Whether you're planning to retire in your sixties or a lot earlier, there's one thing you're going to need -- passive income. And to maintain your standard of living, you're probably going to need a significant amount of it.
Social Security isn't an option for you if you retire too early. Even if you wait until you're eligible, the benefits won't be enough for most people. You'll very likely need other income sources.
There are multiple ways to earn additional money. However, some of these approaches won't generate the amounts of supplemental income that many people will need. Don't despair, though. Here's a simple strategy to make $70,000 in passive income per year.
You only need simple math to determine the critical prerequisites needed to generate $70,000 in annual passive income. Divide the amount by the percentage you expect to make from your investments. That's how much you'll need upfront if you don't want to withdraw your initial capital.
The calculations are more involved if you plan to reduce your initial capital over time. You'll need to factor in how much you want to take out each year and how long you expect to need the additional income.
Let's make the math really easy. If we assume an annual yield of 7%, you'll need $1 million to earn $70,000 per year in passive income without eating into the initial amount. The higher your initial investment, the lower the percentage required -- and vice versa.
Many Americans will be able to accumulate $1 million or more by the time they retire. The trick is to consistently invest over the course of your career. The earlier you start, the better off you'll be.
A simple strategy
But how can you earn 7% per year? One simple strategy is to invest in two types of assets: closed-end funds (CEFs) and real estate investment trusts (REITs).
A CEF is a type of mutual fund that can be bought and sold like a stock on an exchange. Some CEFs specialize in high-yield bonds. Others own preferred stocks and dividend stocks. Some sell covered call options on stocks to boost returns.
A REIT, as its name implies, is an entity that focuses on owning real estate properties. They're required by law to return at least 90% of taxable income to shareholders in the form of dividends.
Can you really make $70,000 in passive income per year with this approach? Absolutely.
There are dozens of CEFs that offer annual yields of at least 7%. Many of them are even available at discounts to their net asset values. For example, the AllianceBernstein Global High Income (AWF 0.10%) currently yields 7.99%. It primarily invests in corporate bonds.
The Nuveen Preferred Securities and Income Fund (JPS) is another CEF that focuses on preferred stocks and other high-income securities. Its yield currently tops 7.6%.
If you'd like to add covered calls to the mix, the BlackRock Enhanced Global Dividend Trust (BOE -0.51%) could be attractive. Its yield stands at nearly 7.5%. The CEF primarily invests in large-cap dividend stocks and increases its returns by selling covered call options on those stocks.
You can also find quite a few REITs that can generate significant passive income. Don't worry if the yield is a little under 7% when a company's underlying business is exceptionally strong.
For example, Medical Properties Trust's (MPW -7.04%) dividend yield is 6.64%. However, higher yields from your other investments can more than make up for the lower yield. This is a dividend stock that you can buy and sleep peacefully owning.
Important things to consider
No investment is risk-free. CEFs and REITs can and do decrease in value at times. As a case in point, the values of each of the CEFs and REITs mentioned previously dropped significantly during the coronavirus-fueled panic in early 2020.
CEFs come with annual expense fees. You can typically expect annual expense ratios of around 1%, although in some cases the fees can be a little lower or higher.
Another important thing to keep in mind with this passive income strategy is that it's geared toward income rather than growth. All of the CEFs and REITs used as examples delivered positive total returns over the past five-year and 10-year periods. However, only Medical Properties Trust performed similarly to the S&P 500.
With all of this said, though, it's quite possible to make $70,000 per year in passive income with an initial investment of $1 million. And doing so is easier than many people might think.