Sources of Income in Retirement
An old adage compares retirement income to a three-legged stool: Just as the stool requires three legs to stand, your retirement income is generally supported by three sources of funds: 1) Social Security, 2) retirement savings or pensions and 3) personal savings/investments. Here’s a closer look at each “leg,” and how they can work together to contribute to a more stable retirement.
401(k)s and PensionsAt one time, pension plans, where an employer agrees to pay a defined benefit to employees throughout their retirement, were largely considered the bedrock of retirement security. However, most organizations today no longer provide pensions. According to Bureau of Labor Statistics data, only one-fourth of civilian workers were offered a traditional pension plan as of 2022.
Still, several dedicated retirement account options are available to investors. 401(k) plans, which enable employees to contribute pre-tax funds to an investment account through their employer, are the most popular.
In 2023, the U.S. government allows 401(k) participants to save a maximum of $22,500 per year through their plan — plus an additional $7,500 in “catch-up contributions” for those age 50 or over at the end of the calendar year — and many employers will “match” employee contributions up to a certain amount.
Many 401(k) and IRA plans have required minimum distributions, meaning you must withdraw a certain amount from your account per year. Many financial experts suggest a good rule of thumb is withdraw 4% of your retirement savings the year you retire, adjusting for inflation each year after that for 30 years. The "4% rule" helps maintain a steady income stream without prematurely depleting funds.
Social SecurityChances are, if you've been working and paying income taxes, you've been contributing to Social Security and are entitled to receive benefits after you retire. Typically, the longer you wait to withdraw your benefits, the more you'll receive each month. If you don’t wait until your full retirement age, and elect to receive benefits early, you’ll have a decreased monthly payment. However, if you wait beyond your full retirement age, you’ll receive more. Workers who didn't wait until age 70 to receive Social Security lost an average of more than $180,000 in potential income, according to the National Bureau of Economic Research.
Personal Savings and InvestmentsThis retirement leg is composed of individual savings, investments and other assets outside of employer-sponsored plans. It can include IRAs, brokerage accounts, savings accounts or real estate. The amount of income derived from this leg largely depends on an individual's budgeting, saving and investing habits throughout their working years.
It's All About Balance
The best time to start planning for retirement is right when you begin working, but the second-best time is now. A financial professional can make sure your approach to retirement is sustainable and maintains a healthy balance. With the right strategy and disciplined savings, you can help ensure a solid foundation for a comfortable retirement.
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