If you’re planning to create the most secure financial future possible before you retire, you may consider passive income investments as part of your strategy. Income investing can provide regular cash flow, ensuring that your retirement savings last as long as you do. There are plenty of resources available online to help you start such as Money Morning’s Income Investing Guide. However, if you’re looking for a more introductory guide on the basics of fixed income investing, then look no further.
How Income Investing Is Related to Retirement
Many people have some sort of 401(k) or another retirement plan that automatically deposits money into an income-investing plan. However, people can also invest independently with individual retirement accounts (IRAs), which are tax-deferred savings accounts.
Different Types of Fixed Income Investments
There are many different types of income investing opportunities, so the first decision you need to make is what sort of income you’re looking for. Here are some of the main ways to gain cash flow through your investments:
Real estate investment trusts (REITs) are assets that invest in commercial properties like malls, apartments, and even warehouses. As publicly traded companies, REITs provide investors access to real estate with minimal risk.
A dividend is a distribution of an asset paid on shares of stock in a company. Dividends are usually declared once per year, but payouts can range from quarterly to yearly. When you own shares of stock in a company, your dividends depend upon the company’s earnings each quarter.
Bonds are a form of debt financing that allows firms to borrow money for a specified period, paying the lender interest along the way. Although the income generated by bonds comes from interest payments, companies usually set them semiannually.
While selling is not the only way to generate revenue, it is a popular method to acquire capital. Selling puts a company in direct competition with others, which requires a significant amount of knowledge, skill, and effort. For example, one strategy includes selling any stocks whose prices have dropped over time. This may seem counterintuitive since shares typically grow in value over time, but sometimes they don’t.
Mutual investment funds allow investors to pool their resources and capital, which means more money is available for investments. By pooling together, individuals get to share in the profits of a larger fund.
While many people choose to invest in income investing because it is a strategy that does not involve taking on many risks, there are also ways to maximize returns. By taking advantage of current market trends, you can potentially increase your retirement savings by making smart choices when investing.
The Role of 401(k)s and IRAs
It’s important to understand how 401(k)s and IRAs work—they’re very different types of investment vehicles with distinct advantages and disadvantages. 401(k)s can be used as savings vehicles, to create an emergency fund, or even as a backdoor way to invest in real estate (though that’s not advisable). In addition, IRAs allow you to withdraw your contributions at any time and typically offer better interest rates than savings accounts.
One popular strategy that displays how IRAs differ from other investment types is laddering: spreading your IRA across various fixed-rate investments with maturities ranging from 1 year up to 10 years. This ensures you have enough money available at every stage so you can take advantage of higher returns without having to sell lower-value assets too soon.
While income investing can sound complicated, it doesn’t have to be. Once you understand how these strategies work, you’ll be able to plan your financial future with confidence.