7 Types of Retirement Income Sources

When people retire, their income often shifts from a regular paycheck to a combination of sources. Depending on your savings and retirement plan, that may include Social Security, retirement accounts, pensions, investments and earnings from work. The amount you receive from each source can change over time, which makes planning for different types of retirement income important.

If you need help planning for retirement and building income streams, consider working with a financial advisor.

1. Social Security

Social Security is a common source of retirement income. Your retirement benefit is based largely on your earnings history and the age when you start collecting benefits.

Social Security retirement benefits are available beginning at age 62. Starting benefits at that age or at any point before your full retirement age results in a smaller monthly payment than waiting until full retirement age. Full retirement age is 67 for people born in 1960 or later. Waiting beyond full retirement age increases your benefit through delayed retirement credits until age 70.

Social Security does not necessarily need to cover all of your retirement expenses. The timing of your claim can instead be considered alongside your savings, pension income, employment and other resources.

2. Working

Retirement does not necessarily mean leaving paid work altogether. Some retirees continue working part time, take consulting assignments or earn money through freelance or seasonal work.

Employment income can reduce the amount you need to withdraw from savings. It can also allow investments to remain in retirement accounts longer, although taxes and Social Security rules should be considered when deciding how much to work.

If you collect Social Security before reaching full retirement age, earnings above the annual limit can cause some benefits to be temporarily withheld. After you reach full retirement age, wages no longer trigger withholding under the retirement earnings test and SSA adjusts your benefit to reflect months when payments were held back.

Work can also provide benefits beyond income. Some retirees choose to remain employed for professional engagement, social interaction or access to employer benefits.

3. Retirement Accounts

Retirement accounts can provide a substantial portion of income after you stop working. These accounts include 401(k)s, 403(b)s and IRAs.

Once you reach age 59½, distributions generally are no longer subject to the 10% additional federal tax that can apply to early withdrawals. Traditional retirement account distributions are generally taxable as ordinary income except for amounts representing after-tax basis. Roth distributions can receive different tax treatment and qualified Roth distributions are generally tax-free.

Retirement accounts can also eventually be subject to required minimum distributions. Under current rules, many account owners begin RMDs at age 73, although the applicable starting age depends on birth year. The original owner generally does not have to take lifetime RMDs from a Roth IRA or from Roth money held in a 401(k) or 403(b).

4. Annuities and CDs

Annuities can be used to create regular retirement income. You purchase an annuity from an insurance company and depending on the contract, payments may begin soon afterward or at a later date. Some contracts provide income for a set period, while others can provide payments for life.

Annuities vary considerably in cost, guarantees, investment features and withdrawal restrictions. The financial strength of the insurer can also matter because guarantees depend on the insurer’s ability to meet its obligations.

Certificates of deposit (CDs) offer another way to generate income from savings. A CD generally pays a stated interest rate in exchange for keeping money deposited for a specified term.

Retirees can also arrange CDs with different maturity dates through a CD ladder. As individual CDs mature, the proceeds can be spent or reinvested depending on income needs and available rates.

5. Pension

Pensions are defined benefit plans that can provide income after retirement. Instead of depending primarily on an individual account balance, the benefit is generally calculated using a formula established by the employer’s plan.

That formula may consider factors such as salary, years of service and retirement age. Some plans offer a lifetime monthly benefit, while others may provide eligible participants with a lump-sum option.

Payment choices can also affect how much income a surviving spouse receives after the participant dies. Because pension provisions vary considerably, retirees should review their plan documents before deciding when and how to collect benefits.

6. Bonds

Bonds can generate interest income while providing another component of a retirement portfolio. When you buy a bond, you are generally lending money to a government, municipality or corporation in return for interest and repayment of principal according to the bond’s terms.

For example, a $10,000 bond paying a 5% annual coupon would generate $500 in annual interest. If the bond pays interest twice per year, that would mean two $250 payments.

Bonds are not automatically low-risk investments. Their prices can decline when interest rates rise and corporate and municipal issuers can carry credit risk. Bonds with longer maturities may also experience larger price changes as market interest rates move.

Retirees can hold individual bonds with different maturity dates to create a stream of principal repayments over time. Bond funds provide broader diversification but do not offer the same predetermined maturity value as an individual bond held to maturity.

7. Your Home

A home can also become part of a retirement income strategy. One approach is to sell and move to a less expensive property. If the sale produces cash after paying the mortgage, transaction costs and the price of the new home, those proceeds can be used for other retirement expenses or investments.

Another possibility is a reverse mortgage. A home equity conversion mortgage, or HECM, allows eligible older homeowners to borrow against their home equity while continuing to own the property.

A reverse mortgage still creates debt secured by the home. Interest and other charges can increase the loan balance, reducing the equity available later to the homeowner or heirs. Borrowers also remain responsible for requirements such as property taxes, homeowners insurance and maintaining the property.

How Taxes Can Affect Retirement Income Sources

The amount available to spend from a retirement income source can be different from the amount received before taxes. Social Security, traditional retirement accounts, Roth accounts, pensions and investment income can each receive different federal tax treatment.

Withdrawals from traditional 401(k)s and IRAs generally increase taxable income, while qualified Roth distributions can generally be received without federal income tax. Social Security follows its own tax calculation and income from other sources can affect how much of a benefit is taxable. Pension payments and interest from many bonds and CDs can also add to taxable income.

The timing of withdrawals can therefore affect both annual taxes and how quickly individual accounts are depleted. RMDs can create another source of taxable income once they apply.

A retirement withdrawal strategy can account for expenses, tax brackets and the types of accounts available instead of treating every source of income the same way.

Bottom Line

Wooden blocks spelling out "bonds," stacked with coins.

Retirement income can come from Social Security, continued employment, retirement accounts, annuities, CDs, pensions, bonds and home equity. Each source follows different rules and can carry different tax consequences or investment risks. Using more than one source can provide flexibility when covering expenses throughout retirement, while the appropriate mix depends on your savings, spending needs and other financial resources.

Tips for Preparing for Retirement

You’d hire a mechanic to fix your car, so it only makes sense to hire a professional to help you with your finances and retirement savings. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
If your company offers a 401(k) match, max it out. The match is free money and an easy way to grow your nest egg. To figure out how much money you need in retirement, use our retirement calculator, which takes multiple factors into account, like taxes and inflation.