SavvyPoll Number Six

There are basically three types of income, described below: 

Earned Income as defined by the IRS is all the taxable income and wages you get from working or from certain disability payments. For most people it is simply the money earned at a job while working for someone else. This is the type of income most are familiar with and the only source of income for many families. Also referred to as labor income.

IncomePortfolio Income is the interest, dividends, and any other forms of payment received on the investments within your portfolio. Additionally, portfolio income includes capital gains, realized from trading instruments such as ETFs, stocks, bonds, mutual funds, currencies, commodities, etc. For most people, investing in the stock market is the most common form of building wealth and portfolio income.

Passive Income Also known as residual income, this is income that continues to be generated after the initial effort has been expended. It is the money you get from activities you performed in the past but are no longer required to do for an income (e.g. a pension from a previous job); the creation and selling of intellectual property (e.g. books, patents, or music); or assets that you have purchased (e.g. rental property, assuming the amount collected in rent exceeds the mortgage payment) from which you receive income.

This week’s SavvyPoll asks, “What do you believe is the best type of income?”

A. Earned Income

B. Portfolio Income

C. Passive Income

Along with your response, I am hopeful that you will comment on why you made your particular selection.

I was going to wait until tomorrow – Monday – to offer my own selection and comments; however, I will be pretty busy tomorrow and I’m not sure how often I will be able to check in on this post and we have established a good conversation, which I would like to keep going. Perhaps there will be something in my comments which provides more food for thought and conversation.

I’ll lead off my comment by noting that if forced to choose just one answer, I would choose ‘C’ passive income. Why passive? Deb hit on a key reason for me when she noted, “…although effort is put in initially in order to generate it, the effort can be exponentially smaller than the income generated in return.” Or looked at another way, the beauty of passive income is that the effort has already been expended; therefore, present and future resources (e.g. time and money) can be spent on generating income in the other two areas – earned and portfolio – or developing other sources of passive income.

With that being said, I recognize and appreciate that for most people, portfolio income will be the largest source of income in retirement. For the wife and I, it will be nearly a 50/50 split between passive and portfolio income. I touch on the topic in this recent post on multiple streams of income.

The difficult thing with passive income? generating it. While most of us will have the most familiar form of passive income later in life – a Social Security pension – as many employers do away with defined benefit plans, a once common form of passive income is becoming a lot less common.

Outside of pensions, another source of passive income is the creation and selling of intellectual property (e.g. books, patents, or music). Speaking from experience, a couple of self-published books, earning significant passive income in this way is difficult. While I consistently sell a few books a month, it certainly is not significant!

Another source of potential passive income…well really semi-passive income? Rental property. I say semi-passive because the bulk of the work is done in selecting and purchasing the property, while some work/time (e.g. maintenance) will likely be required during the ownership period. Of course, if a property management company is hired to deal with any issues, a rental property creeps a little closer to being completely passive. But of course, hiring a property management company means the income is reduced.

Of course, there isn’t really a correct answer. As astutely noted by Brad, Tyrell and Char, most of us start at ‘A’ earned income to build a foundation which makes portfolio and passive income possible.

Ideally, which a number of readers touched on – as did I in a post discussing the definition of wealth a while back – if you plan on retiring and not working at all, the more passive and portfolio income you have, the better.

On to the results…

Poll #6

Blogger-in-Chief here at RetirementSavvy and author of Sin City Greed, Cream City Hustle and RENDEZVOUS WITH RETIREMENT: A Guide to Getting Fiscally Fit.

19 Comments

  1. A Google+ reader notes…

    “Assuming all three start by giving the same result then passive income. Unlike earned, all the work has already been done therefore that frees up my time.

    It is also better than portfolio income because passive income may grow to a higher level. This is dependent on what is defined as passive and portfolio income of course. For me, portfolio income is invested income – i.e. includes rental properties as well as stocks, bonds etc. Passive income would be self generated income from sales as a result of earlier work. My idea for this is from an internet business. With the internet business, as long as it has reached a critical level where the volume creates volume there is a good chance that a snowball effect will result. This would hopefully create higher future income streams through an exponential growth curve.”

