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Realities behind creating 'passive' income

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Creating passive income, not a passive activity
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Creating passive income, not a passive activity

The idea of building wealth through passive income has understandable appeal, especially if you're worried about being able to save enough from your work earnings to meet your retirement goals.

For example, to generate $1,000 a month in retirement income from a portfolio, you'd have to amass about $250,000, assuming a 5 percent withdrawal rate. Better to generate a stream of income using creative avenues.

What is passive income?

Passive income includes regular earnings from a source other than an employer or contractor. The IRS says passive income can come from just 2 sources: rental income or a business in which an individual does not actively participate. Examples include book royalties and dividend-paying stocks.

Investopedia defines passive income as "earnings an individual derives from a rental property, limited partnership or other enterprise in which he or she is not actively involved." Popular culture, however, defines it as "any money you earn while sitting on a beach sipping mojitos."

Financial coach and expert Todd Tresidder thinks it falls somewhere between the two, defining passive income as the money you earn from a project or investment after you've made an initial contribution of time or money.

"Many people think that passive income is about getting something for nothing," says Tresidder, founder of FinancialMentor.com, a financial coaching service. "It has a 'get rich quick' appeal ... but in the end, it still involves work. You just give the work upfront."

Untold thousands of people have tried to create fruitful passive-income streams only to be surprised by the amount of work, cash or time involved. So if you're thinking about going down this road, check out the reality behind 5 types of passive-income strategies.

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