If you have $1 million or more invested, you have probably reached a point where the question is no longer simply, “How do I grow my portfolio?”
At some point, the question changes to: “How do I make my portfolio produce income without constantly selling investments?”
That is where passive income becomes an important part of retirement planning.
The good news is that you have options. The challenge is that creating reliable retirement income may be more complicated than simply finding investments with the highest yield.
For investors with $1 million or more, I believe the better approach is to think about the entire portfolio: which part of the portfolio is the income coming from, how much risk you are taking to generate it, how liquid your investments are, and how the different pieces may be diversified from one another.
What Is Passive Income in a Retirement Account?
Passive income is money generated by your investments rather than by your labor.
In a retirement portfolio, that income might come from:
- Interest from bonds and other fixed-income investments
- Dividends from stocks
- Distributions from real estate investments
- Income from private investments
- Distributions from alternative strategies
- Other investments designed to generate cash flow
The important distinction is that income and returns are not the same thing.
An investment can produce a high distribution while still losing value. Likewise, an investment with a relatively low yield can generate attractive total returns over time.
That is why I would not build a retirement portfolio around yield alone.
How Much Passive Income Can $1 Million Generate?
There is no single answer because the amount of income your portfolio can generate depends on the investments, market conditions, risk level, and how much of the portfolio you are willing to allocate toward income-producing strategies.
For example, a $1 million portfolio generating 3% in annual income would produce approximately $30,000 per year before taxes.***
At 4%, it would generate approximately $40,000.***
At 5%, it would generate approximately $50,000.***
3%
Annual income
$30,000
per year, before taxes
4%
Annual income
$40,000
per year, before taxes
5%
Annual income
$50,000
per year, before taxes
*** These examples are hypothetical illustrations only and are not intended to represent the expected yield, income, or performance of any particular investment or portfolio.
But there is an important catch.
You generally cannot increase the income from a portfolio indefinitely without increasing risk somewhere else.
Chasing a 7% or 8% yield simply because it looks better on paper can introduce risks and/or restrictions that should be considered.
You as an investor may want to consider the goal of creating sustainable portfolio income that fits your overall retirement strategy.
Can I Create Passive Income Inside an IRA or 401(k)?
Yes. Retirement accounts can hold investments that generate income.
Depending on the type of account and the investment options available, you may be able to use stocks, bonds, real estate-related investments, private investments, or other strategies to generate portfolio distributions.
But there is an important consideration: income inside a retirement account does not necessarily mean income you can spend immediately.
For example, if you are still working and have money inside a traditional IRA or 401(k), generating interest or dividends inside the account does not automatically make that money available for spending without considering the tax and withdrawal rules that apply to the account.
That means retirement income planning needs to look beyond the investment itself.
You need to consider where the investment sits, when you need the money, and how withdrawals will be taxed.
What About Bonds and Fixed Income?
Bonds are another traditional source of portfolio income.
They can provide interest payments and may play an important role in reducing the dependence on stock-market performance for retirement cash flow.
But bonds come with their own risks, including interest-rate risk, credit risk, inflation risk, and the possibility of losing principal.
For a $1 million-plus portfolio, the question isn’t simply, “How much should I put into bonds?”
The better question is:
“What role should fixed income play in the portfolio?”
That answer can be very different for someone who needs income today versus someone who has other sources of cash flow and wants to grow their assets for the next 20 years.
Are Alternative Investments Worth Considering for Passive Income?
This is where investors with larger portfolios may have opportunities that aren’t available, or aren’t practical, for smaller investors.
Depending on an investor’s circumstances, alternatives such as private real estate, private equity, venture capital, or hedged strategies may provide exposure to sources of return and income beyond traditional stocks and bonds.
That doesn’t mean alternatives are automatically better.
They can involve illiquidity, complex structures, higher fees, limited transparency, and significant investment risk.
But for the right investor, allocating a portion of a portfolio to investments outside traditional stocks and bonds can potentially create additional diversification and income opportunities.
Position sizing may be one factor to consider when evaluating the potential risks and role of alternative investments within a diversified portfolio.
There is no one-size-fits-all allocation. The appropriate allocation, if any, depends on an investor’s objectives, risk tolerance, liquidity needs, time horizon, and overall portfolio.
Don’t Confuse Passive Income With “Never Selling”
One of the biggest mistakes I see investors make is assuming that a retirement portfolio should never require them to sell an investment.
That sounds appealing, but it isn’t necessarily the most efficient way to manage a portfolio.
Suppose you own an investment that has appreciated significantly but produces very little income. Selling a portion of that investment could be perfectly reasonable if doing so improves your overall retirement strategy.
The objective isn’t to avoid selling.
The objective is to manage your portfolio so that you can fund your lifestyle without taking unnecessary risk.
Sometimes that means collecting income.
Sometimes it means selling investments.
Often, it means doing both.
A Better Way to Build Passive Retirement Income
For someone with $1 million or more, I would start with four questions:
1
How much income do you actually need?
Don’t start with the investment. Start with your spending requirement.
2
Where are the funds?
The type of account, such as a taxable brokerage account, traditional IRA or rollover IRA, or Roth IRA, may influence which investments are appropriate to hold in each account.
3
What risks are you willing to accept to generate income?
Understanding what risks are involved may help with expectations and understanding how things play out. Although, no matter how good your due diligence process is, there will always be risks outside of your control.
4
What role should each part of the portfolio play?
Stocks, bonds, private investments, and other strategies don’t need to compete with one another. They can have different jobs within the portfolio.
The Bottom Line
Creating passive income in retirement accounts isn’t about finding one investment that pays the highest yield.
For investors with $1 million or more, it is about constructing a portfolio where income, growth, diversification, liquidity, and risk work together.
You may use dividends. You may use bonds. You may use alternative investments. You may periodically sell appreciated investments. The right combination depends on your circumstances and what you are trying to accomplish.
The important thing is to avoid building your retirement strategy around a single number, especially a yield percentage.
Your portfolio has a job to do. The question is whether every part of it is doing that job intentionally.
At White Peak Investments, we focus on investment management rather than trying to serve as every type of financial professional.
For investors who already have other professionals handling areas such as tax, estate planning, or financial planning, the investment portfolio can be addressed as its own discipline.
If you’re approaching retirement with $1 million or more and want to explore how your portfolio could create income, the first step may simply be a conversation about what your goals and objectives are.
This article is for educational purposes only and is not tax, legal, or investment advice. Any examples are hypothetical and provided solely for illustrative purposes and are not intended to represent the expected yield, income, or performance of any particular investment or portfolio. Investing involves risk, including possible loss of principal. Investment strategies cannot guarantee income or positive returns. Individual circumstances should be evaluated before making investment decisions.