Well, hi everyone and welcome to another wealthy and wise Wednesday, I am really glad you can join me today and I think our conversations will be a little eye opening and maybe interesting. Because I wanted to start off by asking you this questions, what do you ultimately want your money or your investment to do for you? You probably have the answer right off the top of your head. Maybe you don’t say it quite like this but I will bet it something like you want your money and your investments to provide income for you so that eventually you can retire and have the freedom to do whatever it is that you want to do without having to worry about money.
[00:00:51] Now, maybe I said that a little bit more in debt than you have even [00:00:58] but I have done this now for 33-34 years and I have found that it is almost that answer straight across the board in some version that they are currently putting away money in 401K’s, IRA’s and other investments so that it builds up this pool of money and eventually they can retire not afterwards and that it would provide income for the rest of their life, okay. Now we call that kind of income passive income, so the difference between passive and active income? Pretty obvious, active income, you typically need to be there, you need to put in the hours or the time, it is also considered active income when you are managing something, so for instance maybe you have an apartment complex, that is probably a good idea.
[00:01:59] You might be actively involved who know, maybe you are mowing the lawn, trimming the trees, getting the new tenants and old tenants out, you know and you are actively working it and then the income that comes in from those rents could be considered active income. Now, passive income is just about the opposite, you don’t have to be actively involved. Maybe you own some apartments but they are managed completely by another person or a young couple, they are doing all the work and you are taking the income so that will be considered as passive income. A lot of time we still refer to passive income as mailbox income, in other words it is going to show up in your mailbox every month no matter what. And there was a lot of sources for passive income, one of the most popular sources, one that I am sure you are familiar with.
[00:02:56] One that I am not sure it is going to be here for the next 100 years but that is social security. You have been paying in to social security all these years. At some point in the future, 60, 65, 70 years old, you start to take income. When that now become passive income, you are no longer working, you are no longer putting any more money into it but it is showing up into your mailbox or your bank account any month. And you don’t necessary have to do anything for it, you don’t have to even manage it. Another source of passive income is the pension. Now those are kind of [00:03:39] those aren’t very popular because the 401K kind of replace the pension many years ago. So a lot of you who are probably younger than let’s just say 50 years old, you might not even have the opportunity to have a pension and most companies have gotten rid of them.
[00:04:02] And again like I said they replaced it with 401K. The 401k, this is where you put money in, the company in a lot of case with matches and the pension there was typically funded solely by the employer. But eventually, you would retire, you would request your pension benefits and it too is a lot like social security, you just got a paycheck every month in the mailbox or deposited into your bank account. And you could choose how you wanted that to be paid out in the pension, you could choose what is called a life only. I mean just your lifetime; income will last as long as you do. You could do a joint, which means it might be with a spouse, so that income will be guaranteed to last in your lifetime, in your spouse’s lifetime. You could also just do period certain where you can say well I want this to go 10 years or 20 years.
[00:05:05] So there were quite a few different choices there on your pension but again passive income. And nowadays, there are several things you can do for passive income, I already mention apartments but let’s just call it real estate in general. This might be rental real estate; it could be real estate that you leaned on which has becomes a big thing too. Where you can actually lend money, kind of like being a mortgage ore and you can then take income from the mortgage payment that these people are paying back. This can be done through second mortgages, it can be done through first mortgages, there is a lot of lending going on in the world out there and it can be a good way to get a few extra percentage point in return than sitting and then checking a saving account or a [00:05:59] Especially with where rates are with those.
[00:06:03] So lending in real estate is a big deal, again owning real estate is a good way to have passive income and as I have already mentioned, you can be actively involved in your rental real estate or you could passively income. Actively meaning you are going to take care of the tenants and the toilets and the issues that come up or passive where you are going to hire that out and just travel around the country around the world and take in the rents. The other thing you can especially if you have been a business owner, when you sell your business, you could carry that paper or carry back a loan against the business instead of being cashed out, you could effectively have the new buyer of your business pay you income payments every month and those could last for many years. The obvious downside to that is hopefully the owner doesn’t run it into ground and then they can’t pay you and maybe the whole company even go defunct or bankrupt, so that is a risk you want to at least assess.
[00:07:16] But it is a good way to have passive income especially if you have got a good growing business, you have got a solid new ownership coming in and they have the capacity to grow that business and to pay you that income instead of taking that lump sum of cash and then you have got to do something with it. At least you know where it is at and at least you have known the business and if you are comfortable with the business, it might be a good place to store your capital because they have the capacity to pay you back.
