Three Income Producing Assets for Retirement and What $5,000 a Month Costs in Each

If you have about a million dollars saved, nearly all of it in the stock market, you've probably wondered when it could start paying you every month. Right now the S&P 500 pays a dividend of just over 1%. On a million dollars, that's about $870 a month that arrives without selling anything. Every dollar past that comes from selling shares at whatever they're worth that day.

A paycheck usually comes in at the same amount on the same day, and it never asks what the market did that week. Its one catch is that you trade your time for it. The day you stop showing up, it stops too.

Here are three income producing assets for retirement that pay like a paycheck without the job, each priced at $5,000 a month, or $60,000 a year. The cheapest of the three needs about a third of the money the most expensive one does. Each gets the same test: it pays a set amount on a schedule you know ahead of time, you never sell anything to get it, and it keeps coming whether or not you worked that month.

Dividends are easy to collect and expensive to scale

If you own an index fund or a stock, you probably get dividends already. You buy a fund in the brokerage account you have, and the money shows up four times a year with nothing for you to do. SCHD, the big Schwab dividend fund, yields 3.17% today. Getting $5,000 a month from it would take about $1.9 million.

When a dividend is paid, the share price drops by about the same amount, so part of it is your own balance handed back. The weak spot is the schedule. A dividend is a vote. A company's board decides on it every quarter, and the board can cut it. In 2009, dividends paid by S&P 500 companies fell 21%. A $5,000 check would have become $3,950, right after a year when the shares lost 37%. The dividend moved a year later and not as far, but it still moved with the market.

Rental houses cost less and come with a job

I left the Air Force at 33 because rentals covered my bills, and today I own a couple dozen and manage them myself.

A rental passes most of the test. The rent comes monthly, and nothing gets sold to pay you. Arbor, which tracks single-family rental businesses, puts the average cap rate at 7.4% this year. That's the rent left after property taxes, insurance, repairs, and vacancy. At that rate you'd need about $800,000 of paid-off houses to pay yourself $5,000 a month.

Where a rental fails is the last part of the test. Being a landlord is its own job, and you still have it at 70. The tenant still moves out in February. The furnace still quits on a holiday weekend. And 7.4% is an average on a spreadsheet. I recently sold one of my rentals because it had about $100,000 of equity in it and was paying me only $300 to $400 a month.

A landlord who's done with tenants can sell with seller financing. The buyer pays him every month in place of rent, the repair calls and vacancies become the new owner's, and he keeps the monthly income. He's gone from landlord to lender, and what he holds is the third asset.

Private mortgage notes need the least money

A private mortgage note is a loan with a house behind it as collateral. Someone needs money to buy a property, you lend it, and they pay you back every month. You paid a bank this way on your own mortgage for years. With a note, you're sitting where the bank sat.

The Entrust Group, a self-directed IRA custodian, says mortgage notes return between 8% and 12%. At 10%, the middle of that range, $5,000 a month takes about $600,000. The dividend fund needed $1.9 million for the same check, and the rentals needed about $800,000 plus a job.

It's fair to ask why notes pay that much when a Treasury pays about 5%. Borrowers pay for speed, since a private loan can close in days where a bank takes months. Some homes are also priced too low for most banks to bother underwriting. The rest of the rate pays the lender to take on risk, do the homework on the borrower and the house up front, and leave the money in for the whole term.

With a note, the payment amount and dates are written into the loan before a dollar leaves your account. The payment isn't set by stock prices, and you don't sell anything to receive it. The borrower owns the house, so taxes, insurance, repairs, and vacancy are theirs. The lender's work happens up front, so a second note doesn't bring a second set of tenants.

On a well-made note, the loan is smaller than the house is worth, so a borrower who walks away loses money. If the house ever had to be sold, a loan in first position gets paid before any other loan on it. The lender picks the borrower and the house, sets the term, and can say no to any deal.

What this looks like with $1 million

Picture someone with $1 million who wants $5,000 a month whether he works or not. He puts $600,000 into notes at 10%, spread across several loans on different houses. He keeps one year of bills, $60,000, in a high-yield savings or money market account. The remaining $340,000 goes into index funds for growth.

Then a year like 2022 shows up and the market falls 18%. His $340,000 drops to about $279,000. He doesn't sell a share, because the notes are paying the utilities and groceries and the market has time to come back. The version of him with everything in stocks, living on withdrawals, is selling that same year at prices down 18% to buy groceries. That's the biggest reason I like notes covering expenses. A bad year in the market is just a bad year in the market.

The risks, and how notes fit in an IRA

Like any investment, a note carries risk. If a borrower stops paying, the lender has to wait through foreclosure to sell the house and get the money back. So a note is the wrong place for money you might need before the term ends. That's what the cash bucket is for, and it's why notes never get all of my money. A note payment also never gets a raise, so the rest stays invested to keep up with prices over the next 20 years.

Notes also work well in a self-directed IRA, and you can move an IRA or an old 401(k) to a self-directed custodian with no taxes or penalties. Rentals are allowed there too, under strict IRS rules about repairs and bills. A note has nothing to repair. The interest lands inside the account and is taxed only when you take it out, or generally not at all in a Roth. Either way, the other side has to be a third party, never you, your family, or a company you control.

For full transparency, I'm a real estate investor and operator, not an advisor, and I don't give financial advice. I buy affordable houses, mostly in Ohio and mostly with private money, and sell them to families on payments. Rentals came first for me and still cover my bills. Starting over, I'd probably skip the rentals and move my stock market savings straight into notes, enough to cover the bills, with the rest invested for growth so nothing ever has to be sold to pay a bill.