What is Portfolio Income?

Alexis W.

Portfolio income is money earned from a collection of investments. A portfolio generally refers to each of the different investment vehicles a given investor has, including stocks, bonds, certificates of deposits and other related investments. The income earned from it may be interest income, dividends or other forms of passive income achieved through the investment in a given product.

Many people entering retirement hope to live off of their portfolio income.
Many people entering retirement hope to live off of their portfolio income.

Investors have a number of investment options to choose from. When selecting an investment, they normally consider two things: the return on their investment or the income the investment will generate, and the risk level of the investment. Stocks may be considered a risky investment, but may generate income both from the growth of the value of the stock and from dividends, which are distributions of the corporations' earnings passed on to the shareholders. Bonds and certificates of deposit generate income from the interest paid on the investment. Other types of investments may also generate income as well, depending on the nature of the investment.

A person often invests in multiple types of investments to spread out the risk of investing in just one, and to have a mix of risky investments with higher rates of return and less risky investments with lower rates of return. The collection of investments he has is considered his portfolio. All income that portfolio generates is thus considered portfolio income.

Portfolio income is passive income, which means the investor does not have to do anything to earn it. It is money that his initial investment generates without his active involvement. This is distinct from active income, which is money a person has to work for or exchange time and energy to generate.

As most people enter retirement, they often aim to live off of their portfolio income. This means that once they stop receiving a paycheck, they hope to live off of the interest and other income generated by their investments. Typically, advisers recommend living on portfolio income only and not touching the principal.

This means if a person has money invested, he should leave that money within those investments and spend only the money the investments generate. Opting to live off of the income from a portfolio without spending any of the principal means that more money usually has to be saved for retirement; enough has to be invested that it generates sufficient income. It also mean the investor is protected from running out of money since the principal is never spent.

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