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- Herausgeber: John Wiley & Sons
- Kategorie: Ratgeber
- Sprache: Englisch
Unlock Financial Freedom: Proven Strategies to Build Wealth with Passive Income For Dummies
In Passive Income For Dummies, bestselling author, national speaker, popular investing and business educator, and the author of Stock Investing For Dummies, Paul Mladjenovic delivers an exciting and practical new guide to building consistent income streams that work for you. He introduces a broad collection of passive income strategies that fit into all sorts of lifestyles, including selling digital products and earning with affiliate links to investing in dividend-paying stocks and launching subscription-based services.
Mladjenovic draws on over four decades of personal and professional experience building online and offline income streams to show you exactly how you can set up and automate your own. You’ll find step-by-step playbooks and proven examples that work in today’s competitive economic realities. Most importantly, many of the techniques he offers don’t require thousands and thousands of dollars to get off the ground. You can get started building a more prosperous future today even with small amounts!
Inside the book:
- Digital and offline tools and resources that will help you stay on track as you build more income and financial independence
- Easy-to-understand, jargon-free advice for combating inflation, navigating the gig economy, and joining the creator class
- Create multiple streams of income like the most successful investors!
- Hands-on info that helps you manage risk and avoid scams, dead-ends, and common mistakes
Perfect for everyone looking to supplement their income and build a more financially secure and flexible future, Passive Income For Dummies is an invaluable strategy guide for retirees, freelancers, part-time workers, content creators, investors, students, and entrepreneurs everywhere.
Sie lesen das E-Book in den Legimi-Apps auf:
Seitenzahl: 349
Veröffentlichungsjahr: 2026
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Passive Income For Dummies®
To view this book's Cheat Sheet, simply go to www.dummies.com and search for “Passive Income For Dummies Cheat Sheet” in the Search box.
Table of Contents
Cover
Table of Contents
Title Page
Copyright
Introduction
About This Book
Foolish Assumptions
Icons Used in This Book
Beyond the Book
Where to Go from Here
Part 1: Getting Started with Passive Income
Chapter 1: Passive Income 101
Defining Passive Income
Checking Out Categories of Passive Income
Finding Your Own Investable Cash
Building Your Passive Income Spreadsheet
Starting with a Few Easy Steps
Chapter 2: Making Passive Income Part of Your Retirement
Introducing the 5/10 Approach
Considering Retirement Scenarios Using Passive Income
Using Shortfall Strategies
Chapter 3: Investing versus Business Strategies
Investing to Earn Passive Income
Using Business Strategies to Earn Passive Income
Part 2: Regular Passive Investing
Chapter 4: Interest Income
Knowing Your Options for Stashing Your Cash
Earning Interest Income with Bonds
Looking at Peer-to-Peer Lending
Diversifying Your Interest Income Vehicles
Chapter 5: Dividend Income
Assessing the Advantages of Dividends
Looking into Company Fundamentals
Understanding How Dividends Work in a Nutshell
Checking Out Dividend Calculations
Consulting Some Dividend Investing Resources
Chapter 6: Advanced Dividend Strategies
Considering the Yield for Current Income versus Future Income
Digging into the Dividend Capture Strategy
Building Passive Income with the Dividend Snowball
Buying on Margin to Increase Passive Income
Using Passive Income to Wipe Out Consumer Debt
Finding More Inspiration with Additional Dividend Resources
Chapter 7: Dividend ETFs and Mutual Funds
Comparing ETFs and Mutual Funds
Delving into Dividend ETFs and Other Income-Based ETFs
Making the Most of Mutual Funds
Chapter 8: Annuities
Examining the Pros and Cons of Annuities
Checking Out Annuity Categories
Investigating and Buying Annuities
Part 3: Passive Income Alternatives
Chapter 9: Real Estate Income
Considering Real Estate Investment Trusts
Focusing on Real Estate Funds
Assessing More Real Estate Income Alternatives
Chapter 10: Covered Call Options
Outlining How a Call Option Works
Checking Out Covered Call Pros and Cons
Surveying Different Strategies for Covered Call Writing
Chapter 11: Put Options
Seeing How a Put Option Works
Considering the Pros and Cons of Writing Put Options
Surveying Strategies for Put Option Writing
Chapter 12: Closed-End and Enhanced Income Funds
Beginning with Buy-Write Closed-End Funds
Explaining Basic Enhanced Income Funds
