Thursday, September 01, 2011

Put Your Money to Earn Passive Income

There are many ways to place a sum of money and then receive regular income, and they do not possess the same level of risk as shares and mutual funds, but they also cannot promise high return as well. If one is interested to supplement their income with some more passive income then annuities are their investment vehicle. Some investments generate recurring revenue.

Choose those that meet your needs and your profile.
Above all, please be realistic: The chances that your annuity will make you financially independent are very slim unless and until your invested capital is huge. Do not dream of an unrealistic rate of return. We will give you an idea of average returns possible over a period of time.

Indicators like inflation which has averaged around 6% mark, a good debt linked fund will give you an return of 7% pre-tax and the stock market has averaged 12% since inception. So imagining returns of 100% & 200% is unrealistic. There are examples when people have made those kind of incomes but those are one-off cases. One must not generalize with expectation of such returns again and again.

Two choices is up to you.
If you do not want to risk and dent your capital, the income you will reap will always remain modest. A sum of $200,000 placed at 5%-6% p.a. will be a reasonable rate for a risk-free investment before taxes. This means $12,000 a year and less than $1,000 per month. In the first instance, we speak of passive income, since it continues without end by producing interests. One can generate income without worrying about principal capital, which can be retrieved at any time if there is any emergency.

If investor agrees then the income generated by the annuity re-enters the principal capital, in this case investors gets only periodic payments (may be once in 5 years). More importantly investors do annuity to generate income for themselves post retirement. The most interesting form of generating a temporary pension is to conduct partial redemptions on a scheduled life.

These withdrawals from the contract according to a timetable agreed in advance with an excellent tax solution in which only the part is taxable. For a capital of $200,000 placed at 6% per year, you withdraw the current equivalent of $1,000 per month (before taxes) for 30 years. With the taxation of scheduled partial surrenders, income, net of taxes and social charges, will be around $900 per month.

The annuity is different. The amount is calculated based on capital invested, the life expectancy of the policyholder and his age at the outbreak of the payments. A serious drawback: the more of a life annuity payments begin early in your life, minus the rate of transformation capital, and therefore the money paid is high. Over taxation of annuities is less favorable than the scheduled partial surrenders. The annuity is not really suitable for young people.

As often in terms of money, there are two profiles: the risk averse and others. In one case as in the other, there are several choices. The prudent want an insured annuity, stable, amounting totally predictable. They have a very reliable solution: The latter pays the capital for a specified period with an interest rate known at the time of subscribing.

Depending on the size of the money invested, and downtime, pay rates vary. Functioning as a loan of money made by an individual to a bank, the deposit account is normally a maximum of 10 years. Currently, salaries are relatively low: no more than 2.5% gross per annum for investment over 3 years, 3% maximum of 5 years and over, up to 4% per annum for investments 8 / 10 years. In addition, if interest rates rise soon, the CAT will not benefit (as they have a fixed rate).

It is better to opt for another form. The euro fund for life insurance, also known as guaranteed funds, are a better solution, even if they offer less visibility on their yield. This varies from year to year, you do not know in advance, but in return the best funds in euros relate now more than 4% per year.

There are also hybrid investments that combine housing and savings deposit accounts and provide quarterly revenues for 4 or 5 years. Many banks highlight this option for those who wish to receive regular income from their capital. Remuneration of such income investments currently between 3 and 3.5% gross. Rather less than one euro fund.

The most daring investors at heart will turn to the Exchange. Although she knows turbulent times in 18 months, the companies had never distributed as dividends. To the point that this is better than a simple dividend distribution without risk: more than 5% of the share value for certain securities such as Axa or GDF Suez currently, historically the average dividend is much closer to Area Feb-Mar% share price.

An investor confidence in the health of these companies has all the more incentive to turn to actions that will receive tax benefits: a reduction of 40%, and of 1,525 euros on the amount of dividends received (3,050 euros for a couple), which in practice exempt from tax on income from dividends of stock portfolios relatively large (up to 100,000 euros for a couple).

Of course, there is a double risk: that the dividend disappears and the capital value decline. If the current dividends are rather an indication that the shares are under-rated, which confirms the fact that many companies come to be shares of a value below the amount of their own funds, it is possible that the market has result considering that the companies in question can not continue to distribute such dividends for a long time …

Those that manage a portfolio of individual stocks do not try will turn to mutual funds in income distribution (rather than capital swells, the gains are regularly paid out). Most of these mutual funds are comprised of bonds, an investment less volatile than stocks, capable of producing regular income of 3% (government bonds) to 8% (riskier bonds issued by corporations) per year.

Please note, if the income distributed by the SICAV not vary much, the share of the fund may have its value fall, particularly if interest rates rise. Such mutual funds that involve a risk. Other possible investment: the distribution of mutual funds invested in shares.

In the latter case, the fund produced each year corresponding to the dividend income earned by actions. And you can count on capital gains on resale. In short, a formula to be given to investors optimistic but aware also of a high level of risk, the stock market.
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