With inflation likely to barely register this year, The Kiplinger Letter is now forecasting that there will simply not be a Social Security cost-of-living adjustment for 2021. The COLA, which will be officially set in October 2020, would be zero, zilch, nada, nil. And that means no change in benefits next year for millions of Social Security beneficiaries.
Consumer prices fell 0.8% in April 2020, the biggest decline since the Great Recession. While some prices (food — in particular, meat and eggs) are rising strongly, gasoline prices dived, and clothing, car insurance/rentals and other travel-related sectors were hard hit as well. Kiplinger sees the inflation rate ending the year at about 0.3%, far below last year’s 2.3%.
The Social Security Administration, however, ties its adjustment for Social Security benefits to the wage earners’ consumer price index, which is similar to, but not exactly the same as, the urban dwellers’ consumer price index (which drives inflation reporting). Also, the SSA also calculates the percent change between average prices in the third quarter of the current year with the third quarter of the previous year; that’s why the final number comes out in October. And it’s likely that those figures (the third-quarter comparison) will be flat — thus, no Social Security COLA for 2021.
But it could turn out to be worse: The rate could be negative — that’s right, deflation, falling prices. Fortunately for Social Security beneficiaries in 2021, the law says that Social Security COLAs cannot be negative; your 2021 benefits won’t shrink.
Passive income includes regular earnings from a source other than an employer or contractor. The Internal Revenue Service (IRS) says passive income can come from two sources: rental property or a business in which one does not actively participate, such as being paid book royalties or stock dividends.
“Many people think that passive income is about getting something for nothing,” Tresidder says. “It has a ‘get-rich-quick’ appeal … but in the end, it still involves work. You just give the work upfront.”
In practice, you may do some or all of the work upfront, but passive income often involves some additional labor along the way, too. You may have to keep your product updated or your rental property well-maintained, in order to keep the passive dollars flowing.
What is passive income?
Many insurers have extended grace periods beyond the typical 30 days to prevent policy termination due to nonpayment, though the length of the extensions varies, depending on the carrier and the state.
Many insurers also are waiving premium late fees and offering flexible payment solutions, such as changing the frequency of payments, or interest-free payment deferrals for up to a year. In some cases, insurers are going beyond state requirements in the type or extent of the relief they are offering.
People who are having trouble making premium payments are advised to call their insurer, or agent, if applicable, to understand their options. The relief available may be different based on the policy, the product and the state. Consumers can often find basic information on an insurance company’s website, but it’s always best to call. The insurer might even have a special phone line dedicated to Covid-19-related issues.
Grace periods and flexible payments
1. Selling information products
One popular strategy for passive income is establishing an information product, such as an e-book, or an audio or video course, then kicking back while cash rolls in from the sale of your product. Courses can be distributed and sold through sites such as Udemy, SkillShare and Coursera.
Opportunity: Information products can deliver an excellent income stream, because you make money easily after the initial outlay of time.
Risk: “It takes a massive amount of effort to create the product,” Tresidder says. “And to make good money from it, it has to be great. There’s no room for trash out there.”
Tresidder says you must build a strong platform, market your products and plan for more products if you want to be successful.
“One product is not a business unless you get really lucky,” Tresidder says. “The best way to sell an existing product is to create more excellent products.”
Once you master the business model, you can generate a good income stream, he says.
Investing in rental properties is an effective way to earn passive income. But it often requires more work than people expect.
If you don’t take the time to learn how to make it a profitable venture, you could lose your investment and then some, says John H. Graves, an Accredited Investment Fiduciary (AIF) in the Los Angeles area and author of “The 7% Solution: You Can Afford a Comfortable Retirement.”
Opportunity: To earn passive income from rental properties, Graves says you must determine three things:
How much return you want on the investment
The property’s total costs and expenses
The financial risks of owning the property
For example, if your goal is to earn $10,000 a year in rental income and the property has a monthly mortgage of $2,000 and costs another $300 a month for taxes and other expenses, you’d have to charge $3,133 in monthly rent to reach your goal.
Risk: There are a few questions to consider: Is there a market for your property? What if you get a tenant who pays late or damages the property? What if you’re unable to rent out your property? Any of these factors could put a big dent in your passive income.