[00:07:47] Another good passive income source is what’s called annuity, now annuity has got a bad rap, I get that, there is a lot probably sold that shouldn’t be and there is a lot of people who probably should have one that don’t. You know I mentioned the other day in my 3 minutes to money mastery video that I do where I do a bunch of video that are just 3 minutes long and they are quick, you should get on those if you haven’t seen them. But anyway I mentioned in there that almost any investment can be a great investment or a horrible investment, it just depends on the situation. So yeah, there are certainly times where people bought an annuity and the price doesn’t fit, horrible place to put in money. But then there is other who it just fit perfectly, they don’t want risk, they want to get out of traffic, all they want to do is know they are going to have income coming in and they never want to be able to outlive it and they just don’t want to worry.
[00:08:48] So an annuity can be very similar to a pension and very similar to social security or just pay you income every single month, every single year that you don’t have to worry about. So that is a good passive income source. The other is a little bit more on the risk side but you could own a very nice stock portfolio, a blue chip, high quality dividend paying stocks and you could essentially just take the dividend in cash each year rather than re-investing and that could be an income source. Because you can see volatility and fluctuation in the value of those stocks over the years but what usually happens in terms of dividend is these companies even when they don’t have a stellar year, they figure out a way to pay dividend if they have been paying them for sometimes.
[00:09:47] Now, I got to say this, sometimes that could be dangerous too. I remember years ago, pre 2008, when general motors were struggling and it look like they are going to go bankrupt and they ended up defaulting on their bonds. Where they are actually paying money to pay their dividends, so stock holders thought everything was hunky dory because they kept getting their dividends and it was really more mischievous and I don’t know, I shouldn’t say mischievous but it wasn’t very accurate as to what was going on in the company. So you definitely want to, if you are going to own a stock portfolio, you definitely want to know everything about these companies, you are comfortable with them, you understand what they do, you understand their cyclical nature if there is such and you understand how the dividends is being paid, where it is coming from. Is it coming from profit or they are borrowing money from the bank to pay that?
[00:10:48] and if you have all that into control, dividends can be a nice way to have passive income during retirement as well. And the final one that I will mention, you know there is definitely more that I am even talking about but the final one I will mention is using cash valued life insurance. It too pays a dividend, the only difference is cash value life insurance is guaranteed, it is essentially one of the most stable investment out there and you can work with companies who never miss a dividend in 110, 130, 140 years or even longer and never missed. So we are talking about through the crash of ’29, through the horrible years of the ’70s inflation, the good years of the ’80s, the .com burst, the 2008 crash. These companies still maintained their financial very strong stout companies and their dividends also were continued to be paid.
[00:11:55] Dividends can fluctuate for sure but being able to get that dividends each year and I might add if it is handled properly, it is a tax free dividends. Yeah, it is a tax free dividends and it doesn’t even get counted against other income that get added up to see if your social security should be taxed. Now, many of you might not know this but if you make too much money, when you are taking social security then your social security can also be taxed. That is a horrible tax, completely unfair tax in my opinion but it is the way it is. However, income that is coming off a life insurance policy tax free, again handle properly is not counted against the income bear the income that you are going to take to see if your social security is going to be taxed. So it works out pretty well.
[00:12:57] And again, you have got the safety, you have got the benefits, so there is definitely some reasoning to at least look at that, the only downside I should say to using life insurance is it something you need to plan for many years in advance? Because the IRS wants you to hold those things for several years before you start taking income for distributions, or I should say distributions for incomes. Yeah, so those are just some of the things that you can do because ultimately we would all like passive income, I mean that is the day where we get to just live our life in freedom and do what we want, when we want, however long we want, travel, play golf, play tennis, enjoy the world, enjoy your family, grandkids, all that fun stuffs and we can get that way when we have a plan to ultimately have passive income.
[00:14:00] So along those lines, if you want to look and see how your situation is unfolding and what that might look out for you and how you are going to create the passive income down the road, feel free to reach out and also with your questions, you send it all to firstname.lastname@example.org we can have a quick strategy session, look at where things are, look where they are heading and then the nice part about it is that you can correct that course before you get there and make sure that you have a good plan for your passive income and for your retirement years where they should be. Or that they say golden, right, those are the golden years. Alright, so reach out, any questions, comments, even the snide remarks, happy to hear them, happy to discuss anything further if you have any suggestion for other future podcast, happy to hear them as well, don’t forget to subscribe, you don’t want to miss any of this episodes and tell your friends to subscribe as well and we will build this thing up and really have some good contents and info for you over the months and years to come, so that is about it, great to have you with me and I will talk to you next week, take care.