When you stop working, your paycheck stops too—but your bills don't. That's why planning for retirement income is just as important as saving for retirement. Understanding where your retirement income will come from helps you build a strategy that provides reliable, lasting financial security.
Most retirees rely on multiple income sources. Let's explore the seven main sources of retirement income and how to make them work together.
The Three-Legged Stool (That's Now More Complicated)
Traditionally, retirement income was described as a "three-legged stool":
- Social Security
- Employer pensions
- Personal savings
Today, that model has evolved. Pensions are rare, personal savings have grown more important, and new options have emerged. A modern retirement income plan might include 5-7 different sources.
Source 1: Social Security
What It Is
A government-provided benefit based on your lifetime earnings and the age at which you claim.
How Much Can You Expect?
| Earnings Level | Average Monthly Benefit (2025) |
|---|---|
| Low earner | ~$1,200 |
| Average earner | ~$1,900 |
| Maximum earner | ~$3,800 (at FRA) |
| Maximum earner (delayed to 70) | ~$4,700 |
Key Decisions
| Claiming Age | Impact |
|---|---|
| 62 (earliest) | Reduced by up to 30% permanently |
| 67 (FRA for most) | 100% of your benefit |
| 70 (maximum) | 124% of FRA benefit |
Strategies
- Delay if possible: Each year you delay past FRA (up to 70) increases benefits by 8%
- Coordinate with spouse: One spouse delays for higher survivor benefits
- Consider break-even: If health is good, delaying usually pays off
đź’ˇ Pro Tip: Check your estimated benefit at ssa.gov. Log in to see personalized projections based on your actual earnings record.
Source 2: Employer Pensions
What They Are
Defined benefit plans that pay a guaranteed monthly income based on your salary and years of service.
Who Has Them?
- Government employees (federal, state, local)
- Military veterans
- Some large corporations (increasingly rare)
- Union workers in certain industries
How Pensions Work
Typical formula: Final Average Salary Ă— Years of Service Ă— Benefit Multiplier
Example:
- Final salary: $70,000
- Years of service: 30
- Multiplier: 2%
- Annual pension: $70,000 Ă— 30 Ă— 0.02 = $42,000/year
Key Decisions
| Choice | Considerations |
|---|---|
| Single life vs. joint survivor | Higher payout vs. protection for spouse |
| Lump sum vs. annuity | Flexibility vs. guaranteed income |
| Timing of retirement | More years = higher benefit |
đź“Ś Key Takeaway: If you have a pension, understand its terms completely. These guaranteed income streams are increasingly valuable.
Source 3: 401(k)s and 403(b)s
What They Are
Employer-sponsored retirement accounts where you contribute pre-tax or after-tax (Roth) dollars.
Creating Income
Unlike pensions, you decide how to turn these savings into income:
| Strategy | How It Works |
|---|---|
| Systematic withdrawals | Take a percentage (e.g., 4%) annually |
| Required Minimum Distributions | Mandatory withdrawals starting at 73 |
| Rollover to IRA | More investment options and flexibility |
| Purchase annuity | Convert to guaranteed income |
Tax Implications
| Account Type | Tax Treatment |
|---|---|
| Traditional 401(k) | Withdrawals taxed as ordinary income |
| Roth 401(k) | Qualified withdrawals are tax-free |
Key Considerations
- Coordinate withdrawals with Social Security for tax efficiency
- Consider Roth conversions before RMDs begin
- Don't forget about old 401(k)s from previous employers
Source 4: IRAs (Traditional and Roth)
Traditional IRA
| Feature | Details |
|---|---|
| Tax treatment | Tax-deductible contributions; taxed withdrawals |
| RMDs | Required starting at 73 |
| Best for | Those expecting lower taxes in retirement |
Roth IRA
| Feature | Details |
|---|---|
| Tax treatment | After-tax contributions; tax-free withdrawals |
| RMDs | None during owner's lifetime |
| Best for | Tax diversification; leaving to heirs |
Withdrawal Strategies
Traditional IRA:
- Start with smaller withdrawals to stay in lower tax brackets
- Increase withdrawals strategically before RMDs force larger ones
- Consider Roth conversions in low-income years
Roth IRA:
- Save for last—let tax-free growth continue
- Use for large expenses to avoid tax spikes
- Excellent for leaving to heirs (tax-free inheritance)
Source 5: Taxable Investment Accounts
What They Are
Standard brokerage accounts with no special tax treatment—but also no restrictions.
Advantages for Retirement
| Benefit | Why It Matters |
|---|---|
| Flexibility | Withdraw any amount, any time |
| No RMDs | Keep money invested as long as you want |
| Favorable tax rates | Long-term gains taxed at lower rates |
| Step-up in basis | Heirs receive at current value (no gains tax) |
Creating Income
- Dividend income: Stocks, funds, ETFs that pay dividends
- Bond interest: Individual bonds or bond funds
- Capital gains: Selling appreciated investments
- Systematic withdrawals: Regular sales to fund expenses
Tax Efficiency
| Income Type | Tax Rate |
|---|---|
| Qualified dividends | 0%, 15%, or 20% (capital gains rates) |
| Long-term gains | 0%, 15%, or 20% |
| Short-term gains | Ordinary income rates |
| Municipal bond interest | Often tax-free |
đź’ˇ Pro Tip: In retirement, you can often realize $0 in taxes on long-term capital gains if your income is low enough (up to ~$47,000 for singles in 2025).