Singling Out Single-Stock Enhanced Income Funds
Looking at Alternative Enhanced Income Funds
Part 4: Business Strategies for Passive Income
Chapter 13: The A/B Strategy
Discovering the Parts of the A/B Strategy
Choosing Your Optimal Passive Income Business Opportunity
Chapter 14: Publishing Income
Putting Together e-Books
Creating an Audiobook
Selling Digital Images and Photos
Trying Print on Demand
Chapter 15: Online Education
Getting Started with Your Educational Content
Checking Out Some Online Educational Platforms
Employing Marketing Strategies for Your Educational Content
Chapter 16: Affiliate Marketing Strategies
Understanding How Affiliate Marketing Works
Checking Out the Pros and Cons of Affiliate Marketing
Spotlighting Popular Affiliate Marketing Platforms
Using Resources and AI for More Affiliate Marketing Guidance
Chapter 17: Tackling Taxes on Your Passive Income
Beginning with Tax Basics
Handling Taxes for Your Investing Strategies
Dealing with Taxes for Your Business Strategies
Consulting Some Tax Resources
Part 5: The Part of Tens
Chapter 18: Ten (or So) Passive Income Investments
Dividend Yield ETFs
Sector ETFs
Closed-End Funds
Income Mutual Funds
Preferred Stock
Limited Partnerships
Call and Put Options
Business Development Companies
Discount Mortgages
Reverse Annuity Mortgages
Annuities
Chapter 19: Ten Passive Income Business Strategies
Posting Articles Online
Creating an e-Book
Releasing an Audiobook
Putting Together an Online Course
Printing Merchandise on Demand
Selling Your Photos
Offering Your Artwork
Introducing Subscription Services
Trying Affiliate Marketing
Building a Niche Website with Affiliate Links
Chapter 20: (Almost) Ten AI Tactics for Passive Income
Starting with General AI Tools
Adding Details to Your AI Prompts
Considering Robo-Advisors for Financial Help
Writing with AI
Creating Videos and Images with AI
Finding Help with Marketing
Getting AI Guidance for Entrepreneurs
Keeping Up with the Latest AI Resources
Part 6: Appendixes
Appendix A: Investing Resources
Retirement Resources
Interest Income
Dividend Income and Strategies
Dividend-Focused ETFs
Income-Based Mutual Funds
Annuities
REITs and Real Estate Crowdfunding
Call and Put Option Writing
Enhanced Income ETFs and CEFs
Appendix B: Business Resources
Marketing Online
e-Books
Audiobooks
Print on Demand
Online Video Courses
Affiliate Marketing
Taxes and Your Home Business
AI Tools for Marketing
Other AI Tools
Index
About the Author
Author’s Acknowledgments
Connect with Dummies
End User License Agreement
List of Tables
Chapter 1
TABLE 1-1 An Example of Tracking Passive Income
Chapter 4
TABLE 4-1 A Comparison of Bond Ratings
TABLE 4-2 An Example of After-Tax Return
TABLE 4-3 Taxability of Bonds
Chapter 6
TABLE 6-1 Margin Borrowing: Example 1
TABLE 6-2 Margin Borrowing: Example 2
TABLE 6-3 Using Passive Income to Lower Consumer Debt
Guide
Cover
Table of Contents
Title Page
Copyright
Begin Reading
Index
About the Author
Author®s Acknowledgments
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Passive Income For Dummies®
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Introduction
One of the hallmarks of wealth and financial independence is having income coming in even when you aren’t working. Everyone’s favorite investor, Warren Buffett, is famously quoted as saying that if you aren’t making money while you’re asleep, you’ll keep working all your life. In that spirit, you can earn money while you’re asleep, on vacation, or tending to other matters in your life, and passive income is what makes that situation a reality.
About This Book
Few books are packed with as many passive income ideas and strategies as this book. The ideas, strategies, and resources contained in these pages come from decades of work, experience, and research and are generously extracted from the passive income course I’ve taught nationwide, Cash Flow Power. I offer two versions of this course: one for investing strategies and the other for business strategies. This book is laid out to give you clear guidance on both categories of passive income, and you can easily apply whatever fits your goals and personal situation, financial or otherwise. Along with my personal research, I’ve included real-life examples of passive income strategies from clients, colleagues, and me.
Passive Income For Dummies is different from spammy “get rich quick” emails and clickbait internet ads and articles vying for your attention. It also doesn’t take an academic or stodgy approach to the various investment vehicles I recommend. And I’m more than happy to point out which strategies aren’t appropriate for different people or situations.
