Active thinking about passive retirement income

If you are retired or nearing retirement, you may be worried about no longer having a regular, salaried income to rely on. Fortunately, if you have some capital to start with, there are several investment strategies available that can produce what is known as passive (or secondary) income. Unlike active income, which is money you earn from doing a job, passive income is defined as non-W2 income that requires minimal effort to obtain. And while this type of income is not always categorized as “passive income” by the IRS, things like yield, dividends, money made from rental properties, interest from loans, bonds, or savings accounts or even royalties are all ways to generate income.

Your financial advisor can help you decide which options make the most sense for you, but here are a few strategies that you might consider to keep money flowing while you sit on the beach and enjoy a post-retirement sunset.

1. High Yield Stocks

   High yield (dividend) stocks are stocks with a yield well above market average. These stocks pay higher dividends back to investors, which means more income for you. Sometimes, companies offering these higher yields can be somewhat risky (it may be a sign of a company with a weak balance sheet), but there are certain types of high-yield stocks known as “dividend aristocrats” that are strong, reliable companies that continue to grow while historically paying out high dividends over a long period of time. According to Commerce Trust Chief Investment Officer David Hagee, “If you looked at the S&P 500 Index at the start of August 2023, it was yielding around 1.5%. A dividend income or equity income strategy at that same time was yielding north of 3%. It’s an intentional strategy where you invest in high dividend companies to focus on income.”
   
   

2. Treasury Bonds, T-Bills, and Municipal Bonds

   These investments are a great way to generate passive income and tend to be lower risk. Treasury Bonds, T-Bills, and Municipal Bonds are essentially loans made to governments (for various lengths of time) that repay both principal and interest when they mature. As an added bonus, interest income from treasury bonds and T-bills is tax exempt at the state and local level (but will generally be taxable on a federal income tax return.) Additionally, municipal bonds are generally tax free at the federal income tax level, and may be exempt from state tax if the investor resides in the state where the bond was issued.
   
   

3. ETFs (Exchange Traded Funds) and Mutual Funds

   Another source for passive income could involve investing in Exchange Traded Funds (ETFs) and mutual funds. Unlike mutual funds which can only be purchased at the end of a trading day, ETFs track a market index or a sector sub-index and can be traded intra-day like stocks. Often, these are passively managed, which can sometimes result in lower fees.
   
   

4. REITs (Real Estate Investment Trusts)

   Real estate investment trusts, also known as REITs, are another popular passive income strategy. With a REIT, individual investors pool their money together to invest in real estate properties or real estate-related assets. This allows individuals the opportunity to earn dividends from real estate investments without having to buy or manage the actual properties themselves. While REITs are typically traded like stocks on exchanges, REITs do carry more liquidity risk that some traditional investments. REITs are also often required to distribute a significant portion of their taxable income (typically 90%) back to their shareholders in the form of dividends, so that can potentially provide a strong, steady stream of dividend income for investors.
   
   

5. Direct Real Estate

   Owning and renting out residential or commercial properties is another great option for creating income in the real estate space. While this is considered “passive income,” there is some active work involved like maintenance, management, and paying taxes and mortgages. (Some of this can be avoided by hiring a property management company, although that will cut into your profits.) Renting out properties on platforms like Airbnb or VRBO is a popular way to generate passive real estate income.

   Real estate investment requires research and an understanding of the market to minimize investment risk. It can also be impacted by economic and market fluctuations. But when utilized as part of a broader investment strategy, it can be a great source of steady (mostly) passive income.
   
   

6. Other revenue streams

   There are, of course, other ways to generate income during retirement utilizing a particular area of expertise you have —like creating an online course, writing a book, selling products on platforms like Amazon, making educational/informative videos or podcasts, selling photography, and other royalty-based revenue streams (which are considered W2 income and taxed accordingly).

   These ventures do require a lot of active work on the front end before you’ll ever see any passive income. And there’s a possibility that your t-shirt line or video channel about “The Art of Soap Carving” doesn’t ever generate much income at all. But hey, if that happens, at least you were creating something you loved. Consider that your first retirement hobby!

What are the best options for you?

As with most investment strategies, there is no one-size-fits-all solution.

“It's looking at exactly what sort of income stream you need to get from different investments and then marrying that with what sort of growth you need to have inside your retirement plan to be able to fund your retirement years,” said Hagee. “A dividend-focused strategy on the equity side can help get some longer-term growth in addition to some solid income production out of your fixed-income portfolio.”

If you’re unsure where to start, your CommercePremier Banker is a great first step. They can connect you to tools, resources and a network of other financial professionals (including Commerce Trust and/or Commerce Business Banking) that can help assess where you are personally, and where you want to go.