A wealth coaching client recently asked “How much do I need to invest to make $10,000 a month in income?” We explored several options to accomplish her income goal based on her net worth and chosen level of risk.
To see how much you need to invest to make $10,000 in monthly income, or any other amount, simply multiply the desired monthly income by 12, and then divide the result by the expected investment yield.
As you can see, the amount you need to invest to generate a desired amount of income depends on two major variables: investment yield and amount of capital, or savings invested.
This means the more you increase investment yield the less you need to invest to reach a desired income level.
Call me a nerd, but I’m excited to write this post because establishing income streams to replace or supplement retirement withdrawals is a core principle at Retire Certain. This is because we’re in a time when it’s beyond challenging to generate investment income given still relatively low interest rates, low stock yields, and most people not having enough retirement savings to live off retirement withdrawals using the 4% rule.
In this post, we’ll explore different ways to invest to make $10,000 a month from investment income, first with stocks and bonds, and then with alternative income sources. I’ll also provide a favorite resource for investing a core portfolio for capital gains vs just income.
I’ve invested in every strategy listed here. While I have an AFC® credential, I write mostly from the school of hard knocks here at Retire Certain after almost 40 years of investing my own money and also hiring several financial advisors over the years. Over the past 10 years, we’ve gradually replaced job income with income streams from both traditional and alternative assets.
(You can also scroll down to watch my video on how much you need to invest to make $10,000 a month if you prefer video.)
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Investment Income Vs Capital Gains Vs Investment Returns
Many investors looking to live off investments confuse investment income, capital gains and total investment returns. Before we explore how much you need to invest for $10,000 income, let’s get really clear about what kind of investment income you want by clarifying three terms.
What Is Investment Income?
Investment income comes in the form of dividends, interest, and other payouts you get when you own investments. Besides stock dividends and interest, other common alternative income streams include real estate rent, income from covered calls, MLP distributions, REIT distributions, and even small business distributions from lending or from profits.
Some investors casually refer to investment income as cash flow.
What Are Capital Gains?
Capital gains happen when an investment increases in price after you buy it.
For example, if you buy an investment for $5,000 and it increases to $10,000, you have a $ 5,000 capital gain. A lot of investors and even financial professionals refer to a capital gain like this as income. It isn’t truly income, though; this example is a capital gain. As a general rule, capital gains build wealth while income provides money to live.
Investing with a primary goal of capital gains is often called growth investing as explained more in my post How Much Money Do You Need to Live Off Investments.
What Is Investment Return?
The third equation related to investment income is called investment return. Investment return is commonly used for measuring investment performance. Many investors, however, get investment returns confused with yield. “Investment return” is also known as ROI, or return on investment.
Investment returns include any amount an investment has increased (or decreased) in value plus dividends or (other income) plus compounding of both dividends and capital gains when they are reinvested.
INVESTMENT RETURN = GAIN + DIVIDENDS + COMPOUNDING
To clarify this important point, in this post, we are focusing on ways to get an income of $10,000 a month from investments more so than getting less predictable capital gains from investing.
When considering investment return, note that taxes and fees are not factored into the numbers in this post since they vary greatly among investors. These expenses will, however, offset investment income and should be considered in your retirement income planning as they will greatly affect how much money you need to retire.
Now that we’ve clarified investment income vs capital gains vs investment return, let’s look more at how much investors need to invest to make $10,000 a month in income alone.
How Much Do You Need to Invest to Make $10,000 a Month in Income?
Let’s take the example from the first of this post and look at the 2 main elements
- How much you need to INVEST to make $10,000 a month
- How much yield you need to EARN on your investments to make $10,000 a month
We saw that by investing two million in investments that pay 6% income a month, you will make $10,000 a month in income.
The amount you need to save is derived from the yield.
This means that simply by increasing the investment yield you will need less money saved to generate $10,000 a month income.
The huge problem income investors face is that bond yields and most stock yields (dividends) are so low that after inflation, fees, and or taxes, the yield is negative.
So, let’s first look at investments with higher yields with something of a cautious eye since:
- In general, the higher the yield, the higher the risk
- The value of all investments fluctuates based on market and economic cycles as taught in my investing course.