2. Rental income
With affiliate marketing, website owners, social media “influencers” or bloggers promote a third party’s product by including a link to the product on their site or social media account. Amazon might be the most well-known affiliate partner, but eBay, Awin and ShareASale are among the larger names, too.
Opportunity: When a visitor clicks on the link and makes a purchase from the third-party affiliate, the site owner earns a commission.
Affiliate marketing is considered passive because, in theory, you can earn money just by adding a link to your site or social media account. In reality, you won’t earn anything if you can’t attract readers to your site to click on the link and buy something.
Risk: If you’re just starting out, you’ll have to take time to create content and build traffic.
3. Affiliate marketing
Investing in a high-yield certificate of deposit (CD) at an online bank can allow you to generate a passive income and also get one of the highest interest rates in the country. You won’t even have to leave your house to make money.
Opportunity: To make the most of your CD, you’ll want to do a quick search of the nation’s top CD rates. It’s usually much more advantageous to go with an online bank rather than your local bank, because you’ll be able to select the top rate available in the country. And you’ll still enjoy a guaranteed return of principal up to $250,000, if your financial institution is backed by the FDIC.
Risk: As long as your bank is backed by the FDIC, your principal is safe. So investing in a CD is about as safe a return as you can find. Over time, the biggest risk with fixed income investments such as CDs is rising inflation, but that doesn’t appear to be a problem in the near future.
4. Invest in a high-yield CD
A peer-to-peer (P2P) loan is a personal loan made between you and a borrower, facilitated through a third-party intermediary such as Prosper or LendingClub.
Opportunity: As a lender, you earn income via interest payments made on the loans. But because the loan is unsecured, you face the risk of default.
To cut that risk, you need to do two things:
1. Diversify your lending portfolio by investing smaller amounts over multiple loans. At Prosper.com, the minimum investment per loan is $25.
2. Analyze historical data on the prospective borrowers to make informed picks.
Risk: It takes time to master the metrics of P2P lending, so it’s not entirely passive. Because you’re investing in multiple loans, you must pay close attention to payments received. Whatever you make in interest should be reinvested if you want to build income. Economic recessions can also make high-yielding personal loans a more likely candidate for default, too.
5. Peer-to-peer lending
Shareholders in companies with dividend-yielding stocks receive a payment at regular intervals from the company. Companies pay cash dividends on a quarterly basis out of their profits, and all you need to do is own the stock.
Dividends are paid per share of stock,
so the more shares you own, the higher your payout.
Opportunity: Since the income from the stocks isn’t related to any activity other than the initial financial investment, owning dividend-yielding stocks can be one of the most passive forms of making money.
Risk: The tricky part is choosing the right stocks. Graves warns that too many novices jump into the market without thoroughly investigating the company issuing the stock. “You’ve got to investigate each company’s website and be comfortable with their financial statements,” Graves says. “You should spend two to three weeks investigating each company.”
That said, there are ways to invest in dividend-yielding stocks without spending a huge amount of time evaluating companies. Graves advises going with exchange-traded funds, or ETFs. ETFs are investment funds that hold assets such as stocks, commodities and bonds, but they trade like stocks.
“ETFs are an ideal choice for novices because they are easy to understand, highly liquid, inexpensive and have far better potential returns because of far lower costs than mutual funds,” Graves says.
Another key risk is that stocks or ETFs can move down significantly in short periods of time, especially during times of uncertainty, as in early 2020 when the coronavirus crisis shocked financial markets. Economic stress can also cause some companies to cut their dividends entirely, while diversified funds may feel less of a pinch.
6. Dividend stocks
It doesn’t get any more passive than putting your money in a savings account at the bank or one of the many online banks offering high yields. Then sit back and watch the interest mount up.
Opportunity: Your best bet here is going with an online bank, since they typically offer the highest rates and you can usually easily transfer your money between your primary bank and the online bank. Online rates can often be 10 times higher or more than what your local bank may offer.
Risk: If you invest in an account insured by the FDIC, you have almost no risk at all up to a $250,000 threshold per account type per bank. The biggest risk is probably that interest rates tend to fall when the economy weakens, and in this case, you would have to endure lower payouts that potentially don’t earn enough to beat inflation. That means you’ll lose purchasing power over time.
