Planning for retirement can be a daunting task, especially considering the unpredictability of the market. The 2008 financial crisis serves as a stark reminder of the perils of putting all your eggs in one basket. Many who solely relied on their stocks saw their retirement savings drastically diminish during the crisis. However, a diversified passive income strategy, best devised and managed with the aid of a financial advisor, can potentially safeguard your retirement fund against such uncertainties. 

Passive income, which includes earnings from sources such as investments, rental income and royalties, can significantly enhance your retirement fund. The more diversified your investments are the better your portfolio can help you achieve your long-term financial goals. 

To illustrate, consider an account of a 55-year-old woman who wisely invested in rental properties along with different investments in the stock market. By the time she retired at 65, her rental properties were generating an annual passive income of $30,000 in addition to the growth of your portfolio. This income significantly boosted her retirement fund, providing her with a comfortable retirement. 

Similarly, consider another account of someone who started investing in dividend-paying stocks during their 30s. At retirement, his stocks were generating an average annual dividend income of $20,000, supplementing their other retirement income sources. 

As you can see, there are different opportunities to earn passive income which can all help you supplement your income in retirement These examples represent how a financial advisor can effectively help individuals plan and manage their diversified passive income sources to potentially augment their retirement funds.

Passive Income Investment Options for Retirees

There are various strategies, or investment types, to generate passive income, each with its own set of risks and returns. The right investment for you is going to depend on what your goals ultimately are and what you want to accomplish with your portfolio. Here are some of the most common types of income investments:

• Rental property: These investments can provide a steady income but involves property management hassles. 
• Peer-to-peer lending: This type of lending carries the potential for higher returns and greater risk as not everyone you lend money to may pay it back.
• Royalties: Royalties from intellectual property (IP) can supplement other income if you have software, a book or other types of IP. 
• Dividends: Many stocks may pay out a distribution of profits from the company, called dividends. It can be a very passive way to maximize income during retirement if you choose the right dividend-paying stocks.

A strong passive income strategy in your portfolio is going to be diversified in some way. This could mean having multiple types of investments from the group above or it could be having a variety of types of one investment type. For example, having dividend-paying stocks in multiple industries to protect against the poor performance of one could be a way to diversify your strategy. 

Different types of passive income are taxed differently. For example, rental income is subject to ordinary income tax rates while qualified dividends are taxed at lower long-term capital gains tax rates. If you have a diversified portfolio then you should think about speaking to a tax professional who is experienced in dealing with the types of investments you have.

Strategies such as tax-loss harvesting, which involves selling securities at a loss to offset a capital gains tax liability and investing in tax-advantaged accounts, which can provide tax benefits, can be beneficial for retirees. The right tax strategy for everyone is going to be very personalized to your portfolio. 

It can be difficult when planning out your portfolio to know how much money you need to come in from passive investments. Outside of working with a professional, such as a financial advisor, there are ways for you to estimate how much you may want to invest in certain passive investments to help you reach your goals. 

One can utilize a simple formula to estimate how much passive income might be needed for a comfortable retirement: (Annual living expenses – Annual pension/Social Security benefits) = Required annual passive income. 

You’ll obviously need to also calculate your expected social security benefits. The role of pensions and social security benefits in this formula is to account for that portion of your total retirement income. This formula can provide a baseline for planning your passive income strategy and financial advisors can provide personalized assistance for your planning process.

How to Make Extra Income During Retirement

If you want to retire comfortably, you’ll need income. Whether you’re retiring now or in the future, there are several ways to produce this money. And the earlier you start, the more possibilities you’ll have for making extra money.

After a lifetime of working, it can be fantastic to have your money working for you, and you’ll also have money saved in the Social Security system from years of working and paying taxes. However, while Social Security is a good place to start, it was not designed to meet all of your retirement needs, so you’ll need to generate extra sources of income.

