Some ways of generating significant passive income are impractical for many individuals. Sure, there are plenty of methods where you can make at least $100,000 annually. The catch, though, is that you must have a lot more cash upfront than most people will ever have.
However, not every alternative for making money is beyond the reach of ordinary Americans. Here’s how you can realistically make $18,000 in passive income each year.
A manageable goal
The old axiom that “it takes money to make money” is true. And the more money you’ve made, the easier it will be to earn passive income.
But what is a manageable goal? Let’s go with what the average American saves by retirement. The average 401(k) account balance for individuals ages 65 and up was $255,151 in 2021, according to Vanguard.
Most people won’t be able to amass that much money if they only start saving late in life. However, if you start earlier, accumulating at least $255,151 isn’t too much of a stretch for many Americans.
Indeed, the average 401(k) plan balance for individuals between the ages of 45 and 54 totaled more than $161,000 in 2021, based on Vanguard’s data. Getting from that level to our goal by age 65 shouldn’t be too difficult.
The 7% solution
You’ll need to receive a little over 7% per year to generate $18,000 in annual income from an investment of $255,151 without touching your principle. That might seem unattainable, but it actually isn’t.
Series I savings bonds issued by the U.S. Treasury are set to pay 9.6% annualized interest. The downside, though, is that you can only buy $10,000 of these bonds (plus an extra $5,000 with federal tax refunds). Also, the interest rate is adjusted every six months. It’s based on inflation, so if inflation comes down the I bonds interest rate will too.
Don’t despair. There are other ways to obtain the 7% rate needed. Several dividend stocks pay yields of at least 7%. For example, Devon Energy (NYSE: DVN) expects that the combination of its fixed and variable dividends will yield around 8% in 2022. The stock has also been a big winner this year with shares soaring around 70%.
If you don’t relish the idea of picking individual stocks, consider investing in closed-end funds (CEFs). A CEF is a special type of mutual fund that you can buy and sell like a stock through your brokerage.
You shouldn’t have any problems finding CEFs operated by reputable companies that offer annual yields of at least 7%. For example, the Blackrock Enhanced Global Dividend Trust (NYSE: BOE) boosts its returns by selling covered call options on large-cap dividend stocks. The CEF’s distribution yield currently stands at nearly 7.2%.
Not completely passive
Many Americans should be able to make $18,000 in passive income each year without having to amass a fortune upfront beyond their means. However, this passive income won’t be completely passive.
You’ll definitely want to pay attention to the underlying businesses of any dividend stocks that you buy. Just because a company pays a juicy dividend today doesn’t mean that it will always be able to do so.
Also, make sure that any CEF that you invest in isn’t eating into its net asset value to make distributions. Pay attention to the funds’ annual expense fees as well.
The more active you are early on with saving the more passive you’ll be able to be later. And you could even generate a lot more than $18,000 per year when you retire.
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