High Dividend Stocks
If you’re invested in the stock market, a 2% yield is probably about what you are getting in yield unless you are invested in stocks specifically with a higher dividend focus.
Some services provide stock selections yielding as high as a 9% dividend yield. More commonly, however, dividend focused investing and funds range between 2.50% to 4% dividend yield.
So let’s see how much you need to invest to make $10,000 a month if your investments are optimistically yielding 3.5% in “high income funds” or stocks.
$10,000 x 12 months = $120,000 income a year
$120,000/.035 = $3,428,571
Holy Moly! What a difference the yield makes for how much money you need to retire using the income method. We went from needing to invest $2,000,000 to needing over $3,400,000 to make $10,000 a month just by changing the yield from 6% to 3.5%.
The key then is to increase the yield without increasing risk to an unacceptable level.
This equation is all too familiar to me: It’s the same math I did in the mid-2000’s after our “stumble” into early retirement (way before it was vogue) which led us to begin investing in alternative investments to create diversified income streams from real estate, oil, small business, and stocks.
Next, let’s look at various investments with higher yields than the S&P 500 or typical stock income funds to see how much you need to invest to make $10,000 a month in income from these various assets remembering that the amount you make depends on the yield.
How Much You Need to Invest to Make $10,000 a Month from Alternative Investments
There are several ways to increase investment yield from what I call “slightly alternative investments”. These securities are all highly regulated and are bought and sold just like stocks. I call them slightly alternative, however, because they’re not index funds or even typical individual portfolio holdings.
Higher Dividend Stocks
A diversified portfolio of individual dividend paying stocks in the 5% range is very doable these days, as addressed earlier. Again, however, most stock income funds yield in the 3% range, but higher yields from decent quality stocks can be found.
It does, however, take time to find safe high yielding stocks. How can you invest in high dividend stocks without spending hours of analysis finding them?
There are many services that provide analysis and recommendations for high yielding stocks for proactive individual investors who don’t want to do all the work. There are also wealth managers and financial advisors who specialize in high dividend stocks.
Again, income focused stock mutual funds and ETF’s (Exchange Traded Funds) also exist, but most of them have dividend yields much lower than 5%. The trade off is that funds provide instant diversification that is harder to achieve from individual stocks. Since stocks with high dividends can be riskier than most blue chip stocks, diversification is an excellent way to lower risk.
As touched upon previously, be cautious of fees and taxes eating into the yield. Dividend investing through funds not only results in lower yields most of the time, it also results in fees that are higher than most high yielding stock recommendation subscriptions.
Selling covered calls on dividend stocks can also significantly increase income without increasing risk as explained later in this post.
Closed End Funds
A lesser known class of funds called closed end funds exists. These funds usually have higher yields than more common “open end” mutual funds.
The payout rate varies based on prevailing interest rates, asset pricing, and the type of fund.
Several negatives that many people don’t realize are that closed end funds often:
- Pay out capital gains, not just dividends
- Have high fees
- Sell at a premium (or discount) to the value of the stocks (or other securities) in the fund
- Pay out investor’s capital when they don’t have the dividends or capital gains to make the expected yield
This isn’t to say all closed end funds are bad.
In fact, it warms my heart to write that my dad taught me about CEFs (closed end funds) in the early 1990’s. The beauty of closed end funds is that you can frequently buy these assets at a discount as Dad taught me. This occurs when CEFs trade at a discount to their net asset value which isn’t uncommon! This discount gives proactive investors that have done their homework an inside edge, which is always good to find.
When closed end funds trade at a discount to their net asset value, investors get a higher yield, the ultimate goal of income investors.
Again, there are good newsletters or services that do the research on closed end funds for their members so this could be a good option for investors that don’t want to do the research or just need some support.
Note that many investment firms have closed end funds that are almost the exact same as more expensive (higher fees) funds than their closed end funds by offering different classes of funds.
Remember to do your research so you can evaluate funds you’re considering. More advanced investors can investigate closed end funds easily with all the online financial research and newsletters available for high yielding investments. I also like to first consider overall financial cycles and valuations when investing in anything, including CEFs.
Buying Stocks After Bear Markets
Buying stocks after bear markets is more of a strategy than an alternative investment but it’s important to mention because it is a great, yet often overlooked way to increase income from quality stocks.
