Written by Hi, it’s Dre Griggs of Obsidian Wisdom. Today we answer the question, what are the best retirement income streams for passive income? First, let’s start with the seven income streams and what they are. I always talk about the seven streams that the IRS says that they recognize, and then that’s just where it makes sense for us to choose what the best streams will be.
Seven streams of income
And then we’ll talk about the type of ways you can generate an income inside of these seven streams. The first one is your active income, so that’s when you work every day and you get a check. You trade your time for money. Then you have your profits from a business, your investments. That’s your dividend income rental. That’s normally gonna be a property. Royalty, you just invented something, you license it out. Capital gains is selling stocks that you held for over one year, and then you have your interest income. Which is going to normally be things like your savings accounts, bonds. Things where you have a certain number of payments that are already prearranged, and then you get those payments. So there’s a little bit less risk in those and as a result they end up being a little bit less of a return.
So when you’re looking at these streams and you’re saying, okay, Dre, what are going to be my best passive income streams? We already know active is out of the question. We’re retired and we’re talking about passive retirement income, so we’re not gonna work for our money anymore.
Ideal retirement path
Ideally, somewhere about halfway towards whatever your retirement goal is, you have half your income coming from active. You have half your income coming from passive. Ideally, you are able to put your money to work so you can see the light at the end of the tunnel. Where, you may say, you know what?
I need the money, so I’ll get started wherever. Then, when I learn the skill from actively working, I will shift my resources towards financial freedom. We all learned, financial freedom, but I learned that financial freedom ain’t free and it does have a little bit of a cost. So we all gotta get started. Fit in where we get in. Profits from a business, I think we’re really good.
The truth about building wealth
More times than not, I have found that just mathematically calculating it.You are going to generate more retirement income, learning some sort of a trade, a skill, starting a business of some kind. If you spend two to five years becoming the best at something that you love doing and you can offer it as a service or product. You are going to leverage and make more money than if you worked and got promoted every two years and got a 10% raise every time you got promoted.
Now you and I know that it’s unlikely that you’re gonna get promoted every two years and get a 10% raise. But even if you did, you would end up with a greater return if you’re able to start a business of some kind. The way I often put it to people is if you’ve ever worked in Excel. So in my past life, I was a financial analyst when I worked at certain investment banking. We would always be trying to get our work done.
We would sit there and we would calculate the numbers and we would work in excels. Using spreadsheets to create reports for the leadership team. Someone would say, Hey, you should learn how to make macros. Macros are basically writing a program that automatically does some of your everyday routine. Which may take you hours to do something and it could take minutes for a macro to do it for you.
It’s about building leverage
The trade off is it costs you a ton of hours in the beginning to figure out the macro, to work through the kinks to get it to work right. And some people, it just wasn’t something that they could understand. They said, you know what, Dre? It’s gonna take me. Let’s say 40 hours to get this macro to work right?
And yeah, ideally it’s gonna save me time in the long run, but in the meantime, I have to work on the macro and I have to get my everyday work done. So I’m just gonna work on the everyday work because that is gonna give me a short term better payoff. And while it’s true, the difference is if you were able to figure out how to use the macro and it took you three months, let’s say, to get the macro to work. Then the next, I don’t know, year or so of you working in that position, you have now exponentially increased the amount of time that you have. To where instead of it taking you, Two hours a day to run a report.
It takes you two minutes because you have the macro. So every single day you get another hour and 58 minutes back. And as a result, if you did it for a few months, it’s completely worth the trade off. But the difficulty is most of us, we can’t see the long-term benefit of things, and so we aren’t really looking with that view.
And so I often try to have a take a step back and just see some of the long-term benefits. So if you’re not actively working and you can put the money in a business and then you can figure out some skills, some products, some service where it exponentially increases the amount of revenue that you generate and it saves you even more time, just like a macro.
You have options
Well, in my view, that would obviously be worth it. Now, even if you’re not super excited about being a business owner, I would say you would consider learning about investing in stocks. Now, whether you wanna pay me to choose the stocks or whether you wanna choose the stocks yourself, it is a learnable process.
And what I mean is if you and I went to Vegas and we were playing the slot machine, the slot machine doesn’t require any skill. All you’re gonna do is put the money in, pull the lever, and then you’re gonna win some, you’re gonna lose some. But the slot machine, because it has no skill, it’s actually well known that it’s one of the lowest success rates possible.
That it eats up so much money that it will be better for you to learn one of the tables that requires some skill. But it has a significantly better chance of you making money. So if you learn blackjack or you learn poker, well both of those takes a lot more skill and takes a lot more time in the beginning. You’ll find that you have a significantly higher chance of actually making money.
