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Sources of retirement income

Just as we all live unique lives, our retirement income and strategies will come from a variety of different sources. Here are the 6 most common sources of retirement income:

Social security

Social Security is one of the most common, and significant sources of retirement income. Being a government-administered retirement income program, workers become eligible to receive these benefits after paying Social Security taxes for 10 years. 

The biggest decision to make regarding Social Security benefits is when to actually apply for the benefits. There are several options to consider, including taking reduced benefits at age 62, waiting until you’re eligible for full benefits, and further postponing your first payment to qualify for an even larger amount. As always, consult with a financial professional to find which strategy works best for you.

Defined contribution plans

Many workers are able to participate in an employer’s defined contribution plan like a 401k, 403(b), or 457 plan. Participating in these plans means you will be setting aside some of your pre-tax income to the given account. This account then continues to accumulate your pre-tax contributions and accrues more value, tax deferred.

In most cases, you will have to begin taking required minimum distributions (RMDs) from your given defined contribution plan at age 72. Withdrawals from these defined contribution plans are taxed as ordinary income. If you start withdrawing from these accounts before the age of 59½, the withdrawals may be subject to a 10% federal income tax penalty.

Defined benefit plans

Employer-sponsored pension plans have benefits based on factors such as how long you worked at the company, how much you earned, and the age you stopped working. If you have an employer-sponsored pension plan, you should know how much pension income you’ll receive before you retire.

Unfortunately, the number of traditional employer-sponsored pension plans has dropped significantly over the past 30 years.

Individual retirement accounts

Individual retirement accounts (IRAs) are retirement accounts that allow you to save and invest for retirement on the side while being able to save on taxes. The two most popular individual retirement accounts are traditional IRA and Roth IRa, each coming with their own rules and benefits.

A traditional IRA allows you to make pre-tax contributions. You may get a tax break while contributing to the account, though you still have to pay taxes on the money you withdraw from the account during retirement. A traditional IRA does not give you the opportunity to easily make withdrawals before retirement, as most early withdrawals made before the age of 59½ are subject to penalties and taxes. Though, there are exceptions when making withdrawals for major life events such as medical expenses or purchasing your first home under certain circumstances.

A traditional Roth IRA allows you to make after-tax contributions. You will not get a tax break while contributing to the account, though you won’t have to pay taxes on the money you later withdraw during retirement. A Roth IRA also gives you the opportunity to withdraw your investment earnings before retirement, but they are subject to penalties and income taxes if you’re making a withdrawal before the age of 59½. A Roth IRA also gives you the opportunity to withdraw your contributions at any time, penalty-free.

Personal savings and investments as retirement income

Personal savings and investments help provide additional income during retirement. Examples of personal investments include stock positions, home equity, real estate portfolios, etc. It is common to find retirees that prefer personal investments that offer monthly guaranteed income over potential returns, as it helps create a reliable flow of income.

Continued employment as retirement income

While it might not be ideal for some people, continued employment is an excellent way to supplement retirement income. Working part-time at a company that offers great benefits for virtually little or simple work can go a long way.