A hearty welcome to “Grandma’s Wealth Wisdom” with your neighborly hosts, Brandon and Amanda Neely. This is the only podcast that helps you take charge of your cash flow and leverage your assets, simply and sustainably, the way Grandma used to.
Amanda: Hey, I’m Amanda, and welcome to our Grandma's Wealth Wisdom, where we help you break through to a smart, stable financial future, with the tried and true wisdom Grandma used.
Brandon: Hey, and I’m Brandon, and this is Episode 79. Can you believe it's 79 episodes already? The episode today is called “How do you create passive income for life.” People love talking about passive income. We're going to talk about how to actually create it for your whole life.
Amanda: Yeah, and who wouldn't want passive income for life? I mean, hopefully, people are super excited for this episode. I know I am.
Brandon: The ultimate passive income is a pension, right? That's what people think. They love pensions. But those are really hard and becoming harder to find, right? I mean, it was easier to find back in Grandma's generation, but now it's harder and harder to find. [01:18.7]
In Grandma's day they were a standard issue at a lot of workplaces. You would not even think about getting that job unless they had a pension. You might not even consider again working for someone without that. Today most of that has disappeared.
Amanda: Yeah, plus, today, the pensions that people do have might not be as safe as most people think. A lot of pension funds are running low and we could see them disappear entirely. That's not what this episode is about. Just wanted to throw that out there. [01:56.0]
Brandon: I mean, that's a question then. How great are they really? You often have to work for the same company for a really, really long time to build up enough value to make that pension even worth it, and not many people today do that or want to do that anymore anyway.
Amanda: Yeah, and it passive income for life, no matter how long you live and maybe even leaving some passive income for your spouse or for your children, that sounds like a really good idea. That's pretty enticing, and we know from personal experience, my mom, she has a pension and it's been super helpful.
I’ve talked about her a lot on this podcast. She lives with us. We help take care of her, and that steady check hitting her bank account each month gets her and me so much peace that she can cover her cost of living, maybe even do some fun things like buy a chai. When we go to our coffee shop, she gets the chai. She loves it. And, sure, her pension could be a lot higher. There could be other things that work better in her favor, but not having to worry and having at least that base income is super helpful. [03:09.0]
Brandon: I mean, yeah, if it was higher, then maybe we’d increase her rent just for fun.
Amanda: No, no, no.
Brandon: We wouldn't do that. We wouldn't do that, but …
Amanda: She does pay much lower rent. I don't know, because her pension is so small, if she was living on her own, she wouldn't have any extra money. She'd be barely scraping by, and she worked for the same place for over 30 years, right? There should be a good pension, and yet it's still barely scraping by.
Brandon: What if you want passive income for life, but you don't want to work for the same place long enough to even have a pension if they offer it? Is it possible to create your own pension like passive income?
Amanda: I definitely think so and know people that do this. We came up with three options that we see people using to create passive income for life that could last as long as you do. [04:00.6]
Brandon: Before we jump into the three options to create passive income for life, with their pros and potential downsides—there are pros and cons in anything—we should tell you two things. We are not including a common replacement of the pension. Yes, you might guess it, the 401(k). Contrary to popular opinion, 401(k)s aren't the Holy Grail.
In fact, the center of retirement research names a big problem with 401(k)s. There's little or no guidance on how to turn the funds within a 401(k), into actual income. And how much do you take out each year? How much do you take out if the market goes down one year? What if the market is high? What if you have an unexpected expense? How do you use that money that you've built up in your 401(k)? [05:03.5]
Amanda: Yeah, and if all your assets are in your 401(k), when you hit 70 years old—let's just pretend that's your circumstance. You're 70. Everything is within a 401(k)—you're really left with two options. Either, 1) spend too quickly and run out of money before you run out of life, or 2) spend as little as possible and not be able to truly enjoy your life, get that chai at the coffee shop when you want, do the things you always wish you could do in retirement because you're trying to spend as little as possible.
Then, also, no matter which option you choose, whether it's spend whatever you want, it doesn't matter if you run out of money, or spend as little as possible, so that you don't run out of money, your funds are still in a 401(k). They're still likely to be subject to the whims of the stock market, not to mention fees, taxation, RMDs, and so forth.
