Passive income is one of the most important buzzwords that has gained popularity over the past decade. As a coach and advocate for financial wellness, this is my favorite ‘trend’ – one that I firmly believe should become a norm. It should become a knowledge and habit that gets transferred from one generation to another.
Passive income is not simply a strategy; it is a mindset shift that makes individuals take control of their financial future. In my experience of working with clients, I’ve seen how passive income streams can transform not only our bank balances but also our approach to life. The role of passive income streams in assisting people in breaking the paycheck-to-paycheck cycle and planning early retirement cannot be overstated.
In this blog, I won’t just highlight the benefits of having passive income but will also introduce you to simple passive income streams you can create without any extra skills. It’s time to make your money work for you while you enjoy your life.
Table of content
- Benefits of Passive Income
- Structured Passive Income Options for Your Early Retirement
- Systematic Withdrawal Plan (SWP) for Regular Income
- Rental Income for Fixed Monthly Cash Flow
- Dividend Income for Growth and Stability
- Fixed Income Source for Security
- Combining Various Sources of Passive Income for a Strong Financial Future
Benefits of Passive Income in Achieving Early Retirement
If you dream of taking early retirement and living your life on your terms, having streams of passive income is non-negotiable. Passive income serves as a reliable financial foundation that sustains our lifestyle while maintaining peace of mind while we transition away from active work.
Let’s understand how passive income helps in achieving stress-free early retirement –
Steady Cash flow – Passive income ensures regular inflow to cover our living expenses. It reduces our dependency on traditional income sources.
Inflation Protection – Passive income sources like rental income and dividend-paying stocks often grow with inflation, preserving our purchasing power.
Time Freedom – By covering our financial needs, passive income allows us to retire early and focus on our passions, hobbies, or family without monetary constraints.
Longevity of Funds – Strategies like SWP and reinvested returns enable our capital to last longer, securing our retirement years.
Stress-free Lifestyle – Passive income reduces the anxiety of running out of money and offers a safety net for unforeseen expenses.
Opportunity for Growth – Even in retirement, income from investments like mutual funds and dividends continues to grow, enhancing our financial security.
Freedom to Pursue Other Interests – With passive income covering basic lifestyle expenses, we get the freedom to pursue our hobbies or start a new entrepreneurial venture without financial pressure.
Structured Passive Income Options for Your Early Retirement
Now that we’ve explored the many benefits of passive income, such as steady cash flow and a stress-free lifestyle, you may be wondering: How do I get started on creating my own passive income streams?
There are countless ways to generate passive income, but in this section, we will focus on options that don’t require any additional skills. These are the passive income streams where your money works for you, allowing you to build wealth without the need for constant active effort.
Systematic Withdrawal Plan (SWP) for Regular Income
SWP (Systematic Withdrawal Plan) allows us to withdraw a fixed percentage of our mutual fund investments at regular intervals, like monthly or quarterly, while keeping the remaining capital invested to grow.
It provides flexibility by offering a steady stream of income while still allowing our investments to grow. This can be particularly useful for retirees who need consistent cash flow but don’t want to deplete their savings too quickly. It also helps to keep up with inflation as the capital continues to grow over time.
Example:
- You invest ₹50 lakhs in mutual funds with an expected annual return of 9%.
- You choose to withdraw 9% annually through SWP, which is ₹4,50,000.
- This would give you ₹37,500 per month (₹4,50,000 ÷ 12 months).
The beauty of SWP is that while you withdraw money regularly, the remaining balance stays invested, which helps to replenish the funds over time. The income through SWP is potentially sustainable for the long term.
Rental Income for Fixed Monthly Cash Flow
Rental income is the regular payment we receive from renting out our properties, such as a house, apartment, or commercial space. This provides a predictable and consistent stream of income. It typically increases over time to keep up with inflation.
Unlike some other passive income streams, real estate tends to appreciate in value over time. This means our property could be worth more in the future, giving us the potential for both rental income and capital gains.
Example:
Suppose you own a property valued at ₹80 lakhs and it generates ₹20,000 per month in rent.
- This would give you an annual rental income of ₹2,40,000 (₹20,000 × 12 months).
- The Best Part of Rental Income is it increases periodically by 5%-10%, helping our income cope with inflation.
Dividend Income for Growth and Stability
Dividend income is the money we earn from investments in stocks or mutual funds that pay out a portion of their profits to shareholders on a regular basis. These payouts can be a steady source of income while still allowing our investments to grow.
Dividends can provide a reliable income stream and, in many cases, the stock price may also grow, giving us the best of both worlds—income and potential for capital appreciation.
Example:
- If you invest ₹25 lakhs in dividend-paying stocks, with an annual dividend yield of 4%, you would earn ₹1,00,000 per year (₹25,00,000 × 4%).
[Note: Stocks like Coal India, Bajaj Auto, BPCL, and Vedanta are known for offering solid dividend payouts.]
Fixed Income Source for Security
Fixed income sources include investments like fixed deposits (FDs) or bonds, which pay a guaranteed return over a set period. These are considered low-risk investments that offer predictable, regular income.
These types of investments suit retirees who want a reliable income stream that isn’t affected by market fluctuations. They are perfect for covering predictable expenses, like bills or insurance premiums.
Example:
- If you invest ₹30 lakhs in bonds that yield a 7% return annually, you would receive ₹2,10,000 per year (₹30,00,000 × 7%).
With fixed income sources, we get predictable returns, which gives us peace of mind knowing that a portion of our income is stable and secure.
Combining Various Sources of Passive income
After going through these sources of passive income, you might be wondering which one best suits your needs or desires. Before you start any calculation to choose any one of these let me remind you of the age-old saying – “Do not put all your eggs in one basket”.
To fully utilize passive income for your retirement plans, the best strategy is to combine various sources together. Diversifying the passive income streams mitigates risk and creates the strong financial foundation for early retirement.
Imagine combining the four passive income sources we discussed earlier.
- SWP from Mutual Funds: Generates ₹4,50,000 annually or ₹37,500 per month.
- Rental Income: Provides ₹2,40,000 annually or ₹20,000 per month.
- Dividend Income: Adds ₹1,00,000 annually or ₹8,333 per month.
- Fixed Income from Bonds: Contributes ₹2,10,000 annually or ₹17,500 per month.
The total yield from the four sources is an income of ₹10,00,000 annually or ₹83,333 per month.
This diversified approach ensures that your finances remain stable even if one source underperforms temporarily. For instance, if the stock market experiences a downturn, your rental income and fixed deposits can still provide consistent support. On the other hand, if rental income slows due to vacancy periods, your SWP and dividends continue to contribute.
Diversifying your passive income streams ensures stability, growth, and peace of mind.
Over to You
Be it gaining financial independence or achieving early retirement, you can’t get it unless you take action. Start planning, calculating, and implementing the strategies that align with your goals. If you’re unsure where to begin or need personalized guidance to create your passive income roadmap, feel free to connect. Let’s turn your retirement vision into a reality.
