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Retirement