How I’m building more passive income to retire early

As a huge fan of passive income, I’m always looking for new ways to get extra unearned income. By making my money work harder now, I can retire earlier!

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As I enjoy my job as a financial writer (over 20 years and still going), I haven’t given much thought to early retirement. However, having turned 55 this month, more options are now available. Even so, my wife and I don’t feel that we have enough passive income to call it a day just yet.

Enjoying flexible retirement

These days, fewer Brits opt for outright retirement at ‘normal’ retirement age. Instead, some folk continue working while drawing on their pensions. Others work part-time, mixing earned and unearned income. And a few Brits never stop work before they die.

Recently turning 55 gave me the option of early access to benefits from my occupational pensions. I have two ‘gold-plated’ final-salary/defined-benefit schemes from many years working in the financial sector. Also, I have built modest pension pots with my own contributions.

That said, these sums are nowhere near enough to live on until death. Also, I will not qualify for my state pension until 2035, when I reach 67. So what to do?

I need more passive income

In order to retire comfortably and/or early, I’ll need lots more passive income. There are so many different ways I could generate these extra earnings. For example, I could deposit my cash in a safe savings account and spend the interest. But I know hardly anyone who got rich by not taking risks.

Alternatively, I could buy government or corporate bonds and live off the coupons (interest) these fixed-interest securities pay. But even a 10-year UK government gilt pays under 3.5% a year before tax.

Another option would be to become a buy-to-let landlord by renting out property to tenants. As a younger man, I’ve seen the damage bad tenants can do, both to a landlord’s property and finances. Quite simply, this route is not for me.

I love share dividends

As an investor in stocks since 1986/87, my favourite form of passive income is share dividends. These are regular cash payouts paid by companies to their shareholders.

The biggest problem with dividend investing is that most UK-listed companies don’t pay out dividends. Happily, almost all member companies of the FTSE 100 index do pay dividends, so this is where I hunt for my biggest payouts.

Another problem is that future dividends are not guaranteed, so can be cancelled or cut at no notice. Indeed, dozens of companies did this during the pandemic panic of 2020. Nevertheless, total FTSE 100 dividends for 2023 are forecast to hit a new record yearly high of £85.8bn.

Therefore, in order to boost our passive income over the next decade, my wife and I intend to invest heavily in dividend-paying shares. By doing so, we aim to claim a larger share of the torrent of cash generated by large, profitable companies.

For example, suppose we decide to buy a range of different dividend stocks. Let’s say these have an average dividend yield of 5% a year. Thus, every £10,000 we invest would generate an extra £1,000 in passive income.

In order to generate an extra £12,500 of unearned income, we would need to invest another £250,000 into dividend stocks. And this is now our major financial goal for the next five to 10 years!

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services, such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool, we believe that considering a diverse range of insights makes us better investors.

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