There are two popular schools of thought around the best way to build your wealth pre-retirement: one involves focusing on multiple income streams, while the other relies on generating a healthy passive income stream. Both have their advantages and drawbacks, but understanding their unique characteristics and value at specific life stages is what’s most important when weighing up your investment strategies.
Younger years: Capital growth and multiple income streams
In our younger years, capital growth is often the primary goal. Many people use this life stage to invest with a higher risk tolerance – particularly given the longer investment horizon (i.e. there are still decades to make back any potential losses).
During this period, you may have the opportunity to invest in assets that could appreciate substantially over time, whether that’s shares, real estate or various other asset classes. This is also a time when multiple income streams can be advantageous, as they allow for greater diversification and the potential for significant returns. That being said, it’s important not to spread yourself too thin by investing too much time and energy into each income stream. Finding the right balance – in all things – is key.
Approaching retirement : Income generation and protection
As you approach middle age and – beyond that – retirement, your priorities may shift towards income generation and protection of your existing assets. You may have acquired multiple properties with significant equity, or other income-generating assets.
At this stage, the management and maintenance of your investments may be the most time-consuming consideration. Owning multiple properties can be rewarding and set you up for a more comfortable retirement, but it also requires ongoing involvement. Things like property management, tenant selection and regular maintenance can take up hours or even days of your time each month.
How to balance both the time and effort required to manage these income streams becomes a critical factor in planning your future.
Exploring passive income streams
Reaching a point in life where you have substantial passive income streams is something most people can only dream about – but there are ways to achieve it. Passive income simply refers to money that continues to flow into your accounts regardless of your active involvement. In other words, they generally require little to no effort on your part. While some things like a side hustle or dividends from stock trading may not be entirely passive, they can still offer a degree of autonomy compared to property management or your full-time job.
A good passive income stream is one that provides a consistent, reliable source of money without consuming too much of your time and energy. But this isn’t always easy to achieve in the short term – and not all passive income streams are created equal. Some may require ongoing management and monitoring, while others can be truly hands-off.
You should evaluate each opportunity based on its benefits, risk profile and alignment with your overall financial goals.
More wealth, more risk, more diversification needed…
As you continue building your wealth, diversification becomes increasingly important. Your overall portfolio should include a mix of assets – whether that’s shares, fixed-income investments and rental properties, or something entirely different.
Each income stream has its own unique characteristics and features, providing a hedge against certain risks. Diversification also helps reduce the impact of any individual investment’s poor performance on your overall financial health.
Hard work and adaptation
Most people’s wealth journeys last their entire lives – and staying on the right path requires discipline, consistency and due diligence. That’s why it’s so important to adapt your investment strategy as you progress through different life stages.
In retirement, for example, your income streams may need to evolve to accommodate a lack of regular pay from having a full-time job or running a business. Factors like the cost and maintenance of your property portfolio may also become increasingly significant considerations.
The secret to success: Flexibility and seizing opportunities
Ultimately, a well-rounded approach to building your wealth involves exposure to multiple income streams and the building up of passive income sources. By leveraging the growth potential of different asset classes and diversifying your portfolio, you can increase your chances of long-term success. Remember, your money should work for you. By carefully considering the benefits and risk of various income streams, you can pave the way for a more comfortable financial future.
Seeking professional advice from the experts at Talem Wealth can provide you with valuable guidance and ensure your investment strategy stays aligned to your retirement goals.