The Truth about Passive Investment Income

by Chuck
(MD)

What is passive investment income? And what do you need to know about it? My definition of passive investment income is a stream of residual income that comes in each month from the interest of your investments. For example, if you save one million dollars over the course of your lifetime, and have it an investment account that yields 6% annual interest, you would make $60,000 per year (before taxes) from your investments. That’s pretty good.

Some investments produce a greater return and some manage less. Obviously, all investments come with a certain level of risk. You could experience greater gains or you could lose your entire investment.

Most people invest money so that when they retire, they can live off the interest. This interest income will help maintain their standard of living and allow people to retire with comfort. Since more and more companies are doing away with their retirement pensions, most people are stuck funding their own retirements.

As a result, the government created IRAs, 401k programs, and self-employed retirement funds for people to prepare for their own retirement. Although many people take advantage of these programs in preparation of retirement, many do not. In fact, some people don’t save anything for retirement.

Unfortunately, most people don’t save enough money. Most people don’t have enough saved in investments to maintain their current standard of living when they retire. For example, if you are accustomed to earning $60,000 per year and you only had $400,000 saved for retirement, you would need a 15% annual return to maintain your same income levels in retirement. While this is possible, it is highly unlikely. That’s why most people have to lower their standard of living during retirement.

Additionally, many investments fluctuate in value. This can have a significant impact on your retirement portfolio. During recent years, many stocks and mutual funds have lost 30% or more of their value. This has had a huge negative impact on many investors; especially those already in retirement. Many people have been forced back to work, even in their 70s, or they have had to significantly lower their standard of living.

The moral of this story is that you need to plan for retirement. You want passive investment income, but you also want multiple streams of income. I think it’s a good idea to diversify with different revenue streams. For example, you could have a retirement account, a network marketing business, a profitable website, investments in gold and silver and so forth.
When you are diversified (not just paper assets) you can sleep better at night knowing that you don’t have all your eggs in one basket.