7. Savings accounts
A REIT is a real estate investment trust, which is a fancy name for a company that owns and manages real estate. REITs have a special legal structure so that they pay little or no corporate income tax if they pass along most of their income to shareholders.
Opportunity: You can purchase REITs on the stock market just like any other company or dividend stock. You’ll earn whatever the REIT pays out as a dividend, and the best REITs have a record of increasing their dividend on an annual basis, so you could have a growing stream of dividends over time.
Like dividend stocks, individual REITs can be more risky than owning an ETF consisting of dozens of REIT stocks. A fund provides immediate diversification and is usually a lot safer than buying individual stocks — and you’ll still get a nice payout.
Risk: Just like dividend stocks, you’ll have to be able to pick the good REITs, and that means you’ll need to analyze each of the businesses that you might buy — a time-consuming process. And while it’s a passive activity, you can lose a lot of money if you don’t know what you’re doing.
REIT dividends are not protected from tough economic times, either. If the REIT doesn’t generate enough income, it will likely have to cut its dividend or eliminate it entirely. So your passive income may get hit just when you want it most.
8. REITs
A bond ladder is a series of bonds that mature at different times over a period of years. The staggered maturities allow you to decrease reinvestment risk, which is the risk of tying up your money when bonds offer too-low interest payments.
Opportunity: A bond ladder is a classic passive investment that has appealed to retirees and near-retirees for decades. You can sit back and collect your interest payments, and when the bond matures, you “extend the ladder,” rolling that principal into a new set of bonds. For example, you might start with bonds of one year, three years, five years and seven years.
In a year, when the first bond matures, you have bonds remaining of two years, four years and six years. You can use the proceeds from the recently matured bond to buy another one year or roll out to a longer duration, for example, an eight-year bond.
Risk: A bond ladder eliminates one of the major risks of buying bonds – the risk that when your bond matures you have to buy a new bond when interest rates might not be favorable.
Bonds come with other risks, too. While Treasury bonds are backed by the federal government, corporate bonds are not, so you could lose your principal. And you’ll want to own many bonds to diversify your risk and eliminate the risk of any single bond hurting your overall portfolio.
Because of these concerns, many investors turn to bond ETFs, which provide a diversified fund of bonds that you can set up into a ladder, eliminating the risk of a single bond hurting your returns.
9. A bond ladder
This straightforward strategy takes advantage of space that you’re probably not using anyway and turns it into a money-making opportunity.
Opportunity: You can list your space
on any number of websites, such as Airbnb,
and set the rental terms yourself. You’ll collect a check for your efforts with minimal extra work, especially if you’re renting to a longer-term tenant.
Risk: You don’t have a lot of financial downside here, though letting strangers stay in your house is a risk that’s atypical of most passive investments. Tenants may deface or even destroy your property or even steal valuables, for example.
10. Rent out a room in your house
You may be able to earn some extra money by simply driving your car around town. Contact a specialized advertising agency, which will evaluate your driving habits, including where you drive and how many miles. If you’re a match with one of their advertisers, the agency will “wrap” your car with the ads at no cost to you. Agencies are looking for newer cars, and drivers should have a clean driving record.
Opportunity: While you do have to get out and drive, if you’re already putting in the mileage anyway, then this is a great way to earn hundreds per month with little or no extra cost. Drivers can be paid by the mile.
Risk: If this idea looks interesting, be extra careful to find a legitimate operation to partner with. Many fraudsters set up scams in this space to try and bilk you out of thousands.
11. Advertise on your car
How many streams of income should you have?
There is no “one size fits all” advice when it comes to generating income streams. How many sources of income you have should depend upon where you are financially, and what your financial goals for the future are. But having at least a few is a good start.
“You’ll catch more fish with multiple lines in the water,” says Greg McBride, CFA, chief financial analyst at Bankrate. “In addition to the earned income generated from your human capital, rental properties, income-producing securities and business ventures are a great way to diversify your income stream.”
Light traffic on Highway 101 in the San Francisco area. With people driving much less than usual, some auto insurers are on their second round of premium refunds.
