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

Retirement would be a lot easier if you could give up the work but keep the paycheck. Sadly, no employer is quite that generous. Most of us need to replace our working income in retirement, so we can stay afloat financially. That income replacement can come from savings distributions, passive income streams, or both.

Passive income is good for retirees

Passive income is particularly appealing for retirees. Here’s one big reason why. When you have cash coming in, you are less reliant on investment liquidations to fund your retirement distributions. Investment liquidations aren’t bad, but they do lower your earnings potential going forward.

Stock liquidations expose you to short-term market fluctuations as well. If the market happens to be down the day you liquidate, for example, you’ll get less value for a position than you’d like.

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Fortunately, you should have one passive income stream coming your way already — your Social Security benefit. And there’s another passive income source that’s easily accessible — dividend stocks. Together, these two income streams can realistically produce 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 monthly, which equates to just under $20,000 a year. Depending on your income history, your benefit could be higher or lower.

To project your estimated benefit at your expected retirement date, open an account at my Social Security. The online portal estimates your monthly benefit at different claiming ages.

You’ll see that delaying the start of Social Security does raise your monthly benefit. Putting off retirement is one strategy for increasing your passive retirement income — but it’s not the only one. Other actions that could bump up your Social Security income include:

Correcting any missing information in your work record. You can find your work record in your my Social Security account. If your work record is incomplete, your calculated benefit will be too low. Contact Social Security to have your work record corrected.
Working at least 35 years. Your benefit considers your average income, calculated from your highest-paid 35 years of working. If you’ve only worked, say, 30 years, the average calculation assumes zero income for the five missing years. That creates a lower income average and in turn a lower benefit.
Earning more now. Higher income now and for the rest of your career will increase your Social Security benefit at retirement. You can test this in the my Social Security portal. Look for the box to update your average future annual salary and see how those changes flow through to your benefit.

2. Dividend stocks

Premium dividend stocks and funds usually yield 2% to 4% of your invested capital. Using that datapoint and some quick math, you can calculate how large your dividend portfolio must be to produce the income you want. Divide the target income by 2% for a conservative estimate. If you’re targeting $10,000 in dividend income, for example, you’d need $500,000 of dividend-paying shares that yield 2%.

Amassing $500,000 worth of dividend-paying shares is no small task, but it’s doable if you have a longer timeline. A compound interest calculator like this one can help you work out the details. As an 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, quality-screened dividend fund. A fund gives you quick diversification. Plus, the fund will automatically drop stocks that fail to meet quality criteria. Funds to research include the Vanguard Dividend Appreciation ETF (NYSEMKT: VIG), the iShares Core Dividend Growth ETF (NYSEMKT: DGRO), or the iShares Core High Dividend ETF (NYSEMKT: HDV).

You’ll want to hold these shares in a tax-advantaged retirement account. Otherwise, you’ll 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 flow is king

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

Specifically, you can raise your income to push your Social Security benefit higher. And you can increase your retirement contributions and start investing in dividend-paying shares. Make those changes today and kick off a new and improved outlook on your retirement.

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Catherine Brock has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard Dividend Appreciation ETF. The Motley Fool has a disclosure policy.

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