The Dos and Don’ts of Generating Passive Income in Retirement

Last Updated on March 29, 2023 by Ashley Lipman

The Dos and Don’t of Generating Passive Income in Retirement. Planning for retirement is a lifelong effort best handled sooner rather than later. However, there’s been a significant shift in recent years about what retirement means and how to get there sooner. The financial independence and retire early (FIRE) movement is widespread among the Millennial generation.

Generating passive income is an integral piece of the retirement puzzle. Here are some dos and don’ts to bear in mind as you generate passive income in retirement.

How to Generate Passive Retirement Income

Don’t Misunderstand the Term “Passive”

One of the most significant errors people make when planning for passive income is misunderstanding the term. “Passive” doesn’t mean that there’s no work involved. Instead, it means not committing to daily work and getting paid in the context of your effort. 

When you work a full-time job, you earn money based on what you accomplish on a given day. That money is either paid hourly for your time or calculated into a salary reflecting your time and skill set. 

Passive income is generated with minimal ongoing effort. However, starting a passive income stream often requires ample time and resources. For instance, if you create an online course on Udemy, you could hit publish and call it a day. However, putting the course together will take time and effort. There are also ongoing marketing efforts and updates to consider.

While you can earn with apps for passive income, most passive income streams require some upfront work or maintenance to continue. Keep this in mind when choosing the best options for your retirement.

Do Set Intentional Goals and Commitment Levels

Start by reflecting on your goals in retirement and how much effort you’re willing to put into passive income, understanding that some streams require more work than others. 

Clarify the intention of generating income during your retirement. For example, is this money earmarked to pay for extras like travel or experiences, or is it necessary to support your living costs? Determining this factor will also help you clarify how much effort you should dedicate.

Decide how many hours per week you’re willing to work to create and maintain your income streams. Passive income efforts tend to be front-loaded, requiring more resources at the start to get them established.

Finally, consider what you need for support to get these projects off the ground. If you’re investing in real estate, you’ll need financial resources to secure a property. Then, you might decide to hire property managers as the best way to step back and enjoy your retirement.

Getting clear before taking the leap is essential for protecting your assets and getting the most out of this opportunity.

Do Talk to an Accountant First

There’s no clear, definitive answer for how your passive income will impact your pension, investment draws, taxation, etc. Everyone has a unique scenario, and different types of passive income have unique taxation rules.

Make an appointment with your financial advisor or accountant before investing in a passive income stream. Ask about your current retirement income and determine the best way to avoid being overtaxed or upsetting the IRS. 

If you don’t already have an accountant overseeing your taxes and books, now is the time to find one. Look for someone who specializes in retired clients and clearly understands state and federal tax laws.

Don’t Wait Until Retirement to Start

The best way to generate passive income in retirement is to start creating income streams well before you retire. A proactive approach gives you time to get established, figure out what you’re doing, and make a few mistakes without serious risk. Creating passive income streams while still employed also provides a financial buffer to support the upfront costs involved. 

It’s never too early to start thinking about lifelong passive income, but don’t worry if you’ve put it off until later. The point is to start whenever possible to get traction.

Do Plan for Multiple Income Streams

Economic instability and financial turmoil have been a common thread for many in recent years, and unfortunately, that’s unlikely to change. However, if there’s a lesson to be learned from the chaos, it’s the value of not keeping all of your eggs in one basket.

Think outside the proverbial egg basket and consider how you can create multiple passive retirement income streams. For example, you may have a real estate investment as your primary form of passive income and sell stock photos as another. Other options include a dividend growth investing and living off dividends. Having several income streams will protect your livelihood should one area suffer.

Don’t Squander Your Precious Time

Remember that your retirement is supposed to be just that: a retirement. Ensure that your quest to generate passive income doesn’t become all-consuming. It’s worth paying someone to help you launch and maintain your passive income if it means enjoying your time.

While passive income requires some work, don’t let it become active income, making continuous work a necessity. Instead, find your balance and enjoy the fruits of your labor.

Do Explore Your Passions

Don’t restrict yourself to money-centric activities that bring you no joy. Instead, consider exploring your creative passions and trying to generate income around them. For example, if you love bird watching, you could start a blog about your experience or create digital tracking logs to sell. Likewise, if you enjoy painting or making jewelry, consider creating a social media account for your work.

Again, these efforts shouldn’t become a full-time hustle. Having clear boundaries between hobbies and money-making endeavors is better for your retirement. However, it’s worth considering.

Don’t Forget to Reinvest

Finally, don’t forget to reinvest the money you earn from your passive retirement income streams. Create a structured plan that allows you to use your earnings to enjoy life while setting yourself up for future success. Reinvesting can help your passive income streams grow and expand.

Keep these essential considerations in mind as you start your passive income journey. Brainstorm ideas, consult an accountant, and invest your time and money in revenue-generating activities that will bolster your retirement.

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