibles like sneakers and art.