One of the great things about this book’s content is that it doesn’t depend on specific economic conditions. You don’t need to be overly concerned about whether the stock market is bullish (trending upward) or bearish (trending downward), although I do talk about optimal timing for stock investing. Whether the economy is booming or in recession, my passive income ideas and strategies are generally applicable. So, rest assured that you can proceed with confidence because most investment vehicles with passive income potential tend to be more financially secure than nonpassive income vehicles like growth stocks or aggressive small-cap stocks.
Sidebars (boxes of text) in this book give you a more in-depth look at certain topics related to passive income. Although they further illuminate a particular point, these sidebars aren’t crucial to your understanding of the rest of the book. Feel free to read them or skip them. Of course, I’d love for you to read all the sidebars, but my feelings won’t be hurt if you decide to skip over them.
One last note: As you work your way through this book, you may notice that some web addresses break across two lines of text. If you’re reading a printed copy and want to visit one of these web pages, simply key in the web address exactly as it’s noted in the text, pretending as though the line break doesn’t exist. If you’re reading an e-book, you’ve got it easy — just click the web address to be taken directly to the web page.
Foolish Assumptions
I figure you’ve picked up this book for one or more of the following reasons:
You want to discover more ways to generate income without needing to get a part-time job.
You are planning for your retirement and want to make sure you’ll have enough passive income from your investing pursuits to ensure a financially secure future. (Be sure to read all the chapters on investing strategies in
Parts 2
and
3
.)
You have some spare time and would like to engage in a business activity that has the potential for passive income without spending too much money (or any money at all).
You want to read about new investment vehicles and funds that can realistically provide a double-digit income yield.
You need a great gift! If your uncle from Bratislava isn’t generating enough income from his investment portfolio, you can give him this book so he can get on the path to prosperity (and add you to his will). Be sure to get a copy for his financial advisor, too.
Icons Used in This Book
Here’s what the useful icons that appear in the margins of this book mean.
When you see this icon, I’m reminding you about some information that you should always keep stashed in your memory, whether you’re new to passive income strategies or an old pro.
The text attached to this icon may not be crucial to your success with passive income, but it may enable you to talk shop with investing gurus and better understand the financial pages of your favorite business publication or website.
This icon flags a particular bit of advice that just may give you an edge in your passive income pursuits.
Pay special attention to this icon because the advice it highlights can prevent headaches, heartaches, and financial aches.
Beyond the Book
In addition to the material in the print or digital book you’re reading right now, you can find great supplemental content online. To get the Cheat Sheet, simply go to www.dummies.com and type “Passive Income For Dummies Cheat Sheet” in the Search box.
Where to Go from Here
You may not need to read every chapter to become more confident with your passive income strategies, so feel free to jump around to suit your personal needs. Because every chapter is designed to be as self-contained as possible, it won’t do any harm to cherry-pick what you really want to read. But if you’re like me, you’ll want to check out every chapter because you never know when you may come across a new tip or resource that will make a profitable difference in your passive income pursuits. I want you to be successful!
Part 1
Getting Started with Passive Income
IN THIS PART …
Understand what passive income is and how to earn some.
Decide whether passive income is a financial independence strategy or just something to supplement your current income.
Discover the 5/10 approach so you can seek financial independence with passive income strategies.
Know the difference between passive income from investing and passive income from business strategies.
Chapter 1
Passive Income 101
IN THIS CHAPTER
Understanding the basics of earning passive income
Breaking down passive income categories
Gathering some cash and making a tracking spreadsheet
Walking through the steps of your first passive investment
One of the hottest and fastest-growing financial topics in recent years has been passive income. When you think about it, you probably see passive income as part of the financial picture of the rich and affluent. Noted investor Warren Buffett famously said, “If you don’t find a way to make money while you sleep, you will work until you die.” Who wouldn’t want income flowing in without needing to work hard to get it? The great thing for you is, what’s growing just as fast (faster?) as the popularity of earning passive income are the choices and alternatives for earning it.
Many years ago, your choices for bringing in passive income were very limited: dividend stocks, interest-bearing accounts, annuities, and rental real estate. Perhaps I’ve missed an item or two here, but you get the picture. Fortunately, there’s been an explosion of various methods, strategies, and investment vehicles for gaining true passive income. The traditional ways still exist, but many new and improved strategies and methods have appeared on the scene in recent years.
