Where Will Your Retirement Income Come From? APO Financial

Once you’ve sold your business, you’ll need to make a lump sum of savings last for the rest of your life. This can be difficult, even for those who already have a substantial amount saved. Retirement can last for decades, and the risk of running out of money is very real, especially if we see high inflation and a volatile market. So what can you do? Let’s start with some potential income sources in retirement:

1. Investment Strategy

If you have a Solo 401(k), SIMPLE 401(K), IRA, or other retirement account as a business owner, you’ll need to have a plan to draw down your account in retirement. Distributions from these tax-deferred retirement accounts are taxed as ordinary income and may be subject to a 10% penalty if taken before age 59 ½. Generally, Required Minimum Distributions (RMDs) start at age 72, which could potentially mean a larger tax burden. Remember that no one knows what the tax rates of the future are, which is why it’s important to keep taxes top of mind when it comes to tax-deferred retirement accounts.

Beyond your retirement account, you may have other assets that you will draw income from in retirement. We can help you create a retirement investment strategy that takes your tax situation into account, as well as inflation and the potential for market losses.

2. Social Security

Although you will most likely not be able to maintain your current lifestyle on Social Security benefits alone, it can make up a significant portion of your income and is guaranteed for as long as you live. Despite its importance, only 4% of retirees claim Social Security benefits at the optimal time, losing out on an average of $111,000 per household, according to a recent study.[1]

This means that having a plan for maximizing your benefits is essential. Benefits are designed to replace about 40% of income[2], but this percentage can be higher or lower depending on your earnings history, income needs, and success in maximizing benefits.

3. Supplemental Guaranteed Income

While you may have been comfortable with some uncertainty and risk as a business owner, you may need to reassess your risk tolerance in retirement. Just like Social Security can provide guaranteed regular payments for life, an annuity can also provide steady income in retirement.

An annuity is an insurance-based financial product that accepts funds and then pays them back later in a stream of payments or a lump sum. An annuity can be thought of as the opposite of life insurance, which protects against the possibility of passing away too soon and leaving your loved ones to struggle financially. An annuity can help protect against outliving your money by providing guaranteed payments to you for life or a pre-determined amount of time.[3] There are also potential tax-benefits: some annuities can be funded with untaxed dollars, and some annuities can offer tax-deferred growth during the accumulation phase.[4]

[1] https://www.usatoday.com/story/money/2019/06/28/social-security-claim-too-early-and-lose-100-000-retirement/1572620001/
[2] https://www.ssa.gov/benefits/retirement/learn.html
[3] https://www.investopedia.com/terms/a/annuity.asp
[4]https://www.annuity.org/annuities/taxation/#:~:text=One%20of%20the%20main%20tax,being%20reduced%20by%20tax%20payments.