Read Also: The Risks and Rewards of Passive Income Ventures

There are numerous ways to generate income in retirement, but it helps if you already have a large sum of money from your working years. If you do, you’ll be able to turn it into a variety of revenue streams, based on your requirements and risk tolerance. With proper planning, you may be able to significantly lower your taxes in retirement.

1. Social Security

Social Security can form the basis of any retirement income plan, and while it was never intended as a complete solution for retirement income, Social Security does offer a lot. One huge benefit of the program is that by the time you retire you’ve already made your contributions to the program, so there’s nothing left for you to do. You don’t have to worry about a further investment or otherwise setting aside money from a paycheck.

The average retired worker receives more than $1,800 a month from Social Security, and some workers earn considerably more than that. That level of money can establish a firm base of income, but you’ll likely need to supplement it with other streams, such as those that follow.

Plus, you can boost your Social Security payout as much as 24 percent, if you’re willing to delay taking your benefits past full retirement age. And you have still other ways to fatten your Social Security check.

If you’re among the lowest earners, you may be able to receive your monthly check tax-free, and even those earning a bit more can still receive some of their benefits tax-free.

2. Rental income

Owning a rental property can be an excellent way to generate income in retirement, and it doesn’t have to be too difficult to do so, especially if you invest in residential real estate. While you’ll have to put in some time managing the property, it can make you real money over time.

It can be smart to think years out on rental real estate because you’ll be able to generate more income that way. Rents typically rise over time, giving you more of a cushion over your costs, such as your mortgage. And with time you can pay down or refinance your mortgage, giving you more breathing room on your expenses and more money in your pocket during retirement.

However, it’s important to remember that real estate can also require income, too. It’s not just a one-way cash generator. Roofs need to be replaced, furnaces need to be repaired, and so on. If you’re on a tight income, you’ll want to budget for the unexpected repair and have ready cash.

If managing property is not your thing, you have other ways to invest in real estate, too.

3. CDs

Investing in a CD is one of the safest and easiest ways to make retirement income, and now it’s a great time to invest in CDs, given a relative high point in rates. CDs are easy to buy, and CDs at FDIC-backed banks are totally safe.

One strategy for CD investors is a CD ladder, which helps minimize the risk of putting your money in all at once. With a ladder you set up CDs at staggered maturities, say, each year for five years. When the one-year CD matures, you roll it into a five-year CD and wait for the next CD – now just a year away – to mature. This way you always have a CD maturing, giving you ready access to cash and lowering your interest-rate risk.

You could also set up a barbell strategy. Here you put about half your money in long-term CDs where the rates are typically higher and the rest in short-term CDs, where the money is more liquid, giving you access to the cash when you need it. You end up with an average return on your money but you have good access to cash, too.

If you go with CDs, it makes the most sense to find the best rates across the country.

4. Annuities

Annuities are a perennially popular option for retirees, but they offer some positives in addition to some negatives. Anyone considering an annuity should understand that they’re quite complex, though their promised benefits – a monthly paycheck – are relatively straightforward.

The options with annuities are all over the place. You can structure your annuity to have insurance-like benefits such as a death benefit and can even pass the monthly income on to a spouse. You can have the potential paycheck be predetermined (as in a fixed annuity) or have it variable (as in a variable annuity). You can start the payments now or at some future time.

But all those options lead not only to greater complexity but also a higher cost, and annuity contracts are almost infamous for their complexity and hard-to-understand rules. Still, for the right person an annuity can provide stable monthly income that makes retirement more fun.

5. Bond funds

Bond funds are an effective way to get a diversified portfolio of bonds without having to select a bunch of bonds yourself. A bond ETF, for example, can provide you with a broad range of bonds or a quite narrow range of bonds, depending on exactly the kind of exposure you want.

Among the more typical options, you can choose among issuers – the federal government, corporations, states and municipalities. You can choose between short-, medium- and long-term bonds. You can have riskier issuers, such as high-yield or “junk” bonds. And there are more arcane options besides.

For example, if you want short-term government bonds or intermediate-term corporate bonds, you can find funds for those. If you want a mix of all kinds of bonds, you can go that direction, too. You can also focus on funds that offer a selection of tax-free municipal bonds. The point is: You have a ton of options with bond funds, and they’re easier to trade than bonds themselves.

