Free Guide to Retirement Income Options

Understanding Your Retirement Income Options

When you stop working, you need money to live on. This money is called retirement income. There are many different ways to get retirement income, and most people use a combination of several sources rather than relying on just one. Understanding what options exist is the first step in planning for retirement.

Retirement income comes from different places. Some income is money you saved yourself during your working years. Other income comes from programs run by the government, like Social Security. Still other income might come from a pension your employer provided, or from investments you made over time. Each source of income works differently and has different rules about when you can start receiving money and how much you might get.

The Social Security Administration reports that as of 2024, about 67 million people receive Social Security benefits, with an average monthly benefit of around $1,907 for retired workers. This shows that Social Security is a major source of retirement income for millions of Americans, though most financial advisors suggest it should not be your only income source.

Your own situation will be different from everyone else's. Some people have pensions from long careers with one company. Others have 401(k) accounts they built up over many years. Some people own their homes outright and have lower living expenses. Some have substantial savings in bank accounts or investments. The combination of sources available to you will shape what your retirement income looks like.

Learning about different retirement income sources helps you understand what might work in your situation. This guide describes several major sources of retirement income and explains how each one generally works. Reading through this information can help you think about conversations you might want to have with a financial advisor or other trusted person in your life who understands money matters.

Practical Takeaway: Make a simple list of potential income sources you might have in retirement, such as Social Security, pensions, savings, or part-time work. This list helps you see what you're working with and where you might need to gather more information.

Social Security: How the Program Works

Social Security is a federal insurance program that provides retirement income to people who have worked and paid into the system. It is the largest source of income for most retired Americans. The program has been around since 1935 and is funded through payroll taxes that workers and employers pay. When you work, money is taken from your paycheck for Social Security. Your employer also contributes an equal amount.

To receive Social Security retirement benefits, you must have worked and paid Social Security taxes for a certain period. Currently, you need 40 work credits to be eligible for retirement benefits. A work credit is based on how much you earn in a year. In 2024, you earn one credit for each $1,705 in wages, and you can earn up to four credits per year. This means you need roughly 10 years of work history to qualify for benefits. The specific calculations are more detailed, but this gives you the general idea.

The amount of Social Security you receive is based on your work history and how much you earned during your working years. The program looks at your highest 35 years of earnings and calculates an average. People who earned more during their careers generally receive higher monthly payments. Someone who worked at lower wages, even if they worked for many decades, might receive a lower monthly amount.

When you can start receiving Social Security retirement benefits depends on your age. You can start at age 62, but you receive a smaller monthly amount. If you wait until your "full retirement age"—which is between 66 and 67 depending on what year you were born—you receive the full amount the program calculated for you. If you wait until age 70, your monthly benefit is even larger. This means there is a trade-off: start earlier and get less each month, or wait longer and get more each month.

Social Security also pays benefits to family members in certain situations. If you are married, your spouse may be able to receive a benefit based on your work record. Children and grandchildren under certain ages may also be able to receive benefits based on your record. Surviving family members may receive benefits if you pass away.

The Social Security Administration maintains detailed information about how the program works, including personal earnings records and benefit estimates. You can create an account on the Social Security website to view your earnings history and see estimates of what your monthly benefit might be at different ages.

Practical Takeaway: Visit the Social Security Administration's website to create an account and review your earnings record. This shows you exactly how much you have paid into the system and gives you an estimate of your potential monthly benefit, which is useful information to have when planning for retirement.

Pensions and Employer-Sponsored Retirement Plans

A pension is a regular payment you receive after you retire, based on your years of service with an employer. Pensions have become less common in recent decades, but they are still offered by many government agencies, some large corporations, and some union employers. If you worked for a federal, state, or local government agency or for certain large companies, you might have a pension waiting for you when you retire.

A traditional pension works differently from other retirement income sources. Your employer sets aside money specifically to pay you in retirement based on a formula that usually considers how long you worked there and your salary. When you retire, you receive a monthly check for as long as you live. Your employer is responsible for making sure there is enough money to pay you. This is different from a 401(k), where you are responsible for managing your own retirement savings.

The amount of a pension depends on the specific plan your employer offered. Some pensions replace a percentage of your final salary—for example, 1.5% of your final salary times the number of years you worked there. So if you earned $50,000 a year and worked for 30 years, your pension might be 45% of that salary, or about $22,500 per year. Other pension formulas work differently, so it is important to understand the specific rules of any pension you have.

Many employers also offer 401(k) plans or similar retirement savings plans. These are different from pensions. With a 401(k), you decide how much money to take from your paycheck and put into a retirement account. You choose how that money is invested. The money in the account belongs to you. Some employers match part of what you contribute—for example, if you put in 3% of your salary, they might add another 3%. This employer match is essentially free money for your retirement, so many financial advisors suggest taking full advantage of it.

403(b) plans work similarly to 401(k) plans but are offered by some nonprofit organizations and schools. 457 plans are offered by some government employers. Individual Retirement Accounts (IRAs) are another type of retirement savings account that anyone can open on their own, outside of an employer plan. Each type of account has different rules about how much you can contribute each year and when you can withdraw the money.

One important rule across all these retirement accounts is that there are usually penalties if you take money out before you reach a certain age, typically 59½. There are some exceptions to this rule for certain situations, such as extreme hardship, but generally these accounts are designed to keep your money growing until you retire.

Practical Takeaway: If you have a pension, contact your former or current employer's pension office or human resources department and ask for a summary of your pension benefits and an estimate of your monthly payment. If you have a 401(k) or other retirement account, review the balance and think about whether you are contributing enough to take advantage of any employer match.

Personal Savings and Investments

Beyond government programs and employer plans, money you save yourself in regular bank accounts, investment accounts, and other savings is an important source of retirement income for many people. Personal savings can fill gaps between what Social Security and pensions provide and what you actually need to live on. Having personal savings also provides security and flexibility—you can access these funds if an unexpected expense comes up.

Many financial advisors suggest building an emergency fund of three to six months of expenses before you retire. This money sits in a regular savings account so you can access it quickly if something unexpected happens. Once you retire, this emergency fund becomes even more important because you don't have a regular paycheck coming in. An unexpected medical bill or home repair can feel more stressful when you are living on a fixed retirement income.

Beyond emergency savings, money in investment accounts like brokerage accounts can grow over time. Common investments include individual stocks, mutual funds, and exchange-traded funds (ETFs). Stocks represent partial ownership in companies