Passive income has become a critical component of modern retirement planning. Rather than relying solely on savings, pensions or Social Security, many retirees are turning to passive income streams, such as rental properties, dividends or royalties, to create reliable cash flow.
Many financial planners say that passive income not only provides financial stability but also offers protection against inflation, longer life expectancies and unexpected expenses that can arise in retirement.
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Here are three reasons financial planners say passive income could be the key to a comfortable retirement.
Predictable Cash Flow
One of the biggest advantages of passive income in retirement is that it generates steady cash flow.
With longer life expectancies, rising costs and unpredictable markets, this reliable income stream helps supplement Social Security, reduce sequence-of-returns risk and create essential financial breathing room, according to Chris Tipton, a CFP with Balefire Wealth Management.
Tipton said a growing number of retirees are using a combination of passive income sources to reduce reliance on investment withdrawals and create a more stable financial foundation in retirement.
“One couple we worked with in their early 60s had two rental properties, a diversified dividend stock portfolio, and a small book of digital courses they created in retirement,” Tipton said. “Between the rental income and dividends, they covered 60% of their living expenses, meaning they only had to draw modestly from retirement accounts. This gave them freedom to travel, withstand market volatility, and even delay Social Security for greater long-term benefits.”
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It Replaces Your Paycheck
In retirement, passive income acts as a replacement for the steady paycheck from full-time work. It fosters financial stability and freedom by generating reliable cash flow.
“In retirement when people no longer have the option or desire to work full-time, passive income becomes a powerful tool for creating stability, freedom, and peace of mind,” said Melissa Murphy Pavone, CFP, founder of Mindful Financial Partners. “It provides a steady stream of cash flow without depleting principal, which is critical for longevity planning. Essentially you are creating a ‘paycheck’ for yourself.”
Reduces Investment Portfolio Pressure
Passive income plays a critical role in helping retirees avoid selling investments during market downturns.
Covering a portion of living expenses reduces the need to liquidate assets at a loss. And, in some cases, the assets can also grow in value over time, keeping pace with inflation.
“Passive income can reduce the burden on one’s portfolio by covering more of one’s spending in retirement,” said Aaron Brask, an independent investment advisor at Aaron Brask Capital. “This can be particularly helpful during significant market downturns, as retirees with more passive income will not need to sell as much, if any, of their portfolio and lock in losses during these volatile periods. Depending upon the source, passive income may also grow with inflation. For example, rental income and dividends generally grow through time.”
Ultimately, passive income can be a great way for retirees to maintain financial stability and keep pace with inflation. “It adds a layer of resilience,” Tipton said. “For example, real estate income tends to rise with inflation through rent increases. Dividends from strong companies often grow over time. Having reliable income sources reduces reliance on selling investments during downturns, preserving principal and longevity of the portfolio.”
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This article originally appeared on GOBankingRates.com: 3 Reasons Passive Income Could Be Key to a Comfortable Retirement, According to Experts
