Here’s how I built a second income (and a third) for life!

Most people of working age tend to live off one main source of income: their earned income (wages or salaries, possibly supplemented by state benefits). But the problem with my income stopped when I stopped working. So how do you create a second income that lasts?

Passive income is my favorite type

American mega-billionaires and philanthropists Warren Buffett once warned, “If you don’t find a way to make money while you sleep, you’ll work yourself to death”. That’s why passive income (not earning) is my favorite income — because it works when I don’t.

Despite what you may think, the biggest form of passive income is not investment income. For most parents, state and workplace pensions make up a large part of their income. In other words, pensions (and benefits) are just another type of passive income – but the most important type for retirees.

I’m getting older…

I was born in 1968 (Generation X proud), so I am 55 years old. However, I don’t consider myself middle-aged, because I don’t expect to live to be 100+. What’s more, this is the first year I can draw a non-state pension. I’ve had quite a few, including some low end salary schemes from working in ‘high finance’ in London. I also have a few small savings pots with no guaranteed payments.

That said, I have decided not to take any income from this pension at this time. Taking early retirement usually means getting a lower monthly payment for life, which I don’t want. So I will leave this for now.

However, my husband was given early retirement after being made redundant almost two years ago. He also turns 55 this year, when he automatically retires on final salary. My guess is that this payment will be thousands of pounds a month, index-linked to inflation for life. Very few people get good deals these days, so I envy them. But these company pensions will be heavily taxed, with almost half lost to HM Revenue & Customs. Yawis.

Our second income

For me, the second best income I get is stock dividends. Dividends are regular cash payments paid by a company to its shareholders. Usually, these payments come quarterly or semi-annually. However, not all listed companies pay dividends – in fact, at least. Also, members of the blue-chip FTSE 100 the index provides almost all of the dividend income from the London stock market.

In short, that’s why we’ve spent the last seven months buying a variety of high-yielding FTSE 100 and FTSE 250 sharing. By building a diversified (well-balanced) portfolio of dividend-paying stocks, we expect to earn up to 6% a year from this UK dividend dynamo.

Of course, stocks are riskier than cash or fixed-interest bonds, so we take greater risks with our money. But 35 years of investing experience shows that stock prices tend to rise sharply over decades. Therefore, as well as double income from dividends, we expect to make capital gains from rising company valuations. And that’s why we want to keep investing in quality stocks until we die!