This article covers methods of investing for income and also takes a look into ways you can work out how much you would need based on spending habits.
Investing for Income Australia
If you are in Australia, perhaps you are interested in ASX listed shares. Some shares pay a dividend periodically which is classified as income. Often these dividends are paid quarterly or half yearly depending on the stock you purchase. One thing to look out for is franking, which basically means that tax is paid on all or part of the dividend. If there is no franking, tax needs to be paid on the dividend amount depending on your circumstances. Of course, this is more complex but that’s the gist of it. For example, if a higher income earner gets a fully franked dividend, they may still have to pay tax on the dividend amount due to the difference in their tax rate compared to the company that franked their dividend.
Investing for Income in Retirement
Investing for income in retirement is the concept of buying assets that will effectively pay for the rest of your life, ideally without eating into capital so that your family wealth can grow through the generations.
Consider the costs you would experience throughout retirement, or even the extra costs you want to cover with investment income before you retire, and then divide that by the expected dividend % return to work out how much you would need.
The formula is INCOME DESIRED FROM DIVIDENDS / DIVIDEND PERCENTAGE RETURN = CAPITAL REQUIREMENT
So in other words, if you needed $50,000 per year to live off, divide that by the expected dividend portfolio (let’s assume 5% per annum), which equals one million dollars in capital required to buy enough shares to get this amount of income based on a 5% return. That doesn’t factor in tax workings though, so if there is franking credits this might change slightly.
Investing Income vs Growth
Investing income is a great way to generate cash from assets long term. It means that you do not have to sell your assets to use the money you have earned. Growth on the other hand, can be excellent in terms of money amounts however to access that money, the asset generally needs to be sold in order to access the money.
Growth creates pressure on whether to sell or not, so if you are looking for a buy and hold solution and want money coming in as well, the investing income may be an ideal way to go.
On the other hand, people say that the growth of assets offer far more return than income but of course this requires the sale of those assets in order to use the money they generate, and then often buy something else in it’s place.
Investing Income Methods
While shares offer dividends, there’s also a couple more options to consider.
Term deposits and fixed interest. Right now inflation is soaring, so is the interest rates paid on cash value. Term deposits basically sit cash with a bank and pay you a rate of return that is pre determined.
Trading CFDs and other assets. Getting in and out of the market can reduce exposure to overall market moves, and has the potential to generate an income. This one is tough though and requires skill, knowledge and training.
Property. Rental income is a good one for property owners, but the entry costs can be high and high interest rates can make it hard to turn a positive rental return in the current climate.