How passive income can help you do retirement your way

Building passive income streams now can bring greater financial freedom during retirement, so you can do more of what you love.

Dreaming of the day you’ll step away from the grind of the workweek and into a schedule filled with lingering moments at the local cafe, a three-month destination getaway or—perhaps best of all—more time to spend with the special people in your life? Retirement presents nearly endless opportunities to pursue your passions. 

And while you may already be taking steps to plan for this special life stage—like contributing to a 401(k)—building additional layers such as passive income into your retirement plan now could give you the chance to do even more of everything you love once you reach retirement. 

Think of passive income as a cushion that sits on top of your retirement savings plan. With it, you can bring in additional revenue and assets, which can ultimately help you feel more comfortable, explore further and soak up special times—your way. Here’s how passive income works and how it can be included in your retirement plan.  

Man stands by his boat smiling on the beach.

What is passive income?

Similar to how it sounds, passive income is money you earn without having to exert much (or any) effort on an ongoing basis. Earning passive income means you put in some time at the beginning and then build income streams that continue to generate profit, even as you step away. From taking advantage of your management skills to harnessing your creativity, you can pair your area of expertise with a type of passive income to truly enjoy the process.

Passive income vs. active income vs. residual income

Whether your company pays you a steady paycheck or you’re self-employed and selling a service, active income is payment for work you’ve done. It’s likely that your active income is not only paying the bills but also allowing you to enjoy life. When you reach retirement, your active income will likely go away, which is why retirement planning is so important.

Passive income, also called residual income, provides the chance for a little more flexibility. If you put in the work to learn about your options and set up your passive income stream now, you could continue to earn for years to come. 

Types of passive income

Here are a few common types of passive income and how they compare with other income streams.

  • Investments: If you’ve invested in the stock market or given a friend money to back a big idea, you may already be familiar with investments—or money that’s spent with the expectation of making a profit. Unlike money deposited in a bank account, money you invest isn’t guaranteed. The value of your money could fluctuate based on the stock market or the success of the thing you invested in. So educate yourself about investments before you even think about making any.
  • Rentals: Have a cottage at the beach you only use a few weeks every year? Or maybe you never sold your starter home after moving out. Vacationers or tenants can help you earn passive income by paying to rent your property. Whether you offer a vacation rental or one that’s more long-term will depend on the type of property you own and your goals overall. Whatever you decide, you’ll want to do your homework. There is some work involved in managing a property. Plus, it’s important to understand things like how to screen tenants and plan for unexpected expenses that could come your way.
  • Royalties: If you’re passionate about creating, royalties could be something to consider. A royalty is the money you receive when someone else uses a creation you own. So if a photo you took appears in a book or a song you composed is part of an ad, you could earn a royalty. The terms of the payment would be laid out in a licensing agreement. There are many types of royalties, though, so do some research to understand what to expect.
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Benefits of passive income

With passive income, you can expect:

  • Little to no impact on your schedule. You’re likely busy with work, family and life in general. The beauty of passive income is that you can earn money without having to interrupt your current routines. 
  • Flexibility of location. With most passive income streams, you can earn revenue from just about anywhere. You can live and travel as you please, without having to worry about residing in a certain area. 
  • More financial freedom to retire your way. By adding passive income to your retirement plan, you could eventually have more flexibility to choose the things that matter most to you, whether that’s additional golf lessons or extra flights to see the grandkids.

Passive income ideas: Ways to make passive income

Only you can find the passive income stream that’s exactly right for you, but here are a few ideas to consider.

Renting property

If you have a guest house and love meeting new people, you might consider renting the space to a college student or elderly couple. Vacation homes, storage space, boats, RVs, backyard pools and parking spaces can all be rented as well.

Creating online courses

You don’t have to be a teacher to share your expertise with others. If furry friends are your sweet spot, you might share your experience fostering pets—through videos, lesson guides and worksheets. First, take steps to retain your ownership of the content; then set a price for the course and enjoy the benefits of passive income for months or years to come. 

Selling ad space

Whether you have a personal website that could host online ads or you’re up for wrapping your car with a company’s branding, selling ad space can add up to some extra money.

Selling your photos

Are you always capturing priceless moments as the sun sets or birds soar over an open field? Take your hobby and turn it into a passive income stream by selling your favorite shots to stock photography websites. You could receive royalties if your images are used. 

Writing an e-book

If you’re writing the next great novel, you may already have a publisher. If not, consider self-publishing an e-book. You’ll want to make sure you’re working with a self-publishing company that lets you keep the rights to your work. That way, as readers purchase your book online, the royalties will be sent your way. 

Monetizing your designs

If your friends are always asking you to design wedding invites and baby announcements for them, you might be someone who has various designs or templates just sitting on your computer. Get them online, sell the downloads and reap the rewards of your work. Before you start, you may want to do a little research about protecting your work online. You’ll want to be clear with your terms of purchase and how you deliver your files to customers.

Man laughs holding a saxophone.

What else to know about passive income

While the idea of building passive income streams now to help cushion your golden years seems like a win-win, be sure to do your research. You’ll want to consider all the tips and potential pitfalls you can before you commit. One area you’ll definitely want to understand is taxes. 

Passive income taxes  

How your passive income will be taxed will vary based on your exact circumstances. In many cases, it’s considered regular income and will be taxed accordingly. In other instances, it may be taxed differently. The tax implications for renting out a home could be different from those for selling your photography. Do your research, and consider talking to a tax professional.

While it may seem to be a way off, retirement will be here before you know it. And whether you picture yourself enjoying a current passion full time or having the flexibility to explore a few new ones, building a passive income stream now can help put you on the path to spending your retirement your way.

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