Key Points
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Dividend-paying stocks can put money in your pocket. but they’re not without risk.
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Real estate can be a huge income-generator, but it may not be passive in the classic sense of the word.
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CDs are a good bet right now, but you’ll need to pay attention to falling interest rates.
Retirement can be an exciting period of life, but also, a scary one. While it’s nice to have the freedom of not having to report to work, it’s also nerve-wracking to give up the paycheck your job once provided.
It’s common for retirees to have Social Security benefits to fall back on. But those benefits might only replace a relatively small portion of your pre-retirement income.
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That’s why it’s important to set yourself up with plenty of passive income for your senior years. Here are three sources to consider, along with their pros and cons.
1. Dividend stocks
Companies with a strong history of paying dividends can be a less volatile type of stock to own. And those dividends can result in a steady, reasonably predictable stream of income for you as a retiree.
Also, companies with a long history of paying dividends may be more likely to increase their payments over time. That could not only put more money in your pocket but also serve as protection against inflation.
That said, dividends are never guaranteed. There’s no contractual obligation for companies to pay dividends, so a business could cut its payments or stop making them altogether. And while dividend stocks tend to be less volatile than growth stocks, that doesn’t mean they can’t lose value, especially during a market downturn.
2. Real estate
If you own a rental property as a retiree, you may be able to enjoy a generous amount of extra income each month, especially if your property is in a high-demand area. Plus, real estate has a tendency to gain value over time. So if you hang on to your rental, you might eventually be able to pocket some nice gains in a sale.
On the flipside, managing a rental property isn’t passive income in the classic sense. You still have to maintain that property and deal with tenant issues. Plus, there’s always financial risk involved, from having your property tax bill go up to facing increased insurance costs to having to fix things that break.
3. CDs
The nice thing about CDs is that they not only let you earn money passively, but that money is guaranteed. Plus, your principal deposit is protected provided your bank has FDIC insurance and your CD is limited to $250,000 (or $500,000 if you’re opening a CD with a joint account holder).
Another great thing about CDs is that they’re fairly liquid. There can be penalties for cashing out a CD prior to maturity, but you can mitigate that risk by laddering your CDs instead of tying up all of your cash in the same CD.
Still, historically, CDs have given savers pretty low returns. That’s not the case in today’s interest rate environment, but the Federal Reserve is expected to make its first rate cut of the year in September. From there, CD rates could drop. And if they fall substantially, you may reach a point where CDs can’t generate enough income to keep pace with inflation.
It’s a good idea to set yourself up with different types of passive income in retirement. Dividend stocks, real estate, and CDs are all good options to look at. But it’s important to understand the pros, cons, and risks of each.
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