As addressed earlier, the S&P 500 was paying 3.6% after the last bear market in March 2009. This is about double the historical average S&P 500 dividend yield.
Here’s my video on How Much You Need to Invest to Make $10,000 a Month
As you probably know, the S&P 500 yield is an average for all the stocks that make up the index. This means that some stocks in the S&P 500 were paying much less and other stocks were paying much more than the 3.6% average yield.
We can assume high dividend stocks similar to those paying 5% today would have been paying more than 5% in March 2009 assuming the same increase from the S&P yield to the currently available yield of higher dividend stocks calculated as follows:
3.6% March 2009 yield – 1.7% approximate average yield = 1.9% (Increase in S&P yield March 2009 vs approximate average yield)
This is a 52% increase in yield over March 2009. Based on this, it seems very reasonable that yields for stocks that are comparable to those paying in the 5% range today, dividends could increase to 7% after a similar bear market.
Let’s be conservative and assume you will be able to get a 7% yield from decent quality high dividend stocks after the next bear major market.
All this to demonstrate that simply buying high yield quality stocks after a bear market will probably result in a significantly higher yield.
Remember, one of the keys to investing in stocks after a bear market is having the cash in your portfolio to invest.
While investor emotions can certainly flare up after a bear market, buying quality stocks actually has less risk after a bear market since you’re getting the same companies for a lot less money. This is logical.
And math can confirm that logic since you can look at PE ratios and other factors to evaluate stock investments (funds or individual stocks) before buying them.
Of course, bear markets and recessions tend to happen around the same time so a lot of companies experience lower profits and need to cut dividends or worse. Investors have to be especially cautious near bear markets, but then, I think investors always have to manage risk carefully.
Remember, since the yield equation is based on investment cost, investors naturally get a higher yield when stocks are bought at lower valuations. The fact is very appealing low stock prices occur after bear markets even though they’re scary. The worse the bear market decline is the bigger the discounts in stocks will be after the bear market.
Dividend Aristocrats for Income from Stocks
A lot of dividend investors get excited about the Dividend Aristocrats but not me; many of the aristocrats yield less than 2%.
While the name implies the focus of the Dividend Aristocrats is income, these stocks are considered high quality because they are known for their growth as evidenced by increasing dividend payouts to investors annually.
Of course, sometimes companies drop off the Dividend Aristocrat list when dividends are cut due to slowing profits, reminding us that even investments perceived as the highest quality can and do sometimes fall from grace.
Preferred Stocks for $10,000 of Monthly Income
Preferred stocks are like a combination of stocks and bonds. They are like stocks because they can increase in value but they are like bonds because they pay out fixed dividends.
One good thing about preferred stocks is that they are a little less risky; in the event of a company needing to cut the dividend, the common shareholders get cut, if needed, before preferred shareholders.
Plus, in the rare and unfortunate event of liquidation, preferred shareholders get their equity out before common stock investors (but after bondholders).
The good news for yield seeking income investors is that preferred stocks typically yield more than most common stocks.
Bonds to Generate $10,000 Monthly Income
There are many different kinds of bonds. The amount of income investors make from bonds depends on the type of bond, prevailing interest rates, and the bond’s maturity.
Riskier high yield bonds usually pay much more than U. S. Treasury bonds. The spread between high yield bonds and Treasury bonds varies, however, based on several factors. Long term bonds typically pay more than shorter term debt unless there is an inverted yield curve in which short term debt yields pay more than longer term bonds.
Regardless, when interest rates are low, it takes a lot of investment capital to make $10,000 in monthly income!
It’s worth noting that bond income was previously considered the staple income investment for retirees. The loss of higher bond income is one of the reasons I write about alternative wealth strategies. There is a need for retirement planning to evolve beyond simple retirement withdrawals for “income”, yet it is still done the same old way for the most part.
It’s also worth noting that bonds have risks. When interest rates increase the value of bonds declines, making bonds neither a good income investment nor a suitable defensive investment when stocks and bonds fall together. even though they continue to be wildly popular with fixed asset allocation investors.
Covered Calls for Monthly Income
This simple conservative option income strategy can make a lot of sense for an investor who owns stocks already anyway and wants more income from those stocks.
