What Types of Income Can You Use in Retirement to Support Yourself?

Understanding the various income sources available during retirement is important for individuals planning their financial future. These income streams can provide financial stability throughout one’s post-working years.

Government and Former Employer Benefits

One significant source of retirement income stems from government programs and employer-sponsored benefits. Social Security provides monthly income to eligible individuals based on their earnings record and contributions over their working lives. The amount received can vary depending on the age benefits are claimed, with a full retirement age ranging from 66 years and two months to 67, depending on the individual’s birth year.

Traditional pensions, also known as defined benefit plans, represent another income stream from former employers. These plans promise a specified, guaranteed payment in retirement, often for life, calculated using a formula that typically considers years of service and salary. Although less common for new employees today, many retirees still receive income from these plans. The employer bears the investment risk in these plans, ensuring the promised benefit regardless of market performance.

Retirement Savings Plans

Income in retirement is often significantly supplemented by withdrawals from tax-advantaged retirement savings plans. Employer-sponsored options include 401(k)s and 403(b)s, where individuals can contribute pre-tax or after-tax (Roth) money. When withdrawing from a traditional 401(k) or 403(b) in retirement, distributions from pre-tax contributions and earnings are generally taxed as ordinary income. Conversely, qualified withdrawals from Roth 401(k)s and Roth 403(b)s are tax-free, as contributions were made with after-tax dollars.

Individual Retirement Accounts (IRAs) offer personal retirement savings avenues with distinct tax treatments. A Traditional IRA allows for potentially tax-deductible contributions, with earnings growing on a tax-deferred basis until retirement. Withdrawals from a Traditional IRA in retirement are typically taxed as ordinary income. For both Traditional IRAs and most employer-sponsored plans, Required Minimum Distributions (RMDs) generally begin at age 73, requiring individuals to start withdrawing funds annually.

In contrast, a Roth IRA is funded with after-tax contributions, meaning qualified withdrawals in retirement are entirely tax-free. This structure provides tax advantages in retirement, particularly if an individual anticipates being in a higher tax bracket later in life. Unlike Traditional IRAs and other pre-tax accounts, Roth IRAs do not have RMDs for the original owner during their lifetime.

Personal Investments and Other Assets

Beyond dedicated retirement accounts, personal investments and other assets can provide additional income streams. Taxable brokerage accounts hold investments where gains, dividends, and interest are generally taxable in the year they are realized or received. Income can be generated from selling investments, leading to capital gains, or through regular payments like dividends from stocks and interest from bonds. These accounts offer flexibility as there are no age restrictions on withdrawals, unlike many retirement plans.

Rental income from real estate can offer a consistent stream of cash flow in retirement. Owning investment properties allows retirees to receive regular payments from tenants. All rental income must be reported on a tax return, and certain associated expenses can be deducted to reduce taxable income. This income is generally treated as ordinary income for tax purposes.

Annuities, which are contracts with an insurance company, are designed to provide a steady income stream. In exchange for a lump sum or a series of payments, an annuity can deliver regular disbursements, often for life. This product can help address concerns about outliving savings by guaranteeing payments over a specified period or for the annuitant’s lifetime.

Continuing Work and Home Equity

For some individuals, continuing to work in retirement can be a flexible way to supplement income. Part-time work or consulting allows retirees to earn money, contributing directly to their cash flow without necessarily re-entering full-time employment. The income earned from such activities is generally subject to standard income taxes.

Leveraging home equity is another method to generate income, particularly through a reverse mortgage. A reverse mortgage allows homeowners to convert a portion of their home equity into cash. Funds can be received as a lump sum, a line of credit, or a monthly income stream, without requiring the homeowner to sell the property or make monthly mortgage payments. The loan becomes due and payable when the last borrower permanently leaves the home, such as upon death or moving out. While there are no income requirements for a reverse mortgage, lenders do evaluate financial capacity to ensure the borrower can meet property taxes and insurance obligations.