Why creating passive income is essential for your retirement plan

Published: February 27, 2024 at 6:00 am

Including one or more passive income sources in our retirement plan is crucial. It not only enhances our income and minimizes the risk of investments in the capital market but also helps us stay active and nimble—a strategy for achieving it.

Passive income refers to any income source that requires minimal maintenance of the actual product or service. The costs of keeping the product alive and selling it should be as low as possible. This effort can be regular, say once a year or occasional modifications to comply with shifting laws, trends and technology.

The product or service need not be digital. People designing mattresses and receiving a royalty for it also enjoy passive income. If there is a new development in sleep science, a new design can be released. There is no need to pick on the old.

The point that most people fail to understand about passive income is the “passive” part (minimal effort) refers only to the product or service sold. Sustained, disciplined effort is necessary for the “income” part.

For passive income to work, yes, the product should be evergreen, have low running costs and require little maintenance, but that is only one side of the coin.  Passive income also means regular income. Any product must consistently meet new sets of eyes for a steady income.

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Passive income that arises from human endeavour requires active, growing visibility. The passive only refers to the commodity sold. The income part requires it to be regular and substantial. This may sound like a bad deal. It is not. It could be a fantastic deal.

Imagine yourself as a blogger, YouTuber, social influencer etc. You have created a passive product and realised the importance of active visibility. You build content consistently. Content that is helpful and not directly related to the products. This is not labour; this is not tiresome as long as you genuinely love what you do. You think about what to do next when you sleep and wake up pumped.

This is not labour. It is engagement—the best way to kill time. Time to insert the obligatory Confucious quote (paraphrased): “Create a passive product you love, and you will never have to work a day in your life,” This is also a great way to spend our retirement – a part of it.

That brings us to the connection with retirement planning. Imagine creating a passive product that brings in only Rs. 2500 a month.  This is small. No one will invite you as a keynote speaker to a passive income conference. Who cares? If you nurture it consistently, it could grow to 10% of your monthly expenses, 30%, or 60%, and then it is something.

Why passive income is a crucial part of your retirement plan

Most investors will have a retirement corpus lower than needed to combat inflation and emergencies.  There are two key reasons for this: (1) They are spending more than they should and therefore not investing enough, and (2) they are not investing it in the right asset allocation because of either fear or greed.

Imagine an income stream that slowly grows over decades and is equal to half the monthly expenses of a retiree. This can make a huger difference to a retirement. Enter an income source (up to 3 is possible) in the freefincal robo tool and see the corpus drop.

With such an income source, a large chunk of the corpus can be left alone untouched for a longer time. You can handle a downturn with more confidence if you have some equity exposure. So it is a no-brainer that an additional source of income would help.

Of course, that income can also be active via consulting or a second job. Reliance on active income in old age is not a good idea. It is also a no-brainer that those who wish to continue exchanging their time for money can/should do so. Just that they should not rely exclusively on it. Passive income requires effort too, but the obligations are lower.

How to get started towards creating a passive income stream?

Of course, it will take time and effort, so those decades from retirement should sow the seeds today. Time management is the only requirement. If you tell yourself, “I will allocate one hour per week to work on a future income stream (active/passive), ” you have to put in that one hour, rain or shine.

Theoretically, active or passive income is the overlap of skill and utiity. Practically it is all about consistency

A venn diagram with overlap of skills and utility
A Venn diagram with an overlap of skills and utility
  1. Which of your skills would solve a problem for others while making you happy and content? The answer is your passive income stream.
  2. Then you need to learn how others monetise this content and how you can do it differently. Why should someone pay you when there are others?
  3. Start an online presence: tweet about developments in your skill space. Write short articles on Facebook, in a blog, and on Youtube. Create a community; create an identity (even if people hate your views, they should not be able to ignore you). Polarization works!
  4. Develop trust in your community.
  5. Recognise their problems. This would inspire not only new content but also new products.
  6. Do not start selling anything until people write to you saying: “I want you to help; how do I pay?”
  7. Recognising all this will take years and years.

Perhaps you studied a degree that you did not like. Worked a job only because you had to. You can correct those wrongs here with some introspection. With some planning. If you need help getting started, try our course: Increase your income by getting people to pay for your skills!

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About The Author

Pattabiraman editor freefincalDr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
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