Covered calls can work best for stock investors who want income more than so than capital gains since they already have stock market risk anyway. Selling out of the money covered calls can be ideal for older investors who want to continue to hold one stock for a long time as often happens with retirees.
Covered calls capitalize on the time decay that naturally occurs after the call option is sold by stock investors.
It’s important to note that basic covered call strategies work best in sideways or bull markets. Let me explain.
The first month I sold covered calls I got a 7% return (call income and capital gains) because I was selling covered calls in a strong bull market on high growth stocks with high option premiums. I was hooked on covered calls, needless to say. After over a year of successful covered call writing, however, I was humbled. Stocks began a broad market decline, making a covered call strategy much harder to implement successfully, although covered calls can be rolled during bear markets.
While many covered call strategies yield over 3% a month, I like to use a more conservative income estimate of 1% to 1.5% a month from covered call income. This equates to 12% to 18% return a year, which is very hard to find elsewhere.
For our estimate, let’s use a 15% annual yield to see how much you need to invest to make $10,000 a month using a covered call income strategy.
$120,000/.15= $800,000 investment capital
It’s worth repeating that simple covered call strategies work best in sideways or bull markets.
This is because, with covered calls, you must own the stocks to sell the call options against. Those stocks are subject to stock market risk as well as other kinds of risk.
Contrary to popular belief, however, covered calls are no riskier than simply owning the stock. In fact, covered call strategies are slightly less risky since the underlying stock cost is offset each time you sell a call option against the stock.
Plus, covered calls can generate very good “mostly” passive income.
Covered Calls on Dividend Stocks and ETFs
You’ve seen how selling covered calls on stocks greatly reduces how much you need to invest for $10,000 a month in income. Let’s take the covered call strategy a step further.
Covered calls can be sold on both dividend paying stocks and ETFs thereby increasing investment income significantly.
Here’s what’s gold: Selling covered calls on dividend stocks allows an investor to use the same capital for investment income twice.
I call this a double wealth builder when you get two income streams from the same investment capital. If you have capital gains on the stocks, too, you’ll have a triple wealth builder from selling covered calls on high dividend stocks as taught in my investing course, along with quadruple wealth builders and higher.
So let’s do the math to see how much you need to invest to reach that $10,000 a month income goal.
By estimating an annual covered call income of 15% plus another 4% dividend income, the total annual income from the same investment could be 19%.
For example, AT&T frequently yields over 6%.
Higher yielding stocks also tend to have higher option premiums since they are perceived as higher risk. This means that the covered call income will be higher on high dividend stocks since you are keeping the call option premium.
So, 19% seems like a reasonable income estimate based on the math adding the covered call income of 15% to the 4% dividend yield.
Let’s see how much capital you need to invest to make $10,000 a month with covered calls on dividend stocks.
$120,000/.19 = $631,579
This means if you successfully sell covered calls (in bull and sideways markets) on your dividend stocks the amount you need to invest to make $10,000 a month is only $631,579.
Before we get too excited, let’s remember that, unfortunately, not all investment or income strategies work all the time which leads to the next Wealth Tip.
♦Wealth Tip♦ Diversification in BOTH income streams and investments is important to keep financial stability.
While diversified income streams are for more advanced investors who don’t mind the effort, the higher income can be well worth the effort.
There is also a great probability that everything will not always work. This is why I personally like having diversified income sources from stocks, real estate, and online businesses now.
And remember, covered calls work best in sideways or up trending markets. Note that there are also ETFs that sell covered calls now for investors who don’t want to sell covered calls themselves. The returns, however, aren’t as good and ETF covered call funds have other concerns.
Monthly Income from MLPs
Master Limited Partnerships are in the oil service industry. There has been a lot of change in the MLP sector over the past few years for several reasons.
First, oil prices sank to low prices (relative to historical prices) and many oil companies struggled to stay in business; others cut dividends. This was before oil prices soared back in 2022.
Also, many MLPs changed their tax structure which led to consolidations and mergers of MLPs and related companies.
There have also been environmental and political disruptions and will continue to be, as well. Many major oil companies are making major macro shifts away from oil.
Price volatility, macro changes, and consolidation usually bring some form of opportunities, along with increased risk.