PHOTO: JEFF CHIU/ASSOCIATED PRESS
Many insurers have issued partial refunds and discounts to drivers logging fewer miles during shelter-in-place orders, according to the American Property Casualty Insurance Association, a national trade association for home, auto and business insurers.
Some companies are on their second round of refunds. Earlier this month USAA announced a second round of auto-premium refunds, saying it would return an additional $280 million to its auto-insurance policyholders, bringing the total to $800 million returned. This new, additional credit will reflect 20% of a month’s premium, and will be provided to all auto-insurance policyholders with policies in effect as of April 30, 2020, according to a company news release.
Premium refunds
Insurers have also accelerated their use of digital tools to accept new applications, underwrite and bill customers, and process claims, says Sean Kevelighan, chief executive of the Insurance Information Institute, which helps educate consumers on insurance-related issues.
In addition, more insurers are allowing customers to take their own photos for auto claims and are using drone technology to assess property damage, Mr. Kevelighan says.
On the life-insurance side, traditionally a face-to-face business, many insurers are seeing the number of online applications shoot up, and the use of digital signatures also has increased.
Ameritas Life Insurance Corp. started accepting online applications last year, but the digital shift has accelerated, in part because of the pandemic. In December, 38% of new applications were made online; that figure climbed to 55% in March and 78% in April, says Ryan Beasley, executive vice president of Ameritas’s individual division.
Some life insurers say they haven’t raised prices during this time; however, other carriers are making pricing and product adjustments. It’s possible potential buyers may be turned away or they may experience scaled-back policy sizes and reduced benefits as insurers adjust to the market environment. Additionally, applications could be delayed in certain cases, especially if applicants or their family members are traveling during the pandemic, or have contracted the virus. Insurers have different restrictions and underwriting guidelines, and some of these could have changed amid the pandemic, so be sure to shop around.
Some life-insurance carriers are also making it easier for certain customers to obtain a policy, generally without the hassle of an in-person medical exam, making use of electronic data such as medical records, motor-vehicle reports, a physician statement and prescription data. Minimizing face-to-face interaction is especially attractive amid the pandemic, says David Levenson, president and chief executive officer of Limra, Loma and their parent, LL Global, a not-for-profit industry association.
Northwestern Mutual Life Insurance Co. rolled out accelerated underwriting for life-insurance customers about two years ago and has seen usage pick up since the pandemic began, says John Grogan, executive vice president and chief product and innovation officer.
Ameritas, which had planned to roll out an expedited underwriting process to a subset of applicants in June, accelerated its timeline and is now offering the option to individual applicants between the ages of 18 and 60 seeking a maximum life-insurance benefit of $1 million. The company intends to monitor the program and determine how it can be expanded to a broader market over time. Prudential Financial Inc., which previously offered the service to qualified buyers on an opt-in basis, is more broadly waiving the medical exam, in many circumstances, for people under age 60 seeking less than $3 million of coverage, says Salene Hitchcock-Gear, Prudential’s president of individual life insurance. Pacific Life Insurance Co., meanwhile, expanded an existing pilot program and rolled it out more broadly to consumers between the ages of 18 and 60, for policy limits up to $5 million, depending on the product, says Dawn Trautman, executive vice president and head of the company’s life-insurance division.
Digital push
But, if there is deflation between the 2019 and 2020 quarters, the effect could be lasting and affect any 2022 COLA. Say this year's inflation rate turns out to be -0.3%. In that case, the 2021 COLA would be zero. But the negative value will get deducted from the next positive COLA. In that case, if 2022’s COLA calculation calls for a 1.5% increase, recipients would only see 1.2% (1.5% - 0.3% = 1.2%).
Negative inflation has happened twice before — first in 2009, when a -2.1% rate meant no 2010 COLA, then knocked down the January 2011 COLA from 1.5% to zero, and and carried forward one last hit on the January 2012 COLA, which went from 4.2% to 3.6%. In the second case of negative inflation, there was no January 2016 COLA following a -0.4% inflation rate, and the January 2017 COLA fell from 0.7% to 0.3%.
Enhanced coverage options