Earn while you're not working: Crafting a financial portfolio that generates revenue.
The amount of money you can earn is determined by various factors such as the size of your savings, how they're invested, changes in interest rates, and your tolerance for risk. Managing an income-generating portfolio involves making some fundamental decisions.
Around 3 to 5 years before you plan to start using your portfolio to generate income, think about how you'd like to spend your time upon leaving your job. Will you continue with paid work but reduce your hours? Do you want to travel extensively? Learn something new? Build an eco-friendly house? The more specific you are, the simpler it will be to estimate your actual income needs.
Next, consider the steady payments you'll receive which won't fluctuate. These include Social Security benefits (you can get an estimate based on your earnings record) and pensions.
Calculate your expenses to understand the level of income you require. Financial planner Marguerita Cheng suggests her clients write down their "core and essential" costs, which she refers to as "non-fixed," since some expenses may change, like your energy bill that can vary seasonally. She also asks them to detail "variable or lifestyle" costs representing regular expenses that matter to them.
If your plans involve new expenses or a move with potentially higher living costs, account for these factors.
To bridge the income gap, take the amount you expect to receive from your assets and subtract your needs from that number. For example, if you need $65,000 per year but will only get $40,000, you'll need to generate the remaining $25,000.
Several ways to create this income include obtaining interest from high-yield savings accounts, money market accounts, certificates of deposit, Treasury bills, and government and corporate bonds. Dividends from stocks can also provide income. Certified financial planner David Edmisten suggests owning both growth stocks and dividend-paying stocks for capital appreciation alongside dividend payments.
Capital gains, the difference between purchase and sale prices of assets, are another income source.
You can access these investment types through low-cost mutual funds, exchange-traded funds, and more.
To build a long-term, income-producing portfolio, strike a balance between immediate needs, near-term cash, medium- to long-term growth, and future requirements.
Certified financial planner David Edmisten suggests adopting a "bucket strategy":
- Keep 18 to 24 months' expenses in cash or cash equivalents (including high-yield savings accounts, short-term CDs, and government bills).
- Use short-term corporate bonds and longer-term CDs for cash needed within 3 to 5 years.
- Have a mix of stocks and longer-term bonds for funds required in years 6-10.
- Allocate your savings purely to stock investments for periods 11 and beyond.
To replenish depleting cash reserves, consider stopping dividend reinvestment, selling some shares during periods when it's favorable, or using your bonds in the near term. You might also consider reducing retirement savings contributions, or examine potential expenses reductions - housing, transportation, and health care are common large costs for many individuals.
Diversify your income streams to ensure flexibility in choosing investments when most advantageous. Consider the tax consequences of different investments, too.
Going beyond stocks that pay dividends, bonds, and interest-bearing instruments, some individuals might desire annuities as part of their income sources. You can buy them for the assurance of a stable payout over a specified period.
Seufer suggests that annuities might be suitable for people with a touch of risk aversion, particularly those lacking pensions or other guaranteed income sources. However, annuities can be pricey and limit the freedom to adapt your choices when life circumstances change. Hence, make sure you're well-informed about the contract and its restrictions.
Additionally, it's beneficial to have diverse options for drawing from your accounts, considering their tax implications. Seufer proposes combining a pre-tax 401(k), a taxable brokerage account, and tax-free funds in a Roth IRA. Furthermore, some investments produce tax-free earnings either federally or locally, such as Treasury bills and municipal bonds.
Seek support for your requirements
If you're confident in handling things independently, that's great. If not, you might consider paying a fee to a certified financial planner for a fee-only service to map out your strategy and offer periodic guidance. Alternatively, you might want someone to create a plan and actively oversee your investments if they are capable.
Discuss with the planner what assistance you require. It could involve assistance with budgeting, taxes, or making the most of Social Security benefits when you and your partner withdraw them. "It's okay to be clear regarding the areas where you believe you need help," Cheng notes.
Moreover, if you entrust a firm with managing your pension funds, it would be preferable not to spend more than 1% of your assets annually on their management service, according to Cheng.
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In the context of planning for retirement, successful implementation of an income-generating portfolio can lead to a prosperous business of managing one's finances. Moreover, diversifying income streams through investments like high-yield savings accounts, stocks, and bonds can contribute significantly to the overall success of this business.
Source: edition.cnn.com
