Building a nest egg of $1 million often takes decades of planning and saving. If you’ve reached this milestone and want to live off your savings in retirement, you’ll have some decisions to make. There are different ways you can invest funds, and each method comes with its own interest rate or return.
You’ll also want to evaluate inflation to protect yourself from it. If you choose an investment with a return of 5%, and inflation hits 6% or more, your purchasing power will decline. Diversifying your investments can help to reduce risk. That way, if one investment performs poorly, others could fare better.
Some of the strategies to consider when turning $1 million into passive retirement income include:
— Purchasing an annuity.
— Choosing dividend stocks.
— Buying fixed-income securities.
— Starting a business
— Investing in real estate
— Building a portfolio.
[READ: If I Buy a $750K Annuity, What Will It Pay Annually?]
Purchasing an Annuity
If you buy an annuity, you could get a guaranteed source of income in retirement. You’ll sign a contract laying out what you can expect to receive for a determined time. There are different types of annuities, and some begin sending payments immediately while others are deferred. The rates for these can vary.
While an annuity provides a steady income stream, you may get a lower return than you would with other investments. Also, it may not be the best choice for someone who values flexibility. If you invest $1 million in an immediate annuity that pays for a lifetime, it could be hard to change or access funds to move to a different investment.
Choosing Dividend Stocks
Some companies have stocks that pay dividends to shareholders, which could provide you with income. The stock’s value could also increase if the organization does well in the market. Due to the commitment and stability needed to provide dividends, this option is often offered by companies with a long track record of strong financial performance. You might talk to a financial planner or broker to learn about your options. You can also research well-established publicly traded firms.
Investing in stocks comes with risks and a company’s future performance can’t be guaranteed. Disruptions do occur in industries. “These stocks are attractive for their dual potential of income and capital appreciation, but it’s important to remember that dividends are not guaranteed and can fluctuate with market conditions,” said Khwan Hathai, a certified financial planner and financial therapist at Epiphany Financial Therapy in Denver, in an email. “The psychological aspect here involves balancing the excitement of potential gains with the reality of market risks.”
[Related:What Is a Dividend? Ultimate Guide to Dividend Stocks]
Buying Fixed-Income Securities
You might find Treasury bonds attractive, which are fixed-interest U.S. government securities with a maturity of over a decade. They make interest payments at set times. Bonds tend to have a lower risk than stocks, so including a mix of both might help reduce risk. They are also tax-advantaged, as you don’t pay local taxes on them.
Or you could allocate some of your funds to Treasury bills, a short-term U.S. government debt obligation. They have a maturity of one year or less and are backed by the Treasury Department.
“For an investor looking for passive income on $1 million, we currently recommend Treasury bills as a virtually risk-free and lucrative investment,” said Stephanie Lo, vice president of research at NDVR, a Boston-based fiduciary advisory firm, in an email. You’ll want to watch Treasury bill rates, as they can fluctuate. For a longer-term solution, you might want to consider other investments, Lo added.
Starting a Business
If you’ve always had an entrepreneurial desire, you might try investing some of the $1 million into a business venture of your own in retirement.
Your efforts could bring in additional revenue over time. This option, however, may be best suited for those who retire early or want to do something different. You could be tied to the business during the first years and have to put in considerable hours every week. If you’d rather have a slower pace, you might choose a different strategy for living off $1 million in retirement.
[See: 7 of the Best Ways to Invest in Real Estate.]
Investing in Real Estate
You could buy properties and rent them to tenants with part or all of the $1 million. For Chicago-based Syed Lateef, purchasing rental properties enabled him to build a multimillion dollar portfolio. He began in 2017 while also working full-time in corporate finance. Today, his new company, which focuses on short-term rentals and hotel services, has more than 300 units and brought in over $10 million in business revenue in 2023.
“Instead of just using that $1 million to buy a small apartment block in one area, you could spread it out,” Lateef explained. You might purchase several single-family homes in a growing area or buy properties in different regions of the country. “Real estate can appreciate over time and provide a steady income stream, but direct investment requires significant management and has high entry costs,” Hathai said. You may not be able to access your funds quickly if you decide to invest in something else.
There are also real estate investment trusts (REITs), which are publicly traded companies that own or finance real estate which produce income. You can purchase REIT shares through a broker or financial advisor. “REITs are more liquid but can be sensitive to interest rate changes,” Hathai said.
Building a Portfolio
To weather the next years, you may opt to build a portfolio that provides enough cash to support your monthly living expenses. “Diversification across different types of investments can help manage risk and return,” Hathai said. “Regularly reviewing the investment strategy, while avoiding the temptation to constantly adjust based on short-term market movements, is essential for long-term success in generating passive income.”
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How to Turn $1 Million Into Passive Retirement Income originally appeared on usnews.com
