Also referred to as passive income, investment income is money paid to an investor from the dividends, premiums sold, or sale of assets in their portfolio.
Some investors treat it like a part-time job, such that there is nothing passive about it. In retirement, investors often receive income from bonds, preferred stock, and dividend-paying common shares. Income can be pulled from several kinds of investments, including real estate, and it is likely to be taxed at ordinary income tax rates.
Some dividends are considered qualified by the IRS, such as certain ones related to the oil industry, which may give them a capital gains treatment instead. Some mutual funds and ETFs call themselves income funds, and their purpose is to hold assets that allow the fund to pay income to shareholders. This might be monthly or quarterly. Most dividends on stocks are paid quarterly.
Investment income is often held in a money market account which is refilled every quarter with proceeds from dividends. Money market accounts can work like commercial bank checking accounts, and investors can order debit cards and checks to access their funds on-the-go.
Typically an investor’s overall upside potential and risk exposure will be voluntarily decreased once they get into retirement to avoid what’s known as sequence-of-return risk. Conservative investments with a relatively stable value and a dependable dividend are about the best thing that retired people could ask for.
If shares are being redeemed to provide income, investors should observe a safe withdrawal rate (SWR), which is usually estimated to be about 4% of the overall account’s value, if the investor would like to preserve the principal and have it last as long as possible.
If an investor has not saved enough to provide adequate income from that rate of withdrawal, he or she will most likely deplete assets after about 25 years, and, in the event that the person lives longer than that, it may make sense to get an income annuity, at least with part of their savings.