Where Does Retirement Money Come From?

What workers anticipate in terms of retirement income sources may differ considerably from what retirees actually experience. For many people, retirement income may come from a variety of sources.

Here's a quick review of the six main sources:

1. social security

Social Security is the government-administered retirement income program. Workers become eligible after paying Social Security taxes for 10 years. Benefits are based on each worker's 35 highest earning years. If there are fewer than 35 years of earnings, non-earning years are averaged in as zero. In 2023, the average monthly benefit is estimated at $1,827.^1,2

2. personal savings & investments

Personal savings and investments outside of retirement plans can supplement retirement income. Many retirees choose options that provide regular, predictable income, though others may balance guaranteed income with investments that offer potential growth (like taxable brokerage accounts, CDs, or annuities).

3. individual retirement account (ira)

Traditional IRAs have been around since 1974. Contributions you make to a traditional IRA may be fully or partially deductible, depending on your individual circumstances. In most circumstances, once you reach age 73, you must begin taking required minimum distributions from a Traditional Individual Retirement Account (IRA). Withdrawals from Traditional IRAs are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty. You may continue to contribute to a Traditional IRA past age 70½ as long as you meet the earned-income requirement.

4. roth individual retirement account (ira)

Roth IRA contributions cannot be made by taxpayers with high incomes. To qualify for the tax-free and penalty-free withdrawal of earnings, Roth IRA distributions must meet a five-year holding requirement and occur at age 59½. Tax-free and penalty-free withdrawals also can be taken under certain other circumstances, including as a result of the owner's death. The original Roth IRA owner is not required to take minimum annual withdrawals.

5. defined contribution plans

Many workers are eligible to participate in a defined contribution plan, such as a 401(k), 403(b), or 457(b) plan. Eligible employees can contribute a portion of their pre-tax income to the account, which then grows tax-deferred over time.

In most cases, you must begin taking required minimum distributions (RMDs) from your 401(k), 403(b), or other defined contribution plans in the year you turn 73. Withdrawals are generally taxed as ordinary income. Withdrawals from 401(k) and 403(b) plans may be subject to a 10% federal income tax penalty if taken before age 59½.

6. defined benefit plans

Defined benefit plans are "traditional" pensions—employer–sponsored plans under which benefits, rather than contributions, are defined. Benefits are normally 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.

expected vs. actual sources of income in retirement

Understanding and navigating the gap between anticipated and actual retirement income is crucial for securing a financially stable retirement. To bridge this divide, consider the following strategies:

• Proactive and Ongoing Planning: Start planning for retirement early and continuously refine your strategy to adapt to changing circumstances and financial landscapes.
• Portfolio Diversification: Cultivate a broad array of income sources. Investing across various asset classes, including stocks, bonds, and real estate, can mitigate risks and enhance income stability.
• Maximizing Social Security Benefits: Opting to delay claiming Social Security until age 70 can significantly boost your monthly benefits, providing a more substantial financial safety net in later years.
• Comprehensive Healthcare Strategy: Factor in potential healthcare expenses early on. Planning for these costs is essential, as they can be a major drain on retirement income.

Planning with these factors in mind helps ensure your retirement income lasts and your financial goals stay on track.

wondering how your retirement income will add up?

A Skyla Financial Advisor can help you make sense of your income sources and build a strategy that supports your long-term goals. Feel free to reach us at 704.375.0183 x 3085 to start the conversation and plan with confidence.