Portfolio income is earned from investments like stocks and bonds, and is one of three main types of income. It is important for retirement planning and can generate income through interest, dividends, and increased value. Ideally, investment income should be able to sustain retirees without touching the principal invested.
Portfolio income refers to money earned on investments such as stocks and bonds. Portfolio income is one of the three main types of income that people can earn. For most people, portfolio income plays an important role in their retirement planning.
Active, passive, and portfolio income are the three main types of income most people have. Active income is the income a person earns from his job or from work that he physically must be doing. If the person stops doing the job, the active income stops.
Passive income refers to income that is earned automatically. If the person stops working, the income continues to come. This type of income can come from royalties on a book, for example, or from rental income on a rental property.
Finally, portfolio income is the income earned from money that has been invested in things that pay a return. When a person invests in stocks, bonds, and mutual funds, their group of investments is called a portfolio. This portfolio can be held at one brokerage firm or multiple brokerage firms or can even be held in a 401K set up by an employer.
Those investments in the portfolio generate income, or a return on investment, in a number of ways. Investments generate income if the value of stocks, bonds, or mutual funds increases. Interest can be earned on investments in the case of bond investments, such as municipal bonds where an investor buys government debt and the government pays it back with interest at a set rate.
Finally, investments can generate income through dividends. Dividends are money paid by a company in which the company shares some of its profits with the shareholders. Dividends are paid per share. For example, a company may pay a dividend of $0.06 US dollars (USD) per share.
When investments make money, investments grow. Each year, investments should ideally grow at a certain rate. This money earned each year is considered investment income.
Those who are retired can rely on their investment income as part of their regular monthly income. Ideally, most experts suggest being able to live on investment income alone and not touch the principal invested. If the principal is removed from the account or reduced, this reduces the amount of money invested, which leads to less interest income since there is less money to earn that income.
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