So skilled, you are paid to do nothing
In fact, there are casinos where they have a Blackjack Hall of Fame and they will list people that are in this Blackjack Hall of Fame, and I think it said that they get paid like, a hundred thousand dollars and they get comped every time they show up and they get lots of drinks and cards and they get all this stuff, but they all had to agree to no longer play at the blackjack table.
Well, well, well, why is that? And the reason is, They have figured out a process that didn’t mean they won like 51% of the time to 49% of the time. They would win like 70, 80, 90% of the time. And so if they continued playing, the casino said we would run outta money, so we would rather pay you to not play at the blackjack table.
There are professional poker players who wake up every day and play poker for a living and they’re living not on a minimum wage. They’re, they’re not living paycheck to paycheck. They are living lavishly, wealthy lives. Now, of course, you and I understand that there are lots of people who are losing their money at these events, but I’m trying to show you, there is not a professional slot machine player.
Skills pay the bills
You cannot learn how to win at a slot machine. You will find people that say the craziest things. That this slot machine is gonna be the winner and I’m just gonna use it. And you and I both know that even if it worked, it was just a random act of luck. That there is no skill in a slot machine. But there is skill in the tables.
The tables give you a greater chance of success. It’s not that it’s significantly better, it’s just simply sitting at a table that gives you a 51%, 52% chance of winning is going to be the difference between you making money and losing it all. Versus sitting at a table that gives you a 47%, a 48% chance of winning. Which means that over time you will lose all of your money.
That means it’s designed for you to lose the majority of the time, and if you play over a long period of time, you will lose all your money. Because it’s designed for you to lose the majority of time. That it would be better for you to learn a skilled craft that will generate you the income that you need passively going forward than it is to play something with chance, where people will say, oh, everybody’s saying to do this meme stock or this Bitcoin, or something like that. And I’m like, yeah, that doesn’t require any skill. Our society doesn’t reward the people who aren’t providing significant value.
Make an informed decision
And so I find that investing in the stock market is one of those things. You and I both know the people in Congress because they have the information necessary to make the right decision. They make millions of dollars in the stock market. The stock market is not a scam. It is simply most people don’t spend the time learning and gathering the information to make an intelligent, informed decision.
With that. So I’m definitely big on the business. Whether you start a business or you invest in businesses, I’m big on that.
Investment retirement income
You can tailor that to investment income, and that’s another stream, and that is dividends. If you invest in stocks that are dividends, these are normally blue chips stocks. These are great for generating a retirement income.
More times than not, companies like AT&T, Coca-Cola very large. Significantly sized companies, that is very unlikely that they would disappear. That if Coca-Cola disappeared, that we would have a lot more problems than you and I can imagine, because that’s a company that’s been around for a very long time.
It’s very successful. It’s very large. For Coca-Cola to disappear, that would mean that some of the companies that they own, like they own like Gatorade, so Gatorade would’ve to be gone. And they own like Vitamin Water. There’s a lot of companies that they own, for them to disappear. We’re, we’re all in trouble. Dasani Water even. I mean, we could go on and on.
If you invest in some of these larger companies, it works better for them to be able to pay you a dividend. Share the profits with you as a business owner. Than it is for them to reinvest that money in the company. And the company, they’re like, look, the company’s massive. We’re racking in dough hands over fist. We don’t really need any more of the profits. Why don’t, why don’t you do something with it? And you may decide to invest back in us, which is fantastic. You may decide to take the money as an income, and that’s fine as well.
Not dividend chasing
It’s your choice, because we aren’t gonna be able to do anything amazing with this money. Which is crazy if you just like take a step back and think about it. With that said, there are companies that are not as amazing. Who are just offering the dividend to get you to invest in the company. That would, again, go back to the unskilled position.
You’re not just gonna invest in the company because they offer a dividend. You’re gonna invest in a company because it’s a great company to invest in, and they offer a dividend as icing on the cake. It’s, it’s a small difference, but it is a huge difference. Do not go around looking for a large dividend returning company, and then you invest in a company that’s gonna be gone in a year because they can’t maintain that dividend.
You want to invest in a company that is very stable and solid. Where the dividend makes sense for them to offer.
Start purchasing properties
The next one is rental income. You either can invest in REITs like real estate investment trust through the stock market (investment income). Those pay you income just like you’re investing in any sort of real estate.
The difference is you’re not looking for the real estate and the REITs, they’re gonna find the real estate and then they’ll develop the portfolio and then they’ll share the revenue with you. For REIT not to have to pay certain taxes, they have to give, I think it’s like 80% of the, the, the revenue back to the people who are inside of it.