Source 6: Annuities
What They Are
Insurance products that convert a lump sum into guaranteed income—often for life.
Types of Annuities
| Type | Features |
|---|---|
| Immediate annuity | Start payments right away |
| Deferred annuity | Payments begin in the future |
| Fixed annuity | Guaranteed rate of return |
| Variable annuity | Returns tied to market performance |
| Indexed annuity | Returns linked to index, with protection |
Pros and Cons
| Advantages | Disadvantages |
|---|---|
| Guaranteed lifetime income | Loss of principal access |
| No market risk (fixed) | Fees can be high |
| Simplicity | Inflation erodes fixed payments |
| Longevity protection | Less for heirs |
When Annuities Make Sense
- You want guaranteed income beyond Social Security
- You're worried about outliving your money
- You don't have a pension
- You want to "pensionize" part of your savings
⚠️ Warning: Annuities vary dramatically in cost and features. Work with a fee-only advisor who doesn't earn commission from selling them.
Source 7: Part-Time Work and Side Income
The Reality
Many retirees work part-time, whether by choice or necessity.
Benefits Beyond Income
| Benefit | Impact |
|---|---|
| Social engagement | Combat isolation of retirement |
| Mental stimulation | Stay sharp and engaged |
| Reduced withdrawals | Portfolio lasts longer |
| Health insurance | Access to employer coverage |
| Delayed Social Security | Higher lifetime benefits |
Income Options
| Type | Examples |
|---|---|
| Part-time employment | Retail, consulting, education |
| Freelancing | Writing, design, bookkeeping |
| Gig economy | Uber, TaskRabbit, Instacart |
| Rental income | Property, spare room |
| Passion projects | Teaching, crafts, hobbies |
Impact on Benefits
- Social Security: Working while collecting before FRA may reduce benefits temporarily
- Medicare: Part-time work doesn't affect Medicare
- Healthcare: Even 20 hours/week may qualify for employer health coverage
Building Your Retirement Income Plan
Step 1: Inventory Your Sources
| Source | Expected Monthly Income | Start Age |
|---|---|---|
| Social Security | $_ | _ |
| Pension | $_ | _ |
| 401(k)/IRA withdrawals | $_ | _ |
| Taxable investments | $_ | _ |
| Annuity | $_ | _ |
| Part-time work | $_ | _ |
| Other | $_ | _ |
| Total | $_**** |
Step 2: Match Income to Expenses
| Expense Category | Monthly Cost | Income Source |
|---|---|---|
| Essential (housing, food, healthcare) | $_ | Guaranteed (SS, pension, annuity) |
| Discretionary (travel, hobbies) | $_ | Investment withdrawals |
| Unexpected | $_ | Emergency fund, flexibility |
Step 3: Optimize for Taxes
| Strategy | Benefit |
|---|---|
| Withdraw from taxable first | Let tax-advantaged accounts grow |
| Fill lower brackets | Use traditional accounts strategically |
| Save Roth for last | Tax-free growth continues |
| Consider Roth conversions | Reduce future RMDs |
Step 4: Plan for Phases
| Phase | Focus |
|---|---|
| Early retirement (62-70) | Bridge income before Social Security maximizes |
| Active retirement (70-80) | Higher spending on travel, activities |
| Later retirement (80+) | Healthcare costs increase, activity decreases |
Common Retirement Income Mistakes
1. Claiming Social Security Too Early
Taking benefits at 62 can reduce lifetime income by hundreds of thousands of dollars for healthy retirees.
2. Ignoring Tax Diversification
Having all savings in one account type (all pre-tax, for example) limits flexibility and optimization.
3. Underestimating Healthcare Costs
The average couple needs $300,000+ for healthcare in retirement. Budget specifically for this.
4. No Plan for Inflation
Fixed income sources lose purchasing power over time. Build in growth-oriented investments.
5. Spending Identically Throughout Retirement
Most retirees spend more early (travel, activities) and less later. Plan accordingly.
Your Retirement Income Action Plan
-
Estimate Social Security: Create an account at ssa.gov
-
Inventory all accounts: 401(k)s, IRAs, pensions, investments
-
Project your expenses: What will retirement cost annually?
-
Identify income gaps: Where will additional income come from?
-
Develop withdrawal sequence: Which accounts to tap when
-
Plan for taxes: Optimize across income sources
-
Consider guaranteed income: Do you need more than Social Security?
-
Build flexibility: Have options for adjusting if needed
-
Review annually: Update projections and strategies
A successful retirement isn't just about how much you've saved—it's about how effectively you convert those savings into reliable, lasting income. Start planning your income strategy now, even if retirement is years away.