How to Get Passive Income in Retirement

Managing passive income still takes work

Senior man using laptop and drinking coffee in living room with family in the background
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Passive income is that which comes from investments or business interests that require minimal effort on your part. You don’t go to work each day to earn passive income, although managing your investments may still require some work. Retirement is achieved when you don’t have to work to earn a living but can instead count on solid sources of passive income.

Key Takeaways

  • Despite its name, passive income still requires some degree of effort in management.
  • Sources of income during retirement can include investments, real estate rentals, network marketing, and more.
  • Many retirees hire professionals to help manage their passive income streams due to the chance of cognitive decline over time.
  • The IRS doesn't treat investment income the same as passive income. These two categories receive their own tax treatment.

How to Build Sources of Passive Income

Most people build up sources of passive income over time by working. They save and invest some of what they earn to the point where the investments produce enough income to allow them to retire. Then they simply manage their investments or businesses.

You have to learn to manage your investments so they produce steady and reliable passive income. It's best to follow a set of investment management rules to make sure you don't withdraw too much too soon, putting your future income at risk.

The book Rich Dad Poor Dad by Robert Kiyosaki does a great job of helping you understand the difference between working for a living at a job versus working toward building a business and a portfolio that can produce ongoing passive income.

Passive Income Mistakes

One of the mistakes that many people make when they're planning for passive retirement income is thinking that they can put everything on autopilot. Managing investments takes time, whether they're in the form of mutual funds, retirement accounts, businesses, or real estate. You can hire good people to help you, but you must still keep tabs on those people and on the work they're doing for you.

Cognitive abilities can decline rapidly after age 65. You might not even be aware that it's happening. It's key to have advisors and family members you trust for this reason. Share your passive income strategies with those you know will look out for you.

How to Earn Passive Income in Retirement

You have a few solid options for generating passive income. The key is how to approach each of them.

From a Business

Start by evaluating the areas where you have both experience and passion. You might go back many years to things you did and enjoyed when you were younger. Find that an old hobby and combine it with years of business experience so it can turn into something exciting and lucrative. 

This process can help you find business ideas that leverage the skills you already have.

From Investments

Learn as much as you can about how to invest for income. Each type of investment has its own pros and cons, whether it's interest income from bonds, dividend income from stocks, retirement income mutual funds, high-yield investments, or annuity income. There's no such thing as a perfect investment, so mixing up a portfolio with many choices is often the best approach.

From Rental Real Estate

Creating passive income through rental real estate can be an effective plan. But you have to do your homework before heading down this path. Successful real estate investors look at it as a business, not as a get-rich-quick plan. It can take a good bit of time for this option to produce steady, solid income.

Form a Network Marketing Business

Many network marketing businesses, also called "multi-level marketing," tell you that their business model is a great way to build passive income. People can have a great amount of success building these types of businesses. But there's nothing passive about this approach, at least at first. It requires lots of hours and hard work, just like building any business. Companies such as Avon and Primerica are network marketing businesses that people have found to be lucrative and successful.

Numerous network marketing businesses have turned out to be scams, so be careful. Make sure the business is legitimate.

The Tax Definition of Passive Income

Passive income has a more technical description when it comes to taxes. The IRS defines passive activity as any rental activity or business in which the taxpayer does not materially participate. Passive income does not include salaries, portfolios, or investment income. Non-passive activities are businesses in which the taxpayer works on a regular and continuous basis.

This definition makes a distinction between passive income and portfolio/investment income. It's used to figure out what types of tax deductions might be claimed if you have losses from a passive investment.

One of the key differences among passive income, investment income, and earned income is that you don’t pay FICA taxes (Social Security and Medicare) on passive income or investment income.

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