The great news is, you have this book as a handy guide to help you understand all the ways to navigate this popular income-earning scene. Just be active (not passive!) with the information. This chapter gets you started on your passive income journey.
Defining Passive Income
The purest form of passive income is a continuous stream of money that flows from a singular act or transaction requiring little or no maintenance on your part after the initial transaction. This book focuses on passive income from two different worlds: investing and business (see Chapter 3 for details on the differences between the two).
You won’t find any totally cost-free ways to generate passive income. You can come close, but some type of cost will exist. The cost will either be financial, or it will come in nonfinancial investments such as sweat equity (the initial setup work), or the learning curve of doing things to achieve the pending passive income.
The bottom line is, the passive income strategies I cover in this book don’t require a lot of money to get started. Investing strategies will require some money, of course, but most investment vehicles and strategies can begin with as little as $50 or $100. Business strategies can be executed with no money at all. I discuss ways to find or make some money later in this chapter, so lack of money isn’t an obstacle in the beginning.
For example, suppose you save up $900; what can that cash produce for you via passive investing? Here are some possibilities:
You may buy some local public utility stock that earns a dividend yield of 6 percent. That’s $54 coming in per year. If you reinvest the dividend in the stock, you can grow your original $900 into $1,000, and then $2,000, and on and on. If the stock increases its dividend, and you reinvest your earnings, your investment can grow to $5,000, or $10,000, or more. By then, your annual dividend income can reach $540 or more per year.
You may invest your cash in 100 shares of an optionable stock. You can then write a covered call option and easily earn a few hundred dollars (see
Chapter 10
). Say your investment earns $200 in income. In that case, your $900 has given you an effective dividend of 22 percent ($200 divided by $900). If you do that same covered call three times in a year, your $900 will earn you $600 in option income, which calculates to an effective dividend of 67 percent! And what if you reinvest that income? It can grow and grow …
You may use the $900 to finance a business that gives you passive income from publishing, product sales, or affiliate marketing. Many businesses have generated a handsome income starting with much less. Eventually, you can sell the business, if it’s generating income, for a large sum. Even if it generates income of only $5,000 per year, on a price-to-earnings ratio of 15 (discussed in
Chapter 5
), that means your business may have a market worth of $75,000!
These three scenarios aren’t unreasonable. And I can go on and on. Rich people will be the first to tell you that small sums invested and reinvested over time become substantial wealth.
In my $50 wealth-builder course — a class I’ve offered every year since 1983 — I tell folks what I’m telling you now: Building wealth, including wealth that yields significant passive income, isn’t one big thing that you do. It’s the hundred little things you do, day in and day out, over months and years, that give you the life-changing wealth you seek.
So, take to heart all the passive income strategies I share with you in this book, get really good at a few of them, make them grow, and you’ll do very well.
In this book I focus on passive income, of course, but some folks may be better off with passive gains. In other words, they’ll make that initial singular transaction or effort but get their payoff in long-term appreciation (long-term capital gains) rather than income.
Checking Out Categories of Passive Income
You don’t have to be an expert in every kind of passive income strategy. Your greatest chance of success is to focus on one category or strategy. Get good at that, and do it over and over.
What’s that, you say? You’ve had some success with recording an audiobook or selling artwork? Great! Just do it over and over, get excellent at it, and dominate your market. The passive income will build up, and the gains will come easier over time.
Take a look at some of the different types of passive income categories:
Investment:
This is the simplest one. You make an investment and get regular, predictable income through either dividends or interest. Examples include stocks, bonds, and the world of funds (exchange-traded funds, mutual funds, and so on). Investing is covered in greater detail in
Chapters 4
,
5
,
6
,
7
, and
12
.
Real estate:
Although it can be lumped into the preceding category, real estate has enough variety and specialization to be its own category. Passive income opportunities range from hands-on real estate and limited partnerships, to real estate investment trusts and mortgages (covered in
Chapter 9
).
Trading:
You can earn passive income by utilizing call and put options that complement your regular investment portfolio. Find out about call options in
Chapter 10
and put options in
Chapter 11
.
Traditional:
Social Security, pensions, and annuities are in this category. Annuities are covered in greater detail in
Chapter 8
.
Business creative:
This involves creating something of value and putting or posting it in a suitable marketplace. Your creation can be an e-book, a course, artwork, and the like. See
Chapters 13
,
14
, and
15
for more on creating business income.