And so most of them are able to do that. So it’s a good place for you to get the revenue. You could say, you know what, Dre, I like driving around looking at real estate property and so I’m gonna buy the property myself. And then you can have the rental income come in each month that you generate from the property.
So if you are able to rent a property out for $2,000 a month, well that’s how much you’re gonna generate in income. Now granted, you have to pay a portion of that towards the mortgage. Then you may pay a portion towards like taxes and the upkeep of the property. But whatever’s left is your overall rental income. And you could build a portfolio of properties.
Know what you’re getting into
Now, some people I know they like to get real estate through townhouses because, Townhouses are nice because they cost a little bit less, and as a result they can get multiple townhouses and then they can have someone who kind of manages it for ’em. The difficulty with townhouses, the only thing you wanna be cautious about is you don’t really have much of an avenue to dictate how much you want to get paid back.
You know what I mean is, is, uh townhouse, there’s gonna be maybe five of them on sale at any given time, and people are gonna be able to just go from one townhouse to the next. For most, the townhouses will look the same. Even if one has a few upgrades, it won’t justify a huge price difference. You don’t have a lot of flexibility when it comes to deciding what your price is.
If there’s someone in that property who’s willing to cut their rate race to the bottom, then that person’s gonna be the one selling quicker, and then that becomes a comparable for your property. And, and so you’re putting a lot of trust in some of the other people and, and you just want to be aware of that ahead of time.
But it could be someone who is gonna be investing in real estate or a duplex or something of that nature to where you’re generating the income. So that works as well.
Others pay to use your stuff
Royalties, that’s, that’s leasing. So I would say that’s probably not gonna be, In most of your best interests, most of you aren’t gonna want to invent something.
But with that said, the guy who invented the Super Soaker, I think it was a rocket scientist, it says he’s made maybe $65, a hundred million dollars off of licensing that invention just in royalty payments. To whatever the, the technology that is inside of that. He was paid millions of dollars. He did not have to do anything with that except patent the idea. And you could do something like that. You have a great invention. You want to sell it to another company, license for them to use it, go right ahead. That’ll be passive retirement income for you, and it can’t get much more passive than just opening your mailbox and a check coming in each month.
Living of the stock market
You have capital gains, and that’s just where you sell your stocks after you’ve had them for a year and a day. While stocks invested less than a year are taxed as regular income. Your long-term investments will have a lower tax rate of 15%.
And so you are able to say, all right, I have a hundred thousand dollars. I’m gonna live off of 5% of that, or I’m gonna put that towards what I get, or maybe I’ll live off of 10% to make the math easier for me. And then you’ll say, okay, so that means that I’m gonna be able to put $10,000. Towards my overall retirement income each year based off of that property.
And then you, you live off of that. Now, some people may make more sense to do five or three or four. Generally speaking, most people are going to decide what makes the most sense for them based on the return that they’re getting on their investment.
You don’t want to be taking more than your return because that means you’re dipping into your principle, which ultimately means that you’re gonna run out of money. But if you’re able to pick a strategy that allows you to only be living off the interest and then you can continue investing and allowing the rest of your money to grow.
Then it gives you the chance to be able to maintain that throughout your whole retirement. So some people like that.
Your safe and stable retirement income
Also, you’ll keep in mind that some people like interest income, so that’s just gonna be a set amount that you’ll get. If you’re interested in tax free retirement income, investing in a municipal bond can work. You can invest in an annuity, like an income annuity to where you get a certain amount of money that’s already guaranteed.
It’s like a personal pension every single month or every single year for the rest of your life. You also have the option to where you can just put the money in the debt of a company and then that company will pay you an interest. So the US government is one of those things. You can buy a bond for like a thousand dollars and then they’ll say, you know what?
We’ll give you $10 off of every thousand that you give us. And then you’re set. You’re gonna get that no matter what.
Final thoughts on retirement income
When you’re talking about passive retirement income, then you’re, you oftentimes are gonna be putting in a little bit of work in the beginning. Whether you have to put in the work by actively working to get the money. Which you will then invest in these passive income streams. Or whether you’re talking about a business that you work in and learn and develop a certain skill and a craft, and then that business generates the revenue.
And then you’re able to sell the business and then use that for your retirement. Or whether you’re talking about learning a craft, and that could be investing in the stock market or real estate, and then you can leverage the wisdom that you gained into a repeatable income for the rest of your life. The numbers show that 65% of self-made millionaires have at least three streams of income. And so I often am working to get my clients towards three streams of income because that significantly increases the likelihood of you becoming a millionaire and then having the passive retirement income that you need to never have to worry about money again the rest of your life.