As a result, MLPs tend to pay higher dividends than stocks.
Plus, as a commodity, oil is considered a defensive investment by many.
I don’t know how the MLP industry will play out, nor anything else here. I just do my research using probabilities, estimates, and facts, and then invest within the goals and risk tolerance as defined in our overall wealth plan and acceptable risk. I encourage my financial coaching clients and readers to do the same.
REITs for Investment Income of $10,000 a Month
Through REITs (Real Estate Investment Trust) investors can invest in commercial real estate. Much like MLPs, REITs have gone through a major transition.
The increase in remote workers and the online sales explosion have significantly hurt the retail and office REIT sectors.
Like MLPs, REITs are considered an alternative investment. Most REITs yield more than most stocks.
There are also REIT ETFs and mutual funds.
Covered calls can also be sold on many REIT ETFs thereby significantly increasing investment income.
Real estate, like all asset classes, go through cycles that greatly affect both their yield and capital gains potential, for both the good and bad. Therefore, checking the overall real estate cycle is always wise before making any real estate investment.
Now you have several ways to calculate how much you need to invest for $10,000 a month income based on various potential yields.
High Yielding Investments and Risk
It’s easy to get caught up in the lure of high yielding investments. Therefore, it’s important to address risk since risk management is at the core of my work at Retire Certain. Risk management is especially important for older investors.
Every investment is risky. When you invest in anything, there is a chance the price of that investment will decrease. Such a loss can have irreparable damage to an otherwise solid retirement plan.
Investors can easily get caught in a trap when it feels like investments are less risky due to years of rising asset prices, in seemingly “safe” investments in stocks, bonds, or real estate. After years of rising investment prices, it’s more important than ever to evaluate and manage risk.
This is why investing should always begin with clarifying how much risk you’re willing to take. Then make investment decisions from within your defined risk.
While the focus of this post is on investment income, it’s important to remember the asset you’re using to generate income is almost always subject to declining, possibly substantially, in price.
The good news is that investors that choose to not sell at a loss (“wait out the declines”) won’t have a “realized loss”. They will, however, experience a drop in net worth until their investments eventually increase back to their earlier value. Of course, that’s assuming they will, as some investments never recover to prior highs, certainly not within the desired time frame.
Before you think I’ve taken all the fun out of getting that $10,000 a month income from investing, the next point is on a positive note. It’s important for me to always address risk, however. Risk is often overlooked or ignored in much of the investing content found online, unfortunately.
Investment Income During Bear Markets
The great thing about income investing is that the income usually keeps coming even if the investment generating it decreases in price. As such, investors with a primary goal of income may not be concerned if the assets generating the income drop in value during economic downturns. I feel I must, however, address this “risk reality” in order to be a responsible financial coach.
It’s worth repeating that by first having an overall wealth plan defining your investment goals and acceptable loss based on your age and other risk factors, primary objectives and risk can be managed.
Read my related post What Percentage of Cash Should Be in My Portfolio?
Living Off Capital Gains
Some investors prefer to invest for capital gains vs income. An investor will need to have a reliable strategy or method to do this successfully and systemically since the prices of stocks and bonds are subject to increases and decreases from economic cycles making capital gains hard to consistently achieve over short time frames.
This makes setting a specific goal, such as making $10,000 a month, even harder when investing for capital gains. As previously written, capital gains are generally less predictable than investment income.
The key is to find an investment strategy with a somewhat reliable return. It will also need to be an above average return so the amount of capital needed to make $10,000 a month isn’t astronomical, as you’ve seen in this post.
One of the best resources I’ve found for researching such strategies is Allocate Smartly, which I use myself now for investing our core portfolios.
Summary – Investing for $10,000 a Month Income
Don’t get caught up in the lure of high investment income just to make $10,000 a month from investments. Begin with a personal wealth plan that defines your acceptable risk and investment goals to make wise decisions that will keep your money safe.
Next, check the overall market valuations based on a comparison to historical valuations before investing anything, anywhere, ever. This will give you a better understanding of the prices you’re paying for your investments relative to normalcy and make you feel more in control of your investments.
Then do your research among the various ways to make $10,000 a month investment income or any other amount you’re seeking to happily live off your investments.
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