Chapter 19
gives you 10 business ideas.
Business marketing:
This may include securing licenses and marketing arrangements to make money from what others create. Affiliate marketing, covered in
Chapter 16
, is an example of this.
Finding Your Own Investable Cash
You may not be at the point where you have an investable million bucks on hand for your juicy passive income strategies to become 100 percent financially free … yet. But everyone has a starting point in their own personal situation. In the following sections, I provide some guidance on getting a hold of cash to invest.
You can find more income sources and ideas at www.ravingcapitalist.com/PIFD.
Selling your stuff
A few years ago, I sold a large batch of my childhood comics to a comic book dealer and got $900. No, that’s not a fortune, but it’s always nice to free up a little money that can become productive and earn some passive income.
Perhaps you have some valuable items sitting around and gathering dust. Why not put those things to good use as you pursue passive income? Here are some examples of stuff you can convert into cash and where to go for more details on selling it:
Clothes and more:
Visit Poshmark (
www.poshmark.com
), ThredUp (
www.thredup.com
), and Vinted (
www.vinted.com
).
Designer handbags:
Check out Fashionphile (
www.fashionphile.com/pages/sell-with-us
).
Furniture:
Try AptDeco (
www.aptdeco.com
).
Trying fun activities
By “fun activities,” I mean income-producing activities that aren’t work at all if you think about it. Everyone generally does something day in and day out without viewing it as work or an activity that can generate income. Which of the following things are you doing just for fun … or just because you have some time on your hands? Here are some suggestions for turning those activities into money you can invest:
Do you like to shop? (That’s a dangerous question for some of my family members.) But if you like to shop, why not earn some money while you do it? Consider mystery shopping gigs with sites like Market Force (
www.marketforce.com
), Secret Shopper (
www.secretshopper.com
), and BestMark (
www.bestmark.com
).
Do you spend a lot of time surfing the internet on your laptop or smartphone? You can get paid while you do it. Check out paying gigs at Swagbucks (
www.swagbucks.com
) or InboxDollars (
www.inboxdollars.com
).
Is driving fun for you? Look into getting some driving gigs with Uber (
www.uber.com
) and Lyft (
www.lyft.com
).
Love going to restaurants? Hey, who doesn’t? You can make money while you enjoy your next meal at a restaurant. Check out Coyle Hospitality (
www.coylehospitality.com
) and BestMark (
www.bestmark.com
).
Enjoy giving your opinions? In my opinion, you can make money while sharing your opinion. Earn some bucks telling people what you think at Survey Junkie (
www.surveyjunkie.com
) and User Interviews (
www.userinterviews.com
).
If you make an additional $1,000 per year from fun activities, set a goal of devoting $250 or $500 to dividend-paying stocks or exchange-traded funds (ETFs). How much would you have after five or ten years of doing something this simple?
Building Your Passive Income Spreadsheet
Got some cash to start earning passive income? Great! Use your favorite spreadsheet program to track your passive income portfolio. The following sections can help you with the initial setup.
Determining whether you can depend on your passive income
Just so you have an easier time tracking and predicting your passive income, figure out each type’s pros and cons. Here are some questions to address in your passive income tracking sheet:
Is the income predictable?
If so, is it paid monthly, quarterly, or on some other schedule? Dividend payments are predictable and usually occur quarterly (though some are monthly). Interest from bank accounts and brokerage accounts can be earned monthly. Meanwhile, interest from bonds tends to be semiannual.
Is the payment fixed or variable?
For example, the type of payment you receive from an annuity depends on the type of annuity you have. The typical annuity has a fixed payment that arrives monthly, but some are different (see
Chapter 8
for details).
Is the income unpredictable?
If you get income from royalties and affiliate sales funnels, you may get great income for a given month … but little or nothing the following month. If you get money from the sale of subscriptions, the payment may be monthly and fixed but can end abruptly if anyone cancels their subscription.
Get familiar with how your preferred passive income methods work so you have a better handle on your current and future income.
If you’re getting your passive income from unpredictable sources such as business projects, consider pledging to yourself that you’ll take a chunk of that money and put it into investments to build your investment-related passive income. Make it a habit to regularly funnel money into that investment and keep building it. Try to do it monthly or quarterly if possible. At the very least pledge to invest whatever you can to keep building up your income-producing investments.
