Imagine a never ending source of investment income. Is it possible? Perhaps… if you do things right.
First, you have to understand which investments generate what type of income. I find it helpful to break investment income into three categories: predictable income, variable income and guaranteed income.
The most effective way to generate investment income will be to use a combination of all three strategies, each of which is outlined below.
Predictable Investment Income
Interest income from corporate bonds and dividend income paid by stocks are two good examples of predictable investment income. These sources of income can be relied upon in most circumstances, but they are not guaranteed.
You can use these predictable sources of investment income to supplement guaranteed income by buying interest and dividend paying investments directly, or by buying funds that focus on such investments.
Dividend income is paid by:Interest income is paid by:
- Bonds and Bond Funds
- Certificates of Deposit
- Money Market Funds
- Other Safe Investments
- High Yield Investments
- Income From Selling Covered Calls
Dividend and interest producing investments are best used as part of a total return portfolio as described in the last section below. If used on their own rather than in combination with other income producing strategies, these predictable sources of investment income are best for people:
- Who do not want to spend any of their principal.
- Who have shorter life expectancies.
- Who may not need their investment income to keep pace with inflation.
Variable Investment Income
One way to create lasting investment income is to build an overall portfolio consisting of cash, fixed income and equities.
The cash and fixed income form the "safe" part of your portfolio. They will generate current investment income in the form of interest. The equities form the growth portion of the portfolio, which allows your future investment income to increase with inflation.
There are capital preservation rules and withdrawal rules that need to be strictly followed when creating this type of portfolio and the income generated will vary from year to year.
Academic studies say that creating an income producing portfolio, such as described above, is the best way to generate investment income that will last over a potentially long life expectancy.
If you don’t want to create your own portfolio, you can use a retirement income fund, which will do most of the work for you.
This total return, or variable investment income strategy, is best for people:- With long life expectancies.
- Who want to leave an inheritance.
- Who take a long term, unemotional approach to investing.
A variable investment income strategy can be layered over a base of guaranteed income to create what I call the Ultimate Retirement Income Strategy.
Guaranteed Investment Income
Guaranteed investment income is exactly what it sounds like; income that is guaranteed by either the U.S. government, or an insurance company. Safe investments like certificates of deposit, treasury securities and fixed annuities are the primary sources of guaranteed investment income. Learn more in Making Safe Investments.
In addition, there are several ways you can purchase additional guaranteed income:
- The most common way to purchase guaranteed investment income is by purchasing an annuity.
- If you took social security early you may be able to repay benefits and essentially purchase a higher future benefit amount.
- Your employer sponsored pension plan may allow you to purchase years of service so you qualify for a higher benefit.
Guaranteed investment income makes an excellent foundation for a more comprehensive retirement income strategy.
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