If you’re headed into retirement soon you may be wondering how to calculate investment income so you can make sure you’re covered.
Here’s how to calculate investment income. Let’s say you’ll get a 3% yield from an investment which cost $10,000. You’ll simply multiply the yield by the investment cost to get the amount of income you’ll get.
Here’s the simple formula.
Yield X Investment Cost = Investment Income in Dollars
In this case, we’d simply take .03 X $10,000 and see that you’ll get $300 income a year from that investment. Note that yield is expressed as a percent.
How to Calculate Investment Yield
Investment income is most often expressed as yield so yield is equally if not more important since it allows you to compare income investments easier. Let’s work backwards from the simple formula above.
Investment yield is calculated by dividing the dollar amount of income you get from an investment by the amount you paid for that investment.
While most investors still logically think of bonds as the main type of income investments, many investors have turned to stock dividends over recent years since bond interest is so low. So, we’ll start with a dividend example to calculate the yield.
Dividend/Cost = Investment Yield
If you invested $10,000 in the stock of Income Inc, and Income Inc paid a 3% dividend yield your investment income will be $300 a year.
Dollars Vs Percentages
Looking at the dollar amount I’ll get from an investment puts that investment into better perspective for me. To think of a 3% yield during times of very low interest rates sounds reasonable.
But investing $10,000 to get income of $25 a month is not too exciting especially when there is risk the value of the asset will drop!
That’s me. You may feel differently.
Do you really get to keep the full $25 a month? Unfortunately, you may not, so keep reading to get a full perspective on how investment income from stocks and bonds works when you’re trying to live off investments.
There are a few points to make around investment income calculations from stock dividends which I’ll address next and then go into bond income.
Investment Income from Stocks
The factors below are worth considering since they will affect your investment income.
Annual Dividends Vs Quarterly Dividends
Most stocks pay quarterly dividends and not annual dividends. This is important to note for two reasons.
- Make sure you are dividing the annual yield by 12 to get a monthly perspective on investment income even though it is received quarterly. This is because most of us think of monthly spending when looking to cover expenses from investment income.
- Most companies tend to pay dividends the same months, so it will be important to consider this in planning your cash flow around investment income. You may have some months without any dividends whatsoever.
Taxes on Dividend Income
Dividends are subject to federal income taxes. Qualified dividend income does, however, get a lower tax rate. Even though the taxes probably won’t be deducted before you get your dividends, they will need to be paid at some point.
And only by considering taxes can you get a true comparison among various types of income generating assets.
How to Calculate Investment Income from Bonds
Income from individual stocks is calculated in the same way that investment income is calculated for stocks. The math is the same, but the income you get is in the form of interest and not dividends.
When Do Bonds Pay Interest
Investment income from bonds interest can be even trickier to plan cash flow around than stock dividends. This is because most bonds pay interest twice a year.
Taxes and Bond Interest
Much like stocks, taxes are a consideration for bonds, too. Some bond income is not subject to federal income tax while some bonds are. For example, many investors buy municipal bonds to avoid taxes from bonds income.
The tax rules can also vary for federal income tax vs state income tax, so remember to investigate this.
It is necessary to reduce interest income by the amount of expected taxes you’ll need to pay to fine tune your investment income calculation. This is true even though you won’t see the taxes paid as you receive the interest income.
How to Calculate Investment Income on Funds
The investment income calculation for funds is the same as it is for stocks and bonds but there is yet another hidden factor.
An important factor to consider when it comes to fund income is fees. Like taxes, you won’t see the fees when you receive your investment income whether it is from stock dividends or bond interest.
Fees can range from less than .10% to an expensive 3% or more per year so you’ll want to consider this in getting a true investment income calculation even though they won’t be paid at the time.
There could even be layers of fees, such as fund fees and wealth management fees.
It is important to note that sometimes, however, the yield is “net of fees”. I personally ran into this recently when comparing money market yields.
The Easiest Way to Know Your Investment Income
The fastest way to see investment income is by checking your brokerage statement. This can be done online or from a paper document if you happen to still get them.
The total income year to date will be shown on most statements. You’ll also note various posts to your account from dividends and interest as they are paid during the month.
But sometimes when evaluating an investment, you’ll want to calculate the investment income with the formula above to see how much it will pay in terms of dollars. I do this a lot myself.
Summary for Investment Income Calculation
Now you know how to calculate investment income for stocks and bonds. While these are the most common income investments, there are alternative investments with much more complex income calculations, such as real estate and covered calls.
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Disclaimer: Nothing in this post is meant to be taken as personal financial advice. Only you are responsible for your own money.