How to Earn $30,000 a Year in Passive Retirement Income

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Retirement would be much easier if you could quit the job and still keep the paycheck. Unfortunately, no employer is so generous. Most of us need to replace our work income in retirement, so we can stay afloat financially. This income replacement can come from savings distributions, passive income streams, or both.

Passive income is good for retirees

Passive income is particularly appealing to retirees. Here’s a big reason why. When you receive cash, you are less dependent on investment liquidations to fund your retirement distributions. Investment liquidations aren’t bad, but they do reduce your potential for future gains.

Stock liquidations also expose you to short-term market fluctuations. If the market is down on the day you liquidate, for example, you will get less value for a position than you would like.

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Luckily, you should already have a passive income stream: your Social Security benefit. And there is another easily accessible source of passive income: dividend-paying stocks. Together, these two income streams can realistically produce a passive retirement income of $30,000 or more per year. Read on to find out how.

1. Social security

The average Social Security benefit in 2022 is $1,658 per month, which equates to just under $20,000 per year. Depending on your income history, your benefit could be higher or lower.

To project your estimated benefit to your expected retirement date, open an account at my social security. The online portal estimates your monthly benefit at different claim ages.

You will find that delaying the start of Social Security increases your monthly benefit. Postponing retirement is one strategy to increase your passive retirement income, but it’s not the only one. Other actions that may increase your Social Security income include:

  • Correct any missing information in your working file. You can find your work file in your my Social Security account. If your work file is incomplete, your calculated benefit will be too low. Contact Social Security to have your work record rectified.
  • Work at least 35 years. Your benefit takes into account your average income, calculated from your 35 best-paid years of work. If you have only worked, say, 30 years, the average calculation assumes zero income for the missing five years. This creates a lower average income and therefore a lower benefit.
  • earn more now. A higher income now and for the rest of your career will increase your Social Security benefits in retirement. You can test it on the my Social Security portal. Look for the box to update your future average annual salary and see how these changes affect your benefits.

2. Dividend shares

Stocks and premium dividend funds typically return 2-4% of your invested capital. Using this data point and some quick math, you can calculate how big your dividend portfolio will be to produce the income you want. Divide the target income by 2% for a conservative estimate. If you’re aiming for $10,000 in dividend income, for example, you’ll need $500,000 of dividend-paying stocks that pay 2%.

Amassing $500,000 of dividend-paying stocks is no small feat, but it’s doable if you have a longer time frame. A compound interest calculator like this one can help you sort out the details. For example, a monthly investment of $650 can grow to $500,000 in 25 years with an inflation-adjusted average annual growth rate of 7%.

You could invest this money in a low-fee, high-quality dividend fund. A fund offers you rapid diversification. Additionally, the fund will automatically exit stocks that do not meet the quality criteria. Funds for research include Vanguard Dividend Appreciation ETF (VIG -1.00%)the iShares Core Dividend Growth ETF (DGRO -0.91%)or the iShares Core High Dividend ETF (HDV -0.27%).

You will want to hold these shares in a tax-efficient retirement account. Otherwise, you will pay taxes annually on the dividend income. And one more thing: reinvest your dividends automatically while you’re still working. You can switch to cash distributions once you retire.

Cash is king

Even a small stream of passive retirement income improves your financial flexibility and the longevity of your savings. You should receive income from Social Security, but you can do so much more with a little planning.

Specifically, you can increase your income to increase your Social Security benefits. And you can increase your retirement contributions and start investing in dividend-paying stocks. Make these changes today and launch a new and improved perspective on your retirement.

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