  2. C passive because, although effort is put in initially in order to generate it, the effort can be exponentially smaller than the income generated in return (I realize this is not always the case, there can be the reverse situation, and although I have no studies to prove it, I hope happens less frequently than the opposite situation but I very well could be wrong.)

    • “…because, although effort is put in initially in order to generate it, the effort can be exponentially smaller than the income generated in return.” A great point, Deb. As always, my friend, thanks for stopping by and offering food for thought.

  3. I concur w/Brad, “a” now while building up B and C, and B and C will eventually takeover. I too find being paid for the work I do to be personally satisfying. 🙂

    • Good to hear from you, Char. Thanks for the reply and comment. I will offer my own two cents tomorrow and the results on Wednesday.

    • I think if you like what you are doing, keep doing it. When work is no longer fun or rewarding, then change or stop all together. That’s what happened to me.

      • Long time reader Brian shared some great thoughts on work, vocation and retirement in a recent blog post.

  4. A , being paid for the work I do is personally satisfying , the hope is wise use of this money will allow me to enjoy the portfolio income later in life . So for now “A” and later on hopefully “B” and “C” .

    • Great perspective, Brad. There definitely is not a right or wrong and it is interesting to see the rational applied by different readers. As I indicated to Andy, I plan to let a few more people answer over the next day or so before I give my own thoughts as to which is best.

  5. Portfolio income is best. That is the only income I have at the moment. I like it better than earned or passive because it does not require much time or stress. It is also one that I have the most control over.

    I believe that portfolio income has to be a major part of the overall income plan in retirement. If you are working, you are not really retired. Passive income, like a pension is good but not the best.

    • Thanks for stopping by, Andy and providing some good comments. Definitely food for thought. I will let a few more people answer over the next day or so before I give my own thoughts as to which is best.

  6. C- The dream would be to eventually have enough passive/portfolio income that when I retire (hopefully early) it will be equal to my current earned income 🙂

    • Your answer is noted, Julie. I also see that you seem to indicate that passive/portfolio are the same type of income. To the contrary, I believe they are quite distinct. It seems to me that people often lump them together because most people do not have a source of true passive income. I’m hoping to hear more on your thoughts about those two types of income. Thanks for stopping by. The results will be released on Wednesday.

  7. Having to choose a single answer I choose C, passive. I share the same point of view as Karen.

    I specifically like part b of the definition;
    the creation and selling of intellectual property (e.g. books, patents, or music)

    • Thanks for stopping by, Brian. Your answer is noted. I thought your comment on Twitter, “Part of me believes portfolio income is on a very thin line from being passive” is interesting. Hoping you’ll expound on that thought.

  8. It depends on who you ask. There are a number of folks who only know how to do A. They are either unwilling or unable to createa system that will allow them to get money from “C” sources. We all know that people are afraid of and are unwilling to make certain sacrifices to earn money through “B” sources.

    To get to the point (and my answer), the best strategy is to make money through “B” and “C” sources together while building a foundation with “A.” So for ME, I say all three. Work for wages early on while saving and contributing money towards your portfolio. Simultaneously, use your time wisely and learn how to create a company that will allow you to make passive income with minimal start up costs. The Internet is a perfect platform to help you complete the latter.

    • Great comments and I will comment myself in a couple days or so. However, for now, which would you choose as the single choice?

  9. The BEST type of income for me would be either passive or portfolio as I’m tired of working! I had to work to get the money where it needed to be, so it needs to start working for me!

    I think a combination of all three. Yes, I still have to work, but my money is getting to the point where it is starting to work harder for me so during retirement, there is nothing that I will have to worry about.

    If I HAVE to select one I would say C. Passive because it is work that has already been done, but you are now reaping the benefits.

    • Thanks for kicking off this poll with some good comments, Karen. Your answer of ‘C’ is noted.

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