There can be a significant disparity between the retirement income sources workers expect and what retirees actually encounter. Retirement income often originates from various avenues. Let's take a brief look at the six primary sources:
Personal Savings and Investments
During retirement, personal savings and investments held outside of retirement plans can serve as a valuable source of income. Retirees typically favor investment options that provide a guaranteed monthly income rather than focusing solely on potential returns.
Individual Retirement Account
Traditional IRAs have a long history, dating back to 1974. The deductibility of contributions to a traditional IRA depends on your unique circumstances, with the possibility of full or partial deductibility. At age 73, most individuals must start taking minimum distributions from their Traditional IRAs. Keep in mind that withdrawals from Traditional IRAs are subject to ordinary income tax and, if taken before age 59½, may be subject to a 10% federal income tax penalty. You can continue contributing to a Traditional IRA even beyond age 70½, as long as you meet the earned-income requirement.
Roth IRAs were established in 1997 with certain limitations. Taxpayers with higher incomes are unable to contribute to Roth IRAs. To be eligible for tax-free and penalty-free withdrawals of earnings, there is a requirement to hold the Roth IRA for at least five years and make withdrawals after reaching the age of 59½. However, there are also specific circumstances where tax-free and penalty-free withdrawals can be made, such as in the event of the owner's passing. It's worth noting that the original Roth IRA owner is not obligated to take minimum annual withdrawals.
Defined Contribution Plans
Many employees can participate in a defined-contribution plan, such as a 401(k), 403(b), or 457 plan. These plans allow eligible workers to allocate a portion of their pre-tax income into an account that can accumulate tax-deferred.
Under most circumstances, individuals are required to begin taking minimum distributions from their 401(k) or other defined-contribution plan in the year they turn 73. Withdrawals from these plans are subject to ordinary income tax rates. It's important to note that if withdrawals are taken before age 59½, they may also be subject to a 10% federal income tax penalty.
Defined Benefit Plans
Defined benefit plans are "traditional" pensions—employer–sponsored plans under which benefits, rather than contributions, are defined. Benefits are generally based on factors such as salary history and duration of employment. The number of traditional pension plans has dropped dramatically during the past 30 years.3
Social Security
Social Security is a retirement income program administered by the government. To become eligible, workers must pay Social Security taxes for at least ten years. The benefits are calculated based on each worker's 35 highest earning years. If fewer than 35 years of earnings exist, non-earning years are factored in as zero. As of 2023, the estimated average monthly benefit is $1,827.1,2
Continued Employment
In a recent survey, 73% of workers said they planned to keep working in retirement. In contrast, only 23% of retirees reported that continued employment was a major or minor source of retirement income.4
Expected Vs. Actual Sources of Income in Retirement
What workers anticipate in terms of retirement income sources may differ considerably from what retirees actually experience.
If you have any questions or would like to look at your personal situation, reach out to us today. We are here to help you enjoy the people, things, and experiences that are important to you today, while also having the security and stability down the road.