As we approach and enter retirement, we will need a lot of income, which is why it's important to be saving and investing for retirementto build a sufficiently big nest egg. The best kind of income, arguably, is passive income -- money that just keeps arriving with little to no effort required of you.
Here's a bunch of ways that you might set up passive income for yourself. See which of them make sense for you.
Image source: Getty Images.
1. Dividend income
Dividend-paying stocks are hard to beat for income. If you buy shares of healthy and growing dividend payers, you can expect their share prices to appreciate over time. But while you hold them, they'll also be sending you cash -- typically every three months -- and that amount of cash will likely increase over time, too.
Dividend payers are not slouches, either. According to data from Ned Davis Research and Hartford Funds, dividend-paying stocks grew at an average annual rate of 9.2% between 1973 and 2022, while non-payers averaged 4%. If you can amass a $400,000 portfolio with an overall average dividend yield of 3%, you're setting yourself up to collect $12,000 annually, in very passive income.
2. Interest income
Not so long ago, this passive income strategy would have been ineffective because interest rates were so low. In 2021, for example, savings accounts were paying close to 0%. But that's not the case right now. Yes, the average rate for accounts with a minimum of $2,500 is only around 0.23%, but rates close to 5% and higher can be found. Certificates of deposit (CDs) are also offering rates around 5% for terms of about a year or less.
3. Annuities
Annuities are another passive income option. They involve your forking over a significant sum to an insurance company in exchange for regular payments for a certain period or for the rest of your life (and perhaps even your spouse's). (Note that fixed annuities tend to be more straightforward and less problematic than variable or indexed ones.)
The table below can give you a very rough idea of the kind of income you may be able to buy for $200,000 via an immediate fixed annuity these days. You may find even better offers by shopping around.
Person/People | Monthly Income | Annual Income Equivalent |
|---|---|---|
65-year-old man | $1,216 | $14,592 |
65-year-old woman | $1,176 | $14,112 |
70-year-old man | $1,368 | $16,416 |
70-year-old woman | $1,305 | $15,660 |
75-year-old man | $1,609 | $19,308 |
75-year-old woman | $1,500 | $18,000 |
65-year-old couple | $1,065 | $12,780 |
70-year-old couple | $1,163 | $13,956 |
75-year-old couple | $1,305 | $15,660 |
Data source: immediateannuities.com.
There are many kinds of annuities, and some might serve you very well. Some even include long-term care provisions. Read up on them if you're interested.
4. Your home -- via a reverse mortgage
A reverse mortgage is another way to get passive income. It involves receiving a lump sum or regular income from a lender via a loan with your home as collateral. Once you're no longer living in your home, perhaps because you moved to a facility or you passed away, the lender gets the home unless you or your heirs pay off the loan.
A reverse mortgage isn't best for everyone, but it's a way to generate some meaningful income with fairly little effort.
5. Renting things out
Here's a passive income strategy that does require some effort from you, but not a whole lot. You probably have a bunch of things that you didn't realize you can rent out to others. These include tools, cameras, a parking spot in your driveway, a boat, a truck, a bicycle, an RV, or even your swimming pool, among other examples. Think about what you might not mind renting out for some cash -- and do a little online digging to turn up other rental possibilities.
You can also include home-sharing services such as Airbnb in this category. Renting out a room or your whole house now and then can generate hundreds or thousands of dollars.
6. Create something
This is another strategy requiring some effort, but once you put in the work, you might collect passive income from it for a long time. You'll need to create certain things, such as photographs, T-shirt designs, or an e-book. Then list them online, where others can buy them -- such as via stock photography sites or custom shirts-and-mugs sites, or even your favorite online marketplaces such as Amazon.com and Etsy.
7. Social Security
Finally, there's Social Security -- the ultimate in passive income. All you have to do is turn on the spigot sometime between age 62 and 70 and you'll start collecting checks every month, with inflation increases happening in most years, too. It's hard to beat Social Security!
These are some passive income strategies worth thinking about, because the more income you can set up for yourself, the more financially secure your future can be.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Selena Maranjian has positions in Amazon and Etsy. The Motley Fool has positions in and recommends Airbnb, Amazon, and Etsy. The Motley Fool has a disclosure policy.
