The answer to this question depends on whether you want to be an employee or a business owner. Let me explain what I mean.
An employee has a set salary. A business owner does not. How much income the business owner takes is dependent on the profitability of the company. The employee’s salary is paid regardless.
There are countless studies that have been done to figure out what is a sustainable income a person can take from their retirement accounts. When I started in 1999, retirees were told they could take 6% or higher. Then the dotcom bubble burst followed by the Great Recession of 2008. When I left the business, some had dropped the percentage down to 3%.
Over my 18 years the percentage continuously changed. Those that started taking 6% in 2000 were quickly met with the possibility of running out of money before they die. It happened again in 2008. When will be the next time?
So, what is the correct percentage that you should take? Is there a correct answer to this question? The answer in short to the second question is no. Then, what should you do?
Business Owner, Employee, or Combination
As a business owner, your income is based on profitability. This retiree will base his/her income off of returns. In a year that their account returns 10%, they will take more income than they will in a year in which the accounts return is zero or negative. Good returns equals higher income. Bad returns equals lower income.
Another option for the retiree/business owner is to own assets that produce income such as bonds or real estate. The owner of a rental property still receives income despite the value of the rental property. The bond still pays income despite the value of the bond.
Both options come with risks such as market risk, interest rate risk, and default risk to name a few.
As an employee, your income is set as a salary. What you are doing here is similar to a pension and is usually done with an annuity. Just as with a pension, there are decisions to be made. Do you need income for one life or two. If all the money isn’t used, would you like it to be left to a beneficiary? Each decision made will impact the amount of the income.
The dollar amount paid is set, and running out of income isn’t a risk. The risk comes with inflation because the income typically does not change.
Combination – Business Owner/Employee:
If possible, many retirees will choose a combination. First, they will solve for the amount necessary to pay the bills or slightly higher. The remainder will be run like a business. This option provides inflation protection while covering the necessities of life.
Which retiree will you be? Do you know? Don’t wait until you’re about to retire to find out how much income you can take.
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