How to Live Off of Portfolio Income

If you invest your money in income-producing investment vehicles, you can create an income for yourself that will allow you to live without working. The trick is to have enough income to avoid having to withdraw any principal for living expenses. If you achieve this, you can count on your portfolio to maintain its value and possibly even grow through the years. Your approach to achieving solid income and a steady portfolio involves planning investments and planning withdrawals.

Step 1

Plan your living expenses. Your need to know the dollar amount you can live on and still have a comfortable lifestyle. This means you should count any Social Security income as part of your income needs. You should cut out any expenses you don’t really need. The lower you get your living expenses, the less you will have to withdraw from your portfolio.

Step 2

Invest for income growth. According to SeekingAlpha.com, if you can invest in dividend stocks that have a history of increasing their dividends, you can grow your portfolio. The growing dividends will cover inflation as you rely on the portfolio for income each year.

Step 3

Count on approximately 4 percent from your portfolio. CNN Money says that counting on that much from your portfolio is the rule of thumb for withdrawing from it. This percentage makes it less likely that you will have to dip into principal to maintain your income.

Step 4

Calculate an additional amount for inflation. Stay abreast of the inflation rate and add the inflation percentage to your withdrawals so that you can maintain your lifestyle. Monitor the income growth in your portfolio to ensure that it grows at a rate that allows for this additional withdrawal.

Step 5

Plan for taxes. You have to pay taxes on taxable income you receive from your portfolio. Dividends are subject to changing tax rates, depending on laws passed by Congress. Monitor dividend tax rates so you can set aside enough money from your withdrawals to pay your taxes. Count this as a living expense.

Tip

  • Stocks that pay high dividend rates may be subject to price losses if investors suspect that the company cannot maintain the high dividend and remain profitable.

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