Bonds provide steady income, and bonds are typically much safer than stocks and some other market-based investments.

6. Dividend stocks

Dividend stocks offer two potential benefits over bonds. First, they sometimes pay yields that are higher than what bonds offer. Second, the best companies raise their payouts year after year, meaning you’ll get a raise just for continuing to hold your stock. Unlike bonds, where the payout is typically fixed, the income stream from a dividend stock has the potential to climb over time.

Dividend stocks are usually lower risk than growth stocks, but that doesn’t mean you can’t lose money on them, especially in the short term. Like all stocks, dividend stocks fluctuate, though the better-run companies tend to appreciate over time as they raise their payouts.

It can be difficult to successfully pick dividend stocks, so investors often turn to a dividend stock fund, such as an ETF. The best dividend stock funds have low expense ratios and offer a diversified portfolio of stocks so that performance doesn’t depend too heavily on any one stock. A fund will usually be less volatile than individual stocks and can still grow its payout over time.

As you’re amassing your retirement nest egg, keep your assets inside a Roth IRA and you’ll never pay taxes on the dividends and capital gains again. That’s tax-free retirement!

7. A new part-time job or side business

If you’re out of options, you might consider getting a part-time job, especially if it’s for a short period of time when you need the money. You might also consider making a lifelong hobby into a side business, turning some of your valuable knowledge into cash.

While many people dream of never working again when they retire, many others find retirement to be much different from what they expected. For these reasons, some individuals do decide to return to the workforce, if only to get out of the house a few days a week and see people. Even those who retire early may want to pursue a job they feel passionate about.

Defined Benefit Plans

If you have a defined benefit pension, you should know before you retire about how much pension income you’ll receive. This income is typically based on how long you worked at your company, what you earned and your age when you stopped working. As you approach retirement, you should check with your employer’s human resources office on a number of pension eligibility questions. And after you retire, the office should still be a valuable resource.

First, you should verify that you are fully vested—that is, eligible to collect a full pension. Many private company employees become vested after five years of service, or gradually between years three and seven.

You should also ask your employer what happens to your pension plan benefits if you retire sooner than 65 or work past that age. Some companies might decrease the amount of pension you would otherwise receive if you stop working earlier or later than 65.

If you’re married and are part of a defined benefit plan, your employer is legally bound to pay some of your pension amount to your surviving spouse when you die. The amount may be set at 50 percent, but you may be able to increase it. If you don’t want your spouse to get any of your pension, your spouse must sign a written consent waiving rights to this income.

Pensions can be a major attraction to people working in the public sector and armed services. Government pensions and military retired pay tend to differ from corporate pensions in several ways:

• Government employees may be required to contribute a percentage of their after-tax earnings to their pensions.
• Government employees and military service members may be able to receive their pensions after a set time—such as 20 or 30 years—no matter how old they are or how close they are to the more traditional retirement age of 65.
• Government pensions and military retired pay tend to be adjusted automatically for inflation using a cost of living index adjustment, or COLA.

If you have questions are problems with your pension, a good place to start is the Department of Labor’s Employee Benefits Security Administration (EBSA), which regulates retirement plans. You may contact EBSA toll-free: 866-444-EBSA (3272).

Many company pensions are insured by the Pension Benefit Guaranty Corporation (PBGC). This federally run organization was set up to protect defined benefit pensions—including those that end because an employer terminates a plan. If you lose track of your pension or your employer mismanages your plan, you can ask for help from the PBGC. You also can search for a pension you think you might have a right to on the PBGC’s website. All you need is your name and the name of your former employer.

Final Words

By diverse passive income sources and rigorous planning, you may be able to develop a strong retirement savings fund that will allow you to live a more comfortable life in your golden years. Retirement should be about enjoying the results of your effort rather than stressing about money, and with proper financial planning and diverse income plans, this may be accomplished.