All of these factors should show you, that show me at least, that 401(k)s are not sufficient alone for lifetime passive income. [06:03.0]
Brandon: That's one thing. The second thing you’ve got to know is that the three options we will share aren't right for everyone. Again, everything is kind of tailored to you, right? And so, thinking about that and seeing what fits for you.
This episode is meant to give you some ideas to consider and we highly encourage you to weigh the advantages and disadvantages of each one. Then avoid trying to do all three at the same time. Maybe even avoid choosing two and focus on just one, get that locked in and then add on the other one.
Amanda: Yeah, and this encouragement to focus on one comes from our years of business experience. You might even experience this in your own life. Any time we try to do three things, we end up doing none well. If we try to do two things, we might do pretty well, but when we focus on one thing and doing it to the best of our ability, getting that one thing rock solid for us, we're much more likely to succeed at reaching our goals. [07:09.5]
Brandon: There's an acronym we like. It's called, the word is FOCUS, and it's “follow one course until success” and you might see that it spells “focus.” If your goal is passive income for life and you want to increase your chances of creating it, you might consider choosing one of these to go after really hard.
Amanda: Yeah, and then, after you've had success with one, it might make sense to diversify and add a second. Maybe you can choose that for yourself, but one could even be sufficient if you are successful enough at it.
Brandon: Yeah, and you might, of course, disagree and think you can pursue two at the same time or three, but in our opinion and doing this through years of experience, I feel like, again, focusing on one is going to make your life simpler and easier. [08:06.7]
Amanda: Okay. Without further ado, let's jump into these three ideas for creating a passive income for life.
Idea No. 1 is that certain business opportunities have things called residuals for your life and sometimes can pass on to your heirs. Brandon, give us some pros of having some type of business that has residuals, truly passive income for your life.
Brandon: Yeah. No. 1, you're in control, in that you can build it as big as you'd like. Building your customer base, you can just keep going as long as you want, as long as it's possible. The more time and effort you put in, likely the bigger amount of the residual that you'll have. I mean, that's a good, healthy growing business.
Amanda: Hopefully.
Brandon: Yeah, and there are a bunch of different approaches, so let me name two of them. You can get passive income from the work of others, like people you hire or being a silent partner in a business, or handing off the day-to-day management of your team to someone else while still owning the company and receiving checks from that. [09:16.7]
You could invent something and then license its use, so that you get all the licensing fees without doing any manufacturing or selling. I mean, that would be an awesome way to go. I need to figure out what to invent, though. I haven't got that.
Amanda: Right, right. Those are probably the two biggest pros. There are probably more, but there's no ceiling. You can grow that passive income as big as you want and there's a bunch of choose your own adventures. You can try a bunch of different things or if there's one route you want to go, and other people can do other routes within business opportunities.
But there are also downsides. We're only going to go over one downside and it's the biggest one for us that there are no guarantees. [10:01.8]
Let's say you're doing some kind of network marketing and you're building residual income, where the clients you sign up, you get a commission on their purchases for the rest of time or the rest of your life, maybe even your kid’s life. That company could change their policies. They could get bought out. That could disappear, or maybe the people just stopped buying for a whole lot of reasons. There's a new competitor that gains favor in your industry or maybe those people are also older and they decided they don't want to use that product anymore or something like that.
If you're starting your own business where you're not in another company, people might stop buying, a new competitor in your industry, the business could just fall apart. Even if you passed on the management or you're just a silent partner, there are no guarantees. Businesses come and go. There's a huge failure rate.
Brandon: Yep, and, again, we experienced some of that with our own business, with just having landlord issues, and actually the risk is all on you, right? The landlord didn't care how things went. The risk is more on us, right? [11:15.5]
You put in your hard work. You invest your time and money. Yet you don't really know if the business is going to work or if someone is going to change something, or continue to work and give you passive income for life. We hope, of course, it will, but we don't really know for sure.
Amanda: Now, don't get us wrong. We love business as a way to create wealth for the business owners and creating value for the world, the customers, the vendors, the staff, and other stakeholders. Business creates value, really helpful. However, when it comes to creating passive income for life, business is still a gamble, and we're business owners. A big part of our journey was finally admitting that, with our business, we’re gambling. [12:02.4]
Brandon: Yep. I mean, again, we liked some of that, but we wanted to mitigate a little bit and it was fun, but it was also hard.
Amanda: Okay. Let’s go on to Idea No. 2.
