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Income Investment Philosophy for Beginners

Income investing is based on building a portfolio that will generate steady cashflow as a source of passive income that can help pay current and future bills. This may not be the investment method you hear about in the news—it won’t turn you into a millionaire overnight—but that doesn’t mean it isn’t still a valuable, relevant investment philosophy.

Here’s what you need to know about the income investing philosophy so you’ll be prepared to discuss if it’s right for you with an investment broker or money manager.

What is income investing?

Income investing strives to compile and manage a portfolio of assets that will generate the highest possible annual income at the lowest possible risk. The majority of the produced income is then paid out to the investor (you) so they can use it to pay whatever current expenses they want—rent or mortgage, education fees, new furniture, home repairs, vacations…you get the idea.

How did it start?

Income investing is nothing new—it’s been around for a long time, although before the 1980s, it was commonly referred to as a "widow's portfolio." This came from the routine practice of officers in the trust department of community banks taking the life insurance money a widow received after her husband's death to put together a collection of specific assets that would generate enough monthly income for her to pay the bills and support her family.

Today, with the uncertainty of some retirement investments and the precarious position of Social Security, there has been renewed interest in this type of investing as a sustainable passive income for the present and for retirement.

What types of investments are in an income portfolio?

Within an income investment portfolio, there are three categories of assets: dividend-paying stocks, bonds, and real estate. The dividend-paying stocks can include common and preferred stocks, where the company mails a check to shareholders for a portion of their profit relative to the number of shares each shareholder owns. For bonds, there are lots of options: government bonds, agency bonds, municipal bonds, savings bonds, and more. The real estate investment portion of the portfolio can be rental property owned outright or REITs (real estate investment trust).

How you should divide your portfolio between these three asset categories depends on your risk tolerance, financial health, and goals. Speaking with an investment advisor is the best way to get a personalized answer to this question.

How much can you earn from an income investment portfolio?

If your goal is to never run out of money for as long as you live, the rule is to take out four percent of the account balance each year. Unsurprisingly, this is called the “four percent rule.” This number was reached after much research showed that, taking into account the possibility of market crashes, removing five percent could mean you run out of money as quickly as 20 years, whereas removing three percent virtually never resulted in a zero sum of the portfolio. So, four percent is the highest income rate you can expect while remaining conservative enough to ride out any dips—or crashes—in the market.

To put that in cash terms, if you managed to save $350,000 by retirement at age 65, you should be able to make annual withdrawals of $14,000 without running out of money. Divided up, that’s about $1,166 per month, pre-tax, to add to any other retirement savings and investments you have.