Learn About Retirement Income Options

Understanding Different Types of Retirement Income

Retirement income comes from many different sources, and most people combine several types to support their lifestyle after work. The main categories include Social Security benefits, pensions, retirement savings accounts, and other investments. Understanding how each works helps you see the full picture of what money may be available to you in retirement.

Social Security is a federal insurance program that provides monthly payments to retired workers, their families, and people with disabilities. According to the Social Security Administration, about 67 million Americans received Social Security benefits in 2023, with an average monthly benefit of approximately $1,827 for retired workers. These payments are based on your work history and the age when you start receiving them.

Pensions are retirement plans offered by some employers, particularly government agencies and larger companies. A pension provides regular monthly payments for life, based on factors like your years of service and salary history. While pensions are less common than they were decades ago, many government employees, military personnel, and workers at established companies still have access to them. The difference between a pension and other retirement accounts is that the employer takes on the investment risk and guarantees the payment amount.

Retirement savings accounts like 401(k)s and Individual Retirement Accounts (IRAs) put you in control of building your retirement nest egg. You contribute money during your working years, often with tax advantages, and the money grows through investments. Unlike pensions, the amount available in retirement depends on how much you contributed and how well your investments performed. These accounts give you flexibility in how and when you use the money.

Other income sources in retirement might include part-time work, rental income from property, dividends from investments, annuities you purchased, or reverse mortgages on your home. Some people also receive income from side businesses or consulting work they continue into retirement.

Practical takeaway: List all potential income sources you might have in retirement. This could include Social Security, pensions, 401(k)s, IRAs, investment accounts, real estate, or continued work income. Having a complete picture helps you understand what you're working with.

How Social Security Benefits Work and When You Can Receive Them

Social Security provides a foundation of retirement income for most Americans. To receive Social Security retirement benefits, you must have worked and paid Social Security taxes for at least 10 years (40 work credits). The program tracks your highest 35 years of earnings to calculate your benefit amount. If you worked fewer than 35 years, the calculation includes zeros, which lowers your average and your benefit.

The age at which you can start receiving Social Security affects how much you receive each month. You can start receiving reduced benefits as early as age 62, but your monthly payment will be smaller than if you wait. If you wait until your full retirement age—which ranges from 66 to 67 depending on your birth year—you receive your full benefit amount. If you delay further and start at age 70, your monthly benefit increases by about 8% for each year you wait.

For someone born in 1960, full retirement age is 67. According to the Social Security Administration, the average retirement benefit for workers who started benefits at age 67 in 2023 was approximately $1,907 per month. If that same person started at age 62, their benefit would be roughly 30% lower, around $1,335 per month. If they waited until age 70, the benefit would be about 24% higher, around $2,365 per month. This difference matters significantly over a 20 or 30-year retirement.

Social Security also provides benefits to spouses, ex-spouses, and children of retired workers under certain conditions. A spouse who never worked, or who has a lower earnings record, may receive a benefit based on the worker's record. These spousal benefits have their own rules about age and reduction amounts. Divorced individuals who were married at least 10 years may also receive benefits on their ex-spouse's record.

It's important to note that Social Security is not means-tested, meaning the program doesn't reduce your benefits based on your other income or wealth. However, if you earn wages while receiving benefits before reaching full retirement age, your benefits may be temporarily reduced. After you reach full retirement age, you can earn any amount without losing benefits.

Practical takeaway: Visit ssa.gov to create a my Social Security account and see your estimated benefits at different ages. This helps you compare scenarios and understand how your claiming age affects your monthly income.

Exploring 401(k), 403(b), and Pension Plans

Employer-sponsored retirement plans are a common way workers save for retirement with tax advantages. A 401(k) is offered by private employers and allows employees to contribute a portion of their salary before taxes are taken out. In 2024, you can contribute up to $23,500 per year to a 401(k) if you're under age 50, or $30,500 if you're age 50 or older (including a catch-up contribution). Many employers match a percentage of your contribution—for example, matching 50 cents for every dollar you contribute up to 3% of your salary. This employer match is essentially free money toward your retirement.

A 403(b) is similar to a 401(k) but is offered by nonprofit organizations, schools, hospitals, and some government agencies. The contribution limits are the same as 401(k)s, and the basic mechanics work the same way. Some 403(b) plans offer less investment choice than larger 401(k) plans, but they still provide valuable tax-deferred savings.

When you leave a job, you have choices about what to do with your 401(k) or 403(b) balance. You can leave the money where it is if your balance is above a certain threshold (usually $5,000), roll it over into an IRA at another institution, or roll it into a new employer's plan if that plan accepts rollovers. If you withdraw the money before age 59½, you typically owe income tax on the withdrawal plus a 10% early withdrawal penalty, unless an exception applies. This is why rolling over to an IRA or keeping the money invested is usually better than taking a distribution.

Traditional pensions operate differently from 401(k)s. With a pension, your employer puts money aside in a fund managed by investment professionals, and you receive a monthly payment for life based on your salary and years of service. You don't make contributions or direct investment choices. The trade-off is that pensions have largely disappeared from the private sector. According to the U.S. Bureau of Labor Statistics, in 1980, about 60% of workers in the private sector had access to pensions; by 2020, that number had dropped to about 15%. Pensions remain more common in government and union jobs.

Some employers offer cash balance plans, which are a modern hybrid between traditional pensions and 401(k)s. Your employer contributes a set percentage of your salary to your account, similar to a pension. But the account grows like a 401(k) with investment returns, and you can see the balance grow over time. You receive a lump sum at retirement or can take it as monthly payments.

Practical takeaway: Review your employer plan's terms, including vesting schedules (when you own the employer match), investment options, and what happens to your balance if you change jobs. If your employer offers matching, aim to contribute enough to capture the full match—it's one of the best returns on investment available.

Individual Retirement Accounts (IRAs) and Their Tax Advantages

An Individual Retirement Account, or IRA, is a savings account you set up on your own, separate from any employer plan. There are two main types: Traditional IRAs and Roth IRAs, and they work differently in terms of taxes and withdrawal rules.

With a Traditional IRA, you contribute money that may be tax-deductible on your federal income tax return, depending on your income and whether you have access to an employer plan. The money grows tax-free while it's in the account, meaning you don't pay taxes on investment gains each year. When you withdraw money in retirement, those withdrawals are taxed as ordinary income. For 2024, you can contribute up to $7,000 per year if you're under age 50, or $8,000 if you're age 50 or older. You must start taking required minimum distributions from a Traditional IRA at age 73 (as of 2023, under the SECURE