We all have ideas about what we want to do in retirement. Maybe you dream of pursuing a hobby like painting or writing a novel. Maybe you want to tackle adventures like skydiving or world travel. Or maybe you just want to relax and while away the hours on a sunny beach.
Whatever your retirement dream is, retirement itself is a pretty straightforward concept. For most people, it’s simply the age when you stop working.
But in order to stop working, you need income. And generally speaking, for most people, income in retirement will be limited to your savings, pension (if you have access to one), and Social Security.
Passive income could add to your income once you’ve retired.
What is passive income?
As its name suggests, passive income is generated without active, daily participation from you. It could be money you make by owning an apartment and collecting rent from your tenants. It could also be earnings or dividends from your investments in the stock market. Or it could even include royalties you make from selling a book or acting in a commercial.
What kinds of passive income can you earn in retirement?
Here are some ideas:
- Investing in stocks that pay out dividends, or distributions of a company’s earnings, is one way to earn money on the side. When you get a dividend, you get a certain amount of the profit the company distributes to its shareholders. That amount is determined by how many shares you have. Dividends are usually paid out in cash (occasionally additional shares of stock are issued). And these payments usually occur four times a year, at the end of every quarter.
- Retirement accounts, such as Individual Retirement Account (IRA) and 401(k), can help you develop passive income through earnings and dividends from investments held inside the accounts.
- In 2019, 65% of consumers owned a home in the United States. Renting out property to tenants or travelers can be a source of income. There are a few things to consider before you invest in property, however. Unless you can purchase the property with cash, you should have some savings as you’ll have to put a down payment on the house if you get a mortgage. Typically, you can expect to pay around 20% of the purchase price of the house as a down payment. Then you’ll have to pay off the mortgage on the house, assuming you don’t plan to purchase it outright.
- Maybe you’ve been sitting on the next great novel. If you have a manuscript, you may want to attempt to get your book published as either an ebook or as a print edition.
- You can earn royalties, or a percentage of sales, on a book. While the percentage of sales will depend on the book deal you have, you can estimate what you might earn from royalties. You can also earn extra income by appearing in commercials, or movies, or tv shows.
Retirement accounts and passive income
Anyone earning income may be able to put money into either a traditional or Roth individual retirement account (IRA). Saving money in an IRA could potentially help you develop passive income in retirement.
You can contribute up to $6,000 a year to any type of IRA. (That amount jumps to $7,000 if you are 50 and older.) And you can actually split your contribution between both types of account, as long as you don’t go beyond the annual contribution limits.
With a traditional IRA, you’re taxed on money you withdraw from the account. However, you may not have to pay income tax on the money you contribute to a Traditional IRA and any earnings your investments generate aren’t taxed until you withdraw the money.
With a Roth IRA, taxes work the other way around. You pay tax on any income you contribute to the account. After that point you don’t have to pay any tax on that money or on any of its investment gains—You’ll be able to withdraw your contributions (not your earnings) at any time tax and penalty free as long as you stick to some basic rules. And there is no RMD age, meaning you don’t have to pull money out of the account, and earnings can continue to accumulate.
You can find out more about IRAs here.
Some things to keep in mind
Retirement can be challenging, and most people haven’t saved enough to make it a reality. In fact, nearly half of all people in the U.S. have saved less than $100,000 for retirement, according to reports. Many estimates say you may need more than $1 million in savings to live comfortably once you’ve stopped working.
Increasing monthly income with passive income, even by a little bit, could potentially help you in retirement.
The sooner you start saving for retirement, the more time can help you. And your retirement savings, which could include dividends and earnings, can be part of your passive income strategy.