Watching your income grow
Most folks track their wealth by regularly checking out their net worth — their total assets minus their total liabilities. They track their progress by making sure their net worth is rising, year in and year out. Some folks check monthly or quarterly. This is all good; everyone should be regularly tracking their net worth to ensure their financial progress and wealth-building continue for the foreseeable future.
But what does the passive income enthusiast track? Cash flows. You keep track of the passive money that’s coming in (dividends, interest, annuity payments, and so on), and you watch for target amounts that become milestones as you head toward the ultimate goal of passive income: getting to the point that your passive income meets or exceeds the income levels you need to be financially free and stop working for someone else. (Find out more about planning for these milestones in Chapter 2.)
Given that goal, you can create a spreadsheet (or get software) to track your passive income. Table 1-1 provides an example.
Some columns to consider for your spreadsheet are as follows:
Investment type:
What kind of investment is it? Stocks, bonds, funds, or something else?
Income type:
Is the income interest, dividends, or capital gains? This will be necessary to discern potential taxes (see
Chapter 17
).
Annual yield:
What income is it generating: 4 percent, 6 percent, 10 percent, or another percentage? You want to know which investments are doing better than others.
Annual income:
What total annual income is being generated? Are you doing better than the year before? How can you grow this total annual amount?
TABLE 1-1 An Example of Tracking Passive Income
Investment Type
Income Type
Annual Yield
Annual Income
100 shares of Stock A
Qualified dividend
4%
$400
50 shares of ETF B
Qualified dividend
5%
$250
$10,000 corporate bond
Taxable interest
3%
$300
Annual estimated income
$950
Other helpful questions to ask yourself (and columns you may want to add to your spreadsheet) include the following:
Last year’s payout:
How does a particular investment perform this year versus how much you earned last year?
Tax rate:
You should know to what extent taxes are affecting your return. Are your gains fully taxable, nontaxable, or subject to different tax rates? (See
Chapter 17
for tax matters.)
Cost basis:
If you bought a stock or ETF when it was $50 per share and now it’s $98 per share, what’s your actual yield given the stock’s original cost?
Your goal:
How much passive income do you want coming in annually? If you’re seeking to be 100 percent financially independent with your passive income, you’ll need to know what the shortfall is and how you’re addressing it going forward.
Starting with a Few Easy Steps
From the suggestions given earlier in this chapter (and some ideas you came up with on your own), scrounge up, say, $50 or $100 to start. Take this money and follow these steps to keep your first passive income strategy simple:
Open a stock brokerage account and deposit the money you’ve saved.
For starters, park your money in the broker’s high-yield money market account.
Buy a few shares of a nice dividend-paying ETF.
Some pay quarterly; some pay monthly. Most will pay a yield of 4 percent or higher. See Chapter 7 for info on how to choose an ETF.
Turn on the feature on your broker’s website to designate the dividends for reinvestment.
When you choose this option, you’re ensuring that your initial investment continues to grow.
As money comes in, keep adding to this position (investing in the income-producing ETF).
Investment vehicles such as stocks or ETFs have the potential for good appreciation over time. One ETF I purchased years ago at about $60 per share is now worth more than double that. Meanwhile, the dividends increased by nearly 300 percent over the same period of time.
Now you have your first passive income investment!
At this point, start to explore all the other strategies you can deploy to keep your passive income portfolio growing.
Chapter 2
Making Passive Income Part of Your Retirement
IN THIS CHAPTER
Checking out the 5/10 approach
Reviewing different retirement scenarios
Taking action when you have a shortfall
Uhhh … what’s a chapter on retirement have to do with passive income? Everything, actually. The ultimate financial goal of a hardworking person is to achieve a level of fiscal strength that allows them to stop working — or at least stop working so hard.
This chapter covers retirement planning in the context of investing-related passive income strategies. Don’t consider it too formal since retirement planning takes into consideration a host of related issues such as utilizing tax-advantaged pension plans, Medicare, Social Security, and so on. However, this simple approach I lay out can be at the heart of your overall retirement goals and priorities.
Readers of this book can access my free online video minicourse Rescue Your Retirement at www.ravingcapitalist.com/rescue-your-retirement/ (opt-in required).
Introducing the 5/10 Approach
When it comes to retirement planning, you can get 1,000 different scenarios and strategies from 100 top financial advisors. They may put together a very detailed, sophisticated retirement plan for you (with a huge price tag), but the moment one significant variable changes, that sophisticated retirement plan becomes useless (or close enough). Ugh. Why bother?
No worries — you can keep retirement planning simple with the 5/10 approach, the core methodology in my course Rescue Your Retirement. The goal is simple: Figure out how much you need today that can be reinvested in income-producing investments so you’re minimally financially independent when you retire. Here’s how the numbers work in the 5/10 approach:
The
5
refers to income — specifically, you’ll need an annual retirement income of at least 5 percent from your potential income-oriented investments.
The
10
is for growth. In other words, you want your investment portfolio to grow in market value by 10 percent per year on average.
I make retirement planning seem very simple here, but some financial pros may warn that my approach is too simple. They’ll tell you that retirement planning should be more sophisticated — that you have to run complicated projection models that cover inflation, future taxes, your health profile, and more. My response? I could make retirement planning involved and sophisticated and complex, and present you with a complicated and highly precise retirement projection, but the moment a single variable or factor changes, your entire plan will need to be updated and revised.
The following sections explain how to use the 5/10 approach to calculate how much you’ll need in your retirement portfolio.
Projecting your ideal annual income
Do a tally (as best as you can) of your personal expenses for a full year. When I’m working with clients, I label this outgo — the money that’s going out. Usually it’s expenses, but sometimes it’s something else, like debt payments.
Say you come up with $25,000 for your minimum annual living expenses. This may include your rent or mortgage, food, utilities, and so on. You get the picture.
Now, divide your annual expenses by 5 percent. In this example, you’d divide $25,000 by 0.05 to get $500,000. This is your goal for the value of your retirement fund. In other words, if you have $500,000, and this princely sum is earning 5 percent, your income-producing investments would yield an annual retirement income of $25,000.
Given the amount you need to reach, this is where you need growth-oriented stocks, exchange-traded funds (ETFs), and mutual funds to grow your nest egg. Instead of being in conservative vehicles such as utilities and food companies, you likely need to be in more growth-oriented vehicles such as tech stocks and general S&P 500 stocks to achieve a higher growth rate. This is where you need to speak with your investment advisor to plan this growth. For more information and guidance on growth stocks and funds, check out my book Stock Investing For Dummies (published by Wiley).
In the 5/10 approach, only your income-producing assets are generating your 5 percent annual income. You also want to make sure you’ve set aside money in an emergency fund and you’ve taken care of anything that can zap your financial well-being, such as debt. Also make sure you’ve accounted for miscellaneous housing expenses, whether you’re a homeowner or a renter.
Planning for growth
Accomplishing an average 10 percent annual growth with your investments isn’t that difficult. You’ll have to weather the occasional decline in the value of your portfolio when there’s a bear market (meaning stocks are trending down), crash, or correction, but most studies show that when you account for the good years and the bad, the rate of return for investors averages out to 10 percent.
You can safely enhance your annual return based on how you manage both your investments and the amount you add to your growth-oriented portfolio. If the only thing you do is consistently add $50 or $100 to your investment account each month, year in and year out, your overall growth-oriented portfolio should increase by a higher percentage than the market average. Why? Besides the growth of the investments in your account, you’ll be contributing to your portfolio over time, which will help accelerate the growth.
Besides making regular contributions to your portfolio, consider how your investments are being managed within your brokerage account, especially if dividend or interest payments are involved. Reinvesting these dividends and interest leads to the magic of compounding, or ensuring that your portfolio increases both faster and at a higher rate than ever. (See the nearby sidebar “Understanding compounding with an online calculator” for a useful tool.)
A good example of using compounding to your advantage is the way you manage both your ETFs and your mutual funds. Unless you need the money, you should reinvest all proceeds (dividends and the like). Some dividend reinvestment strategies are covered in Chapter 6.
UNDERSTANDING COMPOUNDING WITH AN ONLINE CALCULATOR
Calculator.net is a free website loaded with helpful calculators, financial and otherwise. The site’s Investment Calculator (found at www.calculator.net/investment-calculator.html) is a valuable tool to use when you’re planning your retirement investments.
In this growth-oriented scenario, I plugged modest numbers into the calculator:
Starting Amount: $20,000. A reasonable starting point.After (years for growing the investment): 25 years. Most younger folks starting their retirement plan earlier would enter 30, 40, or more years here.Return Rate (annual growth rate): 10 percent. I use 10 percent here because it’s reasonable and easily accomplished. As you go forward, it’s certainly possible with diligent investing and professional guidance to achieve 12 percent or more so you can reach your financial goals sooner.Compound:
