Passive Income Target Calculator
Passive income requires capital: whether invested in dividend stocks, rental property, REITs, or bonds. This calculator answers the key question: how much capital do you need to generate a target passive income given your expected yield? Enter your monthly income target and the annual yield of your chosen asset class, and the calculator shows the required capital, plus how far your current savings would stretch.
Passive income capital requirement formula
Annual Target = Monthly Target x 12
Capital Required = Annual Target / (Yield Rate / 100)
Capital Gap = Capital Required - Current Savings
Current Monthly Income = Current Savings x (Yield / 100) / 12
This is the standard income-to-capital inversion of the yield formula. The same formula is used in bond valuation (perpetuity pricing: P = C / r) where C is the annual coupon payment and r is the yield rate.
Common passive income asset classes and typical yields
- High-yield savings / money market: 4 to 5% (liquid, FDIC insured, low risk).
- US Treasury bonds (10-year): 4 to 5% (near risk-free benchmark rate).
- Dividend stocks / dividend ETFs: 1.5 to 4% yield plus capital appreciation potential.
- REITs (Real Estate Investment Trusts): 4 to 6% dividend yield; required by law to distribute 90% of taxable income to shareholders (IRC Section 857).
- Rental property: 4 to 8% cap rate (net operating income / property value), before financing costs.
Passive income: frequently asked questions
What is passive income and how is it different from active income?
Passive income is income that requires little or no ongoing active work to maintain after the initial investment or setup: dividends, rental income, royalties, and interest. Active income requires continuous effort to earn: wages, salary, and freelance fees. The IRS defines passive activities in Publication 925 as trade or business activities in which the taxpayer does not materially participate.
What yield should I use for my passive income calculation?
Use the expected annual yield of your chosen income-generating asset. S&P 500 dividend yield has averaged around 1.5 to 2% historically; rental property cap rates range from 4 to 8% depending on market; high-yield savings accounts currently offer 4 to 5%; REITs average 4 to 5% dividend yield. Always use realistic, sustainable yields based on current market data, not peak historical figures.
How much capital is needed to generate $5,000 per month in passive income?
At a 5% annual yield: Capital = ($5,000 x 12) / 0.05 = $1,200,000. At a 4% yield: $1,500,000. At a 7% yield (e.g., a diversified REIT portfolio): $857,143. The required capital scales inversely with yield: higher yield means less capital needed but typically involves more risk.
Should I account for taxes on passive income?
Yes. Qualified dividends and long-term capital gains are taxed at 0%, 15%, or 20% depending on income. Rental income is taxed as ordinary income but may be offset by depreciation. Interest income is taxed as ordinary income. This calculator shows gross passive income; enter your target net income and divide by (1 minus your effective tax rate) to find the gross target.
What is the difference between passive income and financial freedom?
Financial freedom (also called FIRE) means your passive income covers 100% of your living expenses, so employment becomes optional. This calculator shows the capital needed for any passive income target. The financial freedom timeline calculator extends this by projecting how long it takes to accumulate that capital given your current savings rate.
Official sources
- IRS Publication 925, Passive Activity and At-Risk Rules: irs.gov/publications/p925.
- IRS, REIT Requirements (IRC Section 857): irs.gov REITs.
- U.S. Treasury, Daily Treasury Yield Curve Rates: home.treasury.gov interest rates.
Reviewed by the CalculatorHub team, edited by James Graham, 14 June 2026. See our methodology.