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Retirement saving: 3 smart moves that could help you to generate a passive income

Generating a second income in retirement can be somewhat challenging. It is difficult to know where to invest and how to then manage those investments over time.

With that in mind, here are three moves that could enable you to enjoy a passive income that is sustainable over the long run.

Dividend investing

Perhaps the most obvious means of generating a passive income is through buying dividend-paying stocks. Over the long run, they have historically offered higher income returns than many other mainstream assets such as bonds and property. As such, they could produce inflation-beating returns today, as well as the possibility of increasing their dividends at a faster pace than inflation over the long run.

At the present time, there are a number of FTSE 100 stocks that offer high income returns. It is entirely possible to build a portfolio of 25-30 stocks that averages a dividend yield of over 5%. This is historically high, and suggests that the index offers good value for money. This could lead to high capital growth in the long run alongside an impressive income return.

Diversification

While some investors may be able to buy 25-30 stocks right now, for others it may be more challenging to own a wide range of companies that operate in different sectors. However, having a diverse portfolio is highly important when seeking to have a sustainable income for the long run. As good as an investor may be at anticipating challenges and growth opportunities, the world economic outlook is impossible to accurately predict on a consistent basis. Therefore, spreading the risk among a wide range of companies could be a shrewd move.

If an investor has a modest portfolio and is unable to buy a range of stocks today, having a tracker fund could be a good starting point. It is possible to buy units in a tracker fund cheaply, with FTSE 100 tracker funds offering in excess of 4% in income returns at the present time.

Reinvesting

While withdrawing 4% from a portfolio in retirement is generally viewed as a well-balanced figure that allows a portfolio to grow at a faster pace than inflation over the long run, reinvesting dividends where possible could be a good idea.

For example, should an investor find that they do not require all of the dividends they receive in a particular year in order to fund their lifestyle, it may be worth reinvesting them. Doing so could strengthen the long-term prospects of the portfolio, and potentially improve its long-run income generation potential.

Takeaway

Although generating a passive income is not easy, buying a diverse range of dividend stocks and reinvesting the income received where possible could make it a simpler task. With the FTSE 100 seeming to offer good value for money, today could be a good day to start buying FTSE 100 income shares for the long run.

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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.