What Are the Different Sources of Income I Can Expect to Receive in Retirement?
There are several different sources of income retirees can expect to receive in retirement. A retiree’s income can include guaranteed income (i.e., Social Security, immediate annuity, pension) or variable income (i.e., semi-retirement, savings). While each type of income has pros and cons, let’s look at the most common sources of retirement income.
Social Security is a staple for many retirees. The average monthly Social Security benefit in 2022 is $2,484. While Social Security was not designed to provide enough income to support the entirety of a retiree’s lifestyle, it does provide a healthy base income that retirees can rely on over the course of their retirement. In addition, Social Security benefits are adjusted for inflation each year. This means that the monthly benefit will increase over time to help keep pace with inflation.
An immediate annuity is a vehicle in which a retiree can turn a lump sum cash investment into a guaranteed income stream for life. The good news with an immediate annuity is evident in its guarantee. Retirees will know precisely how much they will receive from the annuity each month for the remainder of their lives. While this may seem comforting, the fixed income stream has the potential to lose ground to inflation over time. However, some immediate annuities will provide a cost of living adjustment so that the income stream can at least keep pace with inflation. Pairing an immediate annuity with Social Security can provide a retiree with a solid guaranteed income base from which they can build on.
A pension is a type of retirement plan offered to employees by their employer (corporations, municipalities, state governments, and the Federal government). Unfortunately, many corporations have either frozen their pension plans or eliminated them all together over the past several years (so count yourself lucky if you will receive a pension payment in retirement). A pension is similar to an immediate annuity in that it is a guaranteed stream of income for life. In addition, the pension plan may offer a survivorship benefit that will pay a pre-determined amount to a surviving spouse upon the pension holder’s death. While a pension benefit can be a predictable monthly income stream, not all pension plans offer an inflation adjustment. Therefore, the pension benefit may lose ground to inflation over time.
Many of today’s retirees decided to continue to work in retirement. Not only does this help provide them with a source of income, but it can also be a great transition to full retirement. Continuing to work (even on a part-time basis) will allow the retiree to maintain a sense of self-worth, engage daily with co-workers, and perhaps provide access to health benefits before Medicare begins.
Last but certainly not least, is utilizing retirement savings to generate the needed income in retirement. Some retirees have other guaranteed sources of income to cover their desired lifestyle, while others need to tap into their savings to maintain their lifestyle. It is best to keep those taking distributions from their investment portfolio within 4%-5% of the portfolio value, adjusted for inflation. Distributing more than this could lead to the depletion of the portfolio before the retiree passes away. However, keeping the distributions within this range should provide the retiree with the best outcome.
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Sources of Retirement Income come in all shapes and sizes. if you are looking to supplement your retirement income, there are several sources you may want to consider; sign up for our Zynergy Retirement Planners newsletter, we specialize in helping you to maximize your retirement income.