How To Live Off Your Investments

Even if you’ve accumulated significant assets over the years you may not know exactly how to turn those investments into income. This frustration comes into play most often when people think about their growth mutual funds and their real estate.  Sure they might have built up tons of equity, but how do you tap in to that sweet nectar?

Some equity investments do throw off dividends of course and real estate often creates rental income but what do you do if it’s not enough to live on? These problems may seem perplexing but as you‘ll see in a moment, they are pretty easy to fix – especially when it comes to growth funds.

Creating Income From Growth Investments

Many times people make the mistake of abandoning their equity funds in favor of fixed income just because they want monthly income. The reality is you don’t have to do any such thing. I’ve written extensively about how investors use growth funds for income. It’s not magic. All you have to do is understand the difference between withdrawals and earnings, have the right funds, withdraw a reasonable 3% to 4% and keep thinking long-term.

It’s true that in any given year your withdrawals could far exceed the returns you make on your money but over the long-haul -on average – they probably won’t as long as your withdrawal rate is reasonable as I said and your portfolio is properly allocated.

An added benefit of using funds to create income is that you have the real opportunity to create more income after inflation for more years than fixed income might provide. This is no guarantee of the future of course but the historical odds have been pretty good.

Real Estate

A good friend of mine owned a vast portfolio of awesome vacation homes spread across the United States. To make it sweeter, he held them all free and clear – no mortgages and they were worth far more than he paid for them. What could be wrong with that?

Even though they were worth several million dollars they weren’t creating enough income to cover their own upkeep and taxes. His solution was to enter into a number of 1031 tax-free exchanges to sell his existing homes and buy properties that did generate net income.

The beauty of doing 1031 exchanges is that when you do it properly you can “sell” your highly appreciated property without paying a cent in taxes. That puts more money into the next deal, delays paying capital gains tax and preserves your capital.

And in this situation, it also enabled my friend to start collecting a heck of a lot more rent on his properties.

If you want to live off of your investments, first make sure you hold the right kind of investments. Don’t ignore growth funds just because you want income and don’t feel trapped just because the properties you currently own don’t throw off enough income.

Are you interested in living off of your investments? Have you maximized your holdings? Would you use either of these ideas? Why or why not?  If you have any questions or would like some help, just let me know.