Frequently Asked Questions
1. How much of my retirement savings should I put into passive income investments?
There is no one-size-fits-all answer, as it deeply depends on your total net worth, your income needs, and your risk tolerance. A very conservative retiree might have 70% or more of their portfolio in fixed-income assets like bonds and CDs. A retiree with a higher risk tolerance and a longer time horizon might have a 50/50 split between stocks and bonds. A financial advisor can help you determine an asset allocation that is right for you, but the focus should always be on preserving your capital while generating the income you need.
2. Will my passive income affect my Social Security benefits?
This is a common point of confusion. Passive income—such as interest, dividends, and capital gains from investments—does not count toward the Social Security earnings limit. That limit only applies to earned income from a job if you are collecting benefits before reaching your full retirement age. However, your total “combined income” (which includes your adjusted gross income, nontaxable interest, and half of your Social Security benefits) can affect whether your Social Security benefits are taxed. If your combined income exceeds certain thresholds, a portion of your benefits may become taxable.
3. Are REITs a safe investment for retirees?
REITs can be a good source of income and provide diversification, but they are not as safe as CDs or Treasury bonds. Because most REITs are traded on the stock exchange, their prices can be volatile, just like any other stock. They are also sensitive to changes in interest rates and the health of the real estate market. They are best used as a smaller part of a well-diversified portfolio rather than a core holding for a very conservative investor.
4. What’s the difference between a dividend and a bond coupon?
Both provide income, but they are fundamentally different. A bond coupon is a contractual obligation. The entity that issued the bond is legally required to make the interest payments and return your principal at maturity. A dividend is a discretionary distribution of a company’s profits. A company’s board of directors can choose to increase, decrease, or eliminate its dividend at any time, usually based on the company’s financial health. This makes bond income generally more reliable and secure than dividend income.
5. Can I live entirely on passive income in retirement?
Absolutely. In fact, this is the ultimate goal of financial freedom for a retiree. A well-constructed retirement plan aims to create a portfolio of passive income streams (from investments, annuities, etc.) that, when combined with Social Security and any pensions, is sufficient to cover all of your living expenses for the rest of your life. It requires careful planning, disciplined saving during your working years, and a smart investment strategy in retirement, but it is an achievable and empowering goal.
