Explore diverse passive income strategies to complement your retirement plan. Learn how to align income sources with tax-efficient, diversified portfolios with advisors at EP Wealth.

Building Passive Income Streams for Retirement

Retirement today goes beyond stepping away from work. It's about crafting a lifestyle supported by income sources that reflect your values and goals. Passive income can be a vital tool to this process, offering financial flexibility and independence. Here's a closer look at how passive income can play a significant role in your retirement planning strategy.

Key Metrics to Consider When Building Passive Income

1. Income Stability

The foundation of any passive income strategy is consistency. Evaluate how reliably each income source performs over time to help reduce the risk of disruption—especially during retirement, when steady cash flow is essential.

2. Risk-Adjusted Returns

Not all passive income is created equal. Assess the potential return of each source relative to its risk level. The goal is to strike a balance between income generation and the level of risk you’re willing to accept based on your broader financial strategy.

3. Tax Efficiency

How your passive income is taxed can significantly affect your net returns. Consider the tax treatment of dividends, interest, real estate income, or distributions from retirement accounts. Identifying more tax-efficient income streams can improve the overall effectiveness of your strategy.

4. Liquidity

Liquidity matters—especially when you need to access funds for short-term expenses. Some passive income sources, like rental real estate or private investments, may be less liquid. A well-rounded strategy includes a mix of accessible and longer-term assets.

Real Estate Income Strategies

Real estate can provide various pathways for generating passive income. Direct ownership of rental properties offers regular income, though it often involves property management responsibilities. For those seeking less hands-on involvement, real estate funds and other private real estate strategies allow investors to diversify their holdings without directly managing properties.

Dividend-Paying Investments and Fixed Income

Investments that generate regular payments can provide a strong foundation for retirement income. These assets typically offer consistency, predictability, and a measure of stability. Key options include:

• Dividend-paying stocks – Shares in companies that regularly distribute a portion of their profits to shareholders. They can offer a steady income stream and potential for capital appreciation.
• Bonds and fixed-income instruments – Loans to corporations or governments that pay interest over time and return principal at maturity. Generally less volatile than equities, they are often favored for reliable income.
• Preferred shares – These offer fixed dividends and have priority over common stock in terms of payouts, making them attractive for those seeking dependable returns.
• Real Estate Investment Trusts (REITs) – Publicly traded or private investments that provide exposure to income-generating real estate, often offering higher yields than traditional equities.

In combination, these investments have the capability to support a well-diversified portfolio intended to deliver consistent income while managing overall risk—an important balance for long-term financial health in retirement.

Business Ownership and Royalties

Owning a business or intellectual property rights can generate passive income during retirement. One option is passive business ownership, where individuals invest in businesses without day-to-day involvement, such as being a silent partner or shareholder. This can result in profit distributions or dividends.

Royalties and licensing offer another potential passive income stream. If you own intellectual property like books, music, or patents, you can earn income when others use these assets under a licensing agreement. These royalty payments can provide a steady income stream without requiring active work, though they may need upfront investment or creative effort.

Alternative Income Streams

Alternative investments can also offer unique opportunities for diversification, providing passive income beyond traditional stocks and bonds. Some examples include:

Although these investments are often more complex and less liquid, they can complement traditional strategies and potentially offer attractive returns.

Strategic Use of Tax-Advantaged Accounts

Tax-advantaged accounts can improve the efficiency of your passive income. They may offer tax benefits to help reduce your tax burden and potentially preserve more of your income.

• Roth IRAs and Roth conversions allow for tax-free withdrawals, making them ideal for long-term growth. Converting a traditional IRA to a Roth IRA can help manage future tax liabilities.
• Health Savings Accounts (HSAs) provide triple tax benefits like tax-deductible contributions, tax-deferred growth, and tax-free withdrawals for qualified medical expenses, offering a powerful tool to cover healthcare costs in retirement.
• Donor-Advised Funds (DAFs) support charitable giving with immediate tax deductions while allowing you to recommend grants to charities over time.

These accounts play a key role in a tax-efficient retirement plan, and a financial advisor can help you integrate them into your larger financial strategy.

Asset Location and Tax Efficiency

Strategic placement of assets in the right accounts, known as asset location, can also significantly impact your retirement taxes. For example, tax-exempt investments like municipal bonds are typically better held in taxable accounts, while tax-deferred accounts generally work best for investments generating taxable income.

Capital gains and tax-loss harvesting can also help manage taxable gains and losses, reducing your overall tax liability. State-specific tax rules also affect your income, so understanding how different states tax various income sources is essential for minimizing taxes and preserving income.

Diversification Across Liquidity and Risk

Balancing investments based on liquidity needs and risk tolerance is another part of creating a well-rounded retirement portfolio. Allocating assets for short-term, near-term, and long-term needs allows you to access funds when necessary without sacrificing future growth.

Evaluating how income sources perform across market cycles is another critical aspect for understanding how to maintain steady income in both stable and volatile conditions. Combining liquid assets, which are easy to access, with illiquid investments, which may offer higher yields, provides a balanced approach to managing risk and growth potential in retirement.

Integrating Passive Income into Retirement Planning

Integrating passive income streams into your retirement strategy supports long-term financial goals while helping to manage risk and taxes effectively. For personalized guidance, consider EP Wealth’s financial planning services for retirement. Contact an advisor near you to get started.

DISCLOSURES

• EP Wealth Advisors, LLC. is registered as an investment advisor with the SEC and only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the advisor has attained a particular level of skill or ability.
• Request an appointment with an EP Wealth Advisor when you have a minimum of $500,000 in investable assets – which includes qualified retirement plans (IRA, Roth IRA, 401(k), taxable brokerage, cash (savings / checking) and CDs. Investable assets do not include your home, vehicles, or collectibles.
• Hiring a qualified advisor and/or financial planner does not guarantee investment success, and does not ensure that a client or prospective client will experience a higher level of performance or results. No guaranty or warranty is made that any direct or implied results or projections being represented here will be met or sustained.
• The need for a financial advisor or financial planner and/or the type of services required are specific to the uniqueness of each individual’s circumstances. There is no guarantee or warrantee that the services offered by EP Wealth Advisors, LLC will satisfy your specific financial services requirements. Services offered by other advisors may align more to your specific needs.
• Information presented is general in nature and should not be viewed as a comprehensive analysis of the topics discussed. It is intended to serve as a tool containing general information that should assist you in the development of subsequent discussions. Content does not involve the rendering of personalized investment advice nor is it intended to supplement professional individualized advice.  
• All investment strategies have the potential for profit or loss. Different types of investments and investment strategies involve varying degrees of risk, and there can be no assurance that any specific investment strategy will be suitable or profitable for a client’s portfolio. The risk of loss can never be eliminated even if working with a professional.
• EP Wealth Advisors (“EPWA”) makes no representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information presented. All expressions of option are subject to change without notice.