Income
PORTFOLIO-GENERATED INCOME
In addition to providing a nest egg you can draw down from , certain investments in your portfolio can also provide income in retirement . The most common source of portfolio-generated income is through interest ( typically from bonds ) and dividends ( typically from certain blue-chip stocks ).
Interest income is generated by corporate and municipal bonds , mutual funds that invest in bonds , certificates of deposit and money market funds . Interest is paid on a regular schedule – typically semiannually , although some investments will pay interest monthly , quarterly or annually . While all bonds carry some level of risk , they are typically considered safer investments than stocks , and with that safety comes a more muted return in interest .
Dividend income , on the other hand , is paid out by stocks and mutual funds that own stocks . They are usually paid out quarterly , though some companies pay them out semiannually or annually , and dividends must first be approved by the company ’ s board of directors . Investments in dividend-paying companies are often expensive ( compared to the rest of the market ) but also lower-risk : Companies that issue dividends usually are well-established and no longer need to reinvest much money back into their business . Dividend income is usually taxed at the same rate as capital gains tax rates , which are less than ordinary income tax rates .
You might be tempted to invest heavily in these kinds of investments and live off the income they generate . It ’ s important to understand that none of these returns are guaranteed : Blue-chip companies might choose to reduce or forgo a quarterly dividend , bonds can default or mature in a lower-yield environment than when you originally purchased them ( meaning a newer bond might not return as much yield ), high-yield bonds are riskier investments than lower-risk Treasury bonds . Plus the income they generate might not be sufficient to meet your spending in retirement .
BUSINESS OWNERSHIP
For many business owners , their company is more than their life ’ s calling – it ’ s their source of income in retirement . A 2018 New York Life survey found that 42 % of small-business owners anticipate using income from their business as their own “ personal pension .” 25 While business owners should absolutely plan to incorporate the wealth their company has generated into their future plans , there ’ s risk in relying on business revenue or proceeds as a savings account to pay your monthly bills in retirement :
• One of the biggest risks in retirement planning is baking in continued good health – especially if you plan on continuing to run your business in retirement . The truth is , there ’ s no way to tell how well , or how long , you ’ ll be able to manage your business when you ’ re older . Maybe you ’ ll have the capacity to keep things running smoothly , or maybe poor health or declining energy will keep you from devoting the time needed to keep your business afloat . You don ’ t want to have to continue running your business just to continue funding retirement .
• If you anticipate selling your business or are relying on continued business growth to sustain you in retirement , you ’ re opening yourself up to seeing your plans derailed by everyday business challenges . Were economic conditions to change or a new competitor or technology to cut into your profit margins , you might see your business income take a serious hit – leaving you with few options to make up for those losses .
That ’ s why it ’ s crucial to save for retirement as a small-business owner , even if you expect to continue running your business into your 60s and beyond . It also means giving serious thought to an exit strategy ( transferring the business , selling it , taking it public ) and setting up a more formal retirement plan , like an IRA or Solo 401 ( k ). That retirement plan , coupled with whatever revenue you do make from the operation or sale of your business , could be enough to create the nest egg to help you retire with confidence .
46 % to
46 % of small-business owners do not have a backup plan if they are unable sell their business or if the proceeds are not sufficient for retirement . 25
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