Brandon: Yeah, Idea No. 2 is real estate. This is “the” hot thing right now, right? There are a lot of ways to do real estate, but not all of them create passive income for life. A very popular way to do real estate to create passive income is to build a portfolio of rentals, whether they be long or short term, single family or multifamily. You're just creating rental income.
Amanda: Right, and there are a lot of pros here, and when you have those properties, you have a tangible asset, something you can physically touch and see and walk through. And it's real, right? Not paper, or not even paper. Points in the computer or something like that. [12:59.7]
Also, because it's a tangible asset, that deed to that property, that can pass on to your heirs. They can continue receiving those rentals. It could stay in your family for as long as people wanted or whoever you might have as your heirs.
There's also the option to sell that deed, sell that tangible asset, and get your investments back. If you ever really needed that big pool of money, it's pretty easy. Maybe you’d have to pay taxes on your growth if you're not going to do another property right away or something like that, but you do have that option, which can feel really good to be able to get those investments back if you need them.
Then, you can also, if you're just starting out thinking about real estate, you don't need necessarily to have a ton of upfront capital because you're able to leverage loans to buy those properties and build up your portfolio with only putting in down payments, rather than having to buy the entire asset all at once. Of course, those loans are available for business purposes, too, but it's a little easier to get a bank to give you a loan for a property that is the collateral behind that loan as well. [14:04.3]
Brandon: There are, of course, with this, downsides. There are ongoing costs and worries, maintenance and bad tenants. I think we also forgot to mention this. Property taxes may increase that you don't have control over, right? We had to deal with that one just recently, and it takes a lot of work and there's a lot to learn to make sure that you don't make bad choices. That's why having a good team around you is important in this venture. Whether in the property you buy or management company you use, or even who you select as tenants, there are a lot of choices that you need to make to make sure you do it successfully.
Amanda: Yeah, and then just like business, there are—guess what we're going to say—no guarantees. [14:53.2]
Grandma always said, “Eat your vegetables. Look both ways before crossing the road. And never risk your financial future on elements of the market you can’t control.” That Grandma, always good for some tried-and-true advice. And although some of her wisdom seems to have skipped a generation, you don't have to be left behind.
Download “Grandma's Top Tips for an Independent Financial Future” absolutely free, when you visit Grandma’sWealthWisdom.com. Don't wait. Get Grandma's best tips today.
Amanda: Now, real estate, historically speaking, might be more stable than starting your own business, especially with the business failure rate, right? But there are still no guarantees.
Brandon: Just like the business owner you're putting in your money, your time and energy, but you don't really know if it'll pay off in the long run. You could have one bad tenant that destroys the property or there could be a housing bubble that destroys property values. We don't know. There could even be localized changes that make it hard to find renters. Real estate is still gambling. The odds might be better in your favor than opening a coffee shop like we did, but there are still risks. [16:14.5]
Amanda: Those are the first two ideas, business and real estate, and there are particular ways to do business or to do real estate that actually create passive income for life.
Now, let's talk about No. 3. Just like the first two, there's a way to do this, to create passive income for life, and there are other ways to do it as well. But this one is—and please don't stop listening. Keep an open mind here—annuities.
These used to be pretty frowned upon. Some people still are in that camp where they just won't even entertain the idea of an annuity and for various reasons, but they are becoming more and more popular. I mean, even when we're watching a streaming service, we see a commercial that is a totally foreign annuity and it's hilarious, yeah. [17:05.0]
Brandon: Oftentimes, almost every day. It’s weird. I was like, I haven't seen this many commercials for this until this past year or two.
Amanda: Yeah, and it's because so many people are at the age where they're thinking about lifetime income and making sure they don't run out of money before they run out of life, and then annuities are one way to do that like we're going to talk about here. They're becoming so popular, too, not just in commercials, but even the experts like the Center for Retirement Research at Boston College and other experts are now officially recommending annuities to the general population, not just a certain segment of Americans.
As we talk about annuities, keep in mind, there are a bunch of different kinds, right? But we're specifically thinking of annuities that have these things called income riders, where you can turn the value of your annuity into a lifetime income. Keep that in mind. There are other kinds of annuities, but that's the kind that we're going to talk about. Brandon, why don't you give us some pros of these types of annuities? [18:06.3]
Brandon: Yeah. One of the biggest pros is it shifts the risk that you live too long to a life insurance company. Again, the risk that you live too long, don't we want to live a long life? But it shifts that to the insurance company. With the right annuity, even when your account value goes to zero, you continue to receive income, and you sometimes receive income, pay raises even, when your account value has zero money in it.
Amanda: Yeah, so when we say that, a lot of people are like, What? How can they do that? How can they keep giving me income even when my account balance has zero in it?
The basic idea of an annuity as it's kind of like the opposite of life insurance. When you buy life insurance, you're often thinking of protecting your loved ones in case you die too young. It's meant to replace the income that you would have been earning, so that your family doesn't starve or be neglected because you died too young. [19:07.0]
Annuities protect you in case you live too long, so that you continue to have income, too, so that you don't starve as you age and if you outlive your money, so the life insurance company is taking that on for you, that risk. In the same way that life insurance protects your loved ones, the annuity is meant to protect you in case you live too long.
Brandon: Could you also say, and I know that life insurance has a death benefit, do annuities have death benefits?
Amanda: Some do. Some don't. You want to make sure when you're exploring an annuity that you ask that question, and one thing that's cool about annuities is you get projections of what your funds would do. It's called an illustration. If the annuity has a death benefit, you would see that clearly defined on what's called an illustration, so be sure you're reviewing that and asking that question. [20:02.2]
Brandon: The annuities we do usually have a death benefit associated, so that's just something a client asked me and I was like, Yeah, it does actually have death benefits.
Amanda: Let's get back to the shifting risk idea.
Brandon: Yeah, so you take some of your money that represents your time and effort, however you make that money, and you put it aside within an annuity. Basically what you're doing is you're taking some money off the table and putting it into another asset. The life insurance company then takes on the risk to fulfill the guaranteed income they promised to you when you start the annuity.
Amanda: Yeah, so let me say that again. We talked about when you're in or you're in real estate, you take the risk, right? You put in your time, your energy, your money, and there are no guarantees, right? It could pay off. It could not pay off. You're effectively gambling. [20:58.7]
With annuities, what you're doing is taking some money that represents your time and effort, however you've made that money, and you're giving that to the life insurance company and putting it into your annuity, paying premiums on the annuity, and the life insurance company is taking on the risk to pay the income to you. Whether their portfolio goes up or down, whether they are successful in managing their business, they have to provide that guaranteed income.
As you know, guarantees are only as good as the company that makes them. You definitely want to choose the company behind any annuity you might consider very carefully. But one good thing is that there are third-party rating services that give you an independent idea of how well the life insurance company comes back the guarantees that it’s making to you, the annuity holder.
Brandon: And also remember that life insurance companies are heavily regulated and there are multiple safety nets in place in case the company can't back its guarantee. There, again, nothing is guaranteed, but they have certain, I don't know, people under them or around them to make sure that they can fulfill those guarantees if things happen. [22:13.0]
Amanda: Yeah. In other words, some things just have less risk than others. Brandon, why don't you go to the next pro of annuities? After you're shifting the risk, what else is an advantage?
Brandon: You can actually move your 401(k) or IRAs to annuities without any penalties or tax consequences, unless you, of course, want to do a Roth conversion. You could do that if you want it, because the annuity is an IRA, which in this case stands for Individual Retirement Annuity rather than Individual Retirement Account.
Amanda: Yeah, so it's considered a roll over, if you do want to turn that 401(k) into a passive income for life through this kind of annuity. There's also a third pro that we'll talk about. There's an additional benefit and protection to some annuities that when we first heard about it totally surprised us. [23:07.7]
Some annuity that you've turned on your lifetime income, if you get a certain diagnosis, you have a chronic or terminal illness, you have to seek extra medical care like going into a nursing home. That special provision in these annuities, your income would double to help cover the costs of the care you're receiving. If you're getting $2,000 a month, all of a sudden, you're starting to get $4,000 a month.
Brandon: Yeah, so with many families worried about how they will pay for long-term care, this could provide some peace of mind and relieves some worries for their family.
Think about it. Lifetime passive income from business or real estate doesn't go up in the case of needing a nursing home, you might actually have to sell the business or the real estate to pay the nursing home costs, and there goes your lifetime passive income for you later on for your survivors, so then they don't even get it. [24:05.0]
Amanda: Yeah, those are some of the pros. Now let's go through a couple of downsides. There are 19 different kinds of annuities and only three or four that we believe are kind of worth it, and even those three or four types are offered with different features at different companies or even with different products at the same company.
If you're going to go the annuity route, you have to do some homework. You have to do some research. You have to find a financial professional who really knows you, your goals, what you're trying to accomplish, and how to compare your options to help you find the right one, or ones, because you can have multiple annuities, for you to help you reach your unique goals.
Brandon: You often lose access to the account value or most of it. This is either through surrender fees or other limitations to the contract and they specifically do this for a purpose for the annuities to make sure that they are working efficiently. [25:03.0]
Amanda: Remember you've shifted the risk. The life insurance company is taking on the risk, right? The majority of it. They need to make sure that they're able to fulfill their guarantees and the promises that they're making. Some of that loss of access to your account value, some of those surrender fees.
Also, with annuities, they'll also have things like caps and spreads and different things where you're not getting the full upside that you might get if you left your funds and riskier investment options, like mutual funds and stocks, ETFs, index funds, etc. That's kind of the con there that, if you did need all that money back all at once, there would be surrender fees or other limitations if you've already turned on passive income, and that you're not going to get all the upside because you're not getting any of the downside either. They're taking that risk off the table, so it's just a trade-off that you have to make. [25:59.3]
Brandon: You'll notice we didn't mention an option most people consider right now. That's building a large enough nest egg in a 401(k) or somewhere else that you can live off just the growth without ever touching the principal.
This option is getting harder and harder to do, and there are often no guarantees and too many risks to either build a big enough nest egg or to get a smaller nest egg to spin off enough income. In today's low-interest rate environment, I don't know of any option without either taking too much risk or needing to create a nest egg that's so large it's out of reach for most people to even accomplish.
Amanda: Yeah, so if you're going to try to make that your passive income vehicle, having such a big investment that you can just live off the growth of that investment and never touch the principal, be sure you do the math on that one.
Brandon: Make sure you do the math on that one.
Amanda: Yeah, yeah. Of the ones that we went over today, the business opportunities, real estate, or annuities, which one do you want to learn more about? [27:07.3]
We want to be sure to let you know that we have a slew of information about annuities from book recommendations to articles to podcasts and videos. We've actually taken courses on annuities and regularly help clients select the right annuity for them and determine how much to put into their annuity to actually reach their goals, and we've got one really great resource that was recently published. We'll put the link to that in the show notes. If you check that out, just be sure to tell them that you heard about it from us.
So, absolutely, whether you have retirement funds, you want to protect and turn into passive income for life, or maybe you're still building up your assets, but you want to make sure they're going to be able to turn into passive income when you're ready for it, we'd love to chat with you and share more of the resources we have without any obligation, just as an educational thing, answering questions that have come up from this episode.
Please reach out to us if you want to explore any of this more deeply. Yeah, annuities, we can totally talk about that, but we also love talking about business and real estate, and making sure those are truly profitable. [28:11.5]
As profit first professionals, we can help you increase your profits from your business and your real estate, and then as personal financial professionals, we'd love to chat about how to put that profit to work to create passive income for life outside of the business or the real estate that you're doing.
The best way to reach us, Grandma’sWealthWisdom.com. Click Request a Meeting up in the top corner and you can schedule right on Brandon or my calendar.
Brandon: Awesome. Make sure you hit that subscribe button and join us next time for another controversial-- Controversial. How do you say that?
Amanda: Controversial. Controversial.
Brandon: Maybe it’s that one.
Amanda: Controversial. [28:53.5]
Brandon: Controversial conversation about when it could be smart to pay interest. Wait, you're just talking about paying interest. When it could be smart to pay interest. Might there be a circumstance or, heaven forbid, several circumstances when paying interest is the smart option? We'll explore that in the next episode. “How to pay interest.” Is that the title?
Amanda: No. “When could it be smart to pay interest?” Something like that.
Brandon: Okay.
Amanda: Yeah. Until next time, keep building your wealth, simply and sustainably, so you can break through to a smart, stable financial future.
The topics presented in this podcast are for general information only and not for the purposes of providing legal, accounting or investment advice. On such matters, please consult a professional who knows your specific situation.
This is ThePodcastFactory.com
