How Passive Income Can Help You Retire Early

Greetings, Great Passive Income friends! Enjoy this guest post from our friends over at Money Done Right.

More and more people are looking for ways to earn passive income, and there are a variety of tools and platforms available to facilitate this process. 

You might not think you have the time to add another source of income, but many of these strategies are simple and can be done relatively quickly.

With a second source of income, you could retire in your fifties or even sooner, much earlier than the American average of 61.  And once you’ve done the work to generate passive income, you’ll have that much more money coming in each month.

Is Passive Income Worth It?

Creating an entirely new source of income for yourself might sound overwhelming, but keep in mind that most of the work happens at the beginning of the process.

It might take time to get any substantial returns, but you’ll continue to receive money over a long period of time with little additional work required.

With that in mind, it’s easy to see why so many people leverage passive income to reach their retirement goals. Instead of taking on a part-time job after retiring, you can pay some expenses with passive income.

This enables you to retire earlier in life, and some people are able to grow their passive income with the extra time they have following retirement.

Passive income also offers the additional benefit of a safety net in case you lose your job. Rather than resetting to nothing, you’ll have your passive income to fall back on while you look for a new position.

You can even use this as an opportunity to spend more time managing your sources of passive income.

The average household led by someone over 65 spends about $45,000 per year, and even if you’re retiring early, this is a decent rule of thumb for the average American, though of course your individual situation could be different.

Thus, using an annual spend of $45,000 per year, if you want 40 years’ worth of retirement money and have $500,000 in savings, you would only need to earn $32,500 each year to break even over that time.

Keep in mind that these numbers will depend on your spending habits and the cost of living in your area, and we are of course ignoring inflation. 

However, you can counter the effects of inflation by being sure to make sure your passive income streams stay ahead of inflation. Some ideas for doing this include raising rents.

You can make sure your savings stays ahead of inflation by keeping it in a well-balanced portfolio.

Defining More Specific Retirement Goals

Retiring early is one of the most common reasons people look for ways to earn passive income, and even a small supplement to your paycheck can make a big difference.

While experts commonly recommend around $1 million to $1.5 million in retirement savings, this is generally recommended for those who want to retire at a “normal age” who haven’t invested in significant streams of passive income.

So while we used an annual retirement spending amount of $45,000 above to do some back-of-the-napkin calculations, the exact amount you need, of course, depends on the lifestyle you want and how early you hope to retire. 

Most people need about 80 to 100 percent of their income per year after retiring — while some costs will likely decrease, you may also spend more on things like travel and entertainment.

The more of that you can cover with a steady source of passive income, the less you’ll need to build in savings before being ready for retirement.

With that in mind, you should determine how much you want to save and how long you have before your ideal retirement age. From there, it will be easy to build passive income goals that match those targets and allow you to measure your progress over time.

Eventually, you should aim to generate enough passive income to support yourself along with any retirement savings. However, it’s better to start with manageable short-term goals before thinking about using passive income to fund your retirement.

Getting Started with Passive Income

While there are a wide range of lucrative opportunities for passive income, you shouldn’t expect to start bringing in revenue immediately. Laying the groundwork for a successful stream of passive income takes time, and you’ll need to do some research to work out a clear plan.

Start by looking into some of the ways people earn passive income and seeing if there’s an idea that fits your schedule and skill set. From there, you can begin working on logistics and developing a concrete roadmap to guide your progress.

Passive Income Examples

You can make passive income in a variety of fields, and you don’t necessarily need a lot of money to get started. These ideas will help you get started with passive income and find something that works for your schedule, budget, and skills.

Renting Out a Room

You might be reluctant to let a stranger rent a room in your home or apartment, but it’s one of the easiest and most lucrative ways to begin earning passive income.

Many people start thinking about passive income around the time their children move out, and a child’s old room can easily be converted into a space for guests.

Renting rooms is easier than ever with websites like Airbnb, and these services also allow hosts to give feedback on guests. You’ll be able to check each renter’s history, and you can turn people away if previous hosts have complained.

If you earn $500 per month from the room, you’ll have $6,000 extra per year, or $120,000 of the $900,000 necessary for a 20-year retirement fund. That’s enough for nearly three years of retirement expenses!

Renting Out Storage Space

Maybe you’re reluctant to spend your years as an early retiree sharing your space with a stranger.  No worries — this doesn’t mean that you can’t enjoy that sweet stream of rental income coming in every month.

Instead of renting out your space to another human to live in, considering renting out your space as storage.  This could be a spare closet, an empty bedroom, a parking spot, or a garage.

The “old-fashioned way” of finding storage tenants is to post in the newspaper or on Craigslist, but a new startup called Neighbor has actually streamlined the process, matching renters with storage space owners and providing adequate insurance protections.

At $125 per month, you would earn $1,500 per year and $30,000 over 20 years, but you could make significantly more depending on your location and the size of the space.

Renting Your Things

You might also consider renting out anything useful that’s too expensive for people to buy themselves. Trucks, trampolines, boats, and a variety of other items have short-term appeal that make them extremely profitable to rent.

Just as Airbnb and other websites facilitate room rentals, you can use Facebook or another platform to advertise your items. It won’t take many rentals for you to earn back what you paid for the product.

Renting out a truck 20 days per month at $50 per day would lead to $1,000 each month, $12,000 per year, and $144,000 throughout the average retirement—more than three years’ worth of costs.

You could retire at 58 rather than 61 and have a continuing source of income after retiring.

Stocks with Dividends

While it’s impossible to predict which stocks will gain value over time, investing in a stock that pays dividends will give you guaranteed income, and some businesses continue to pay dividends regularly for as long as you hold your shares.

The great thing about investing is that you can reinvest the money you earn to keep growing your portfolio. Using each dividend check to buy more stock (whether in the same company or a different one) allows you to continue turning your initial contribution into even more cash.

If you’re new to investing, consider starting with a free or low-cost investing application until you’re more comfortable with the process. Many of these services offer features designed to help new investors get started.

Dividend yields vary widely from one stock to another, but even small amounts can be worth investing for. Earning $250 per year would give you $3,000 in dividends alone over a 20-year retirement—not to mention the gains you could earn on the dividends.

Passive income typically requires some work upfront, but you’ll keep receiving checks after that while spending very little time on your project.

You can use this money to support yourself during retirement without having to rely entirely on savings. There’s no reason to wait—the sooner you get started, the sooner you’ll start earning extra money.

Start Building Your Passive Income Streams Now

If you’re serious about retiring early, the fact is that the best time to start building your passive income streams was yesterday.  But the second-best time is today.

Maybe you don’t have a lot to invest in revenue streams at the moment; that’s alright.  Simply get in the habit of putting any extra money you have toward passive income.

And before you know it, your trickle of passive income will becoming a great, roaring river, and you’ll be well on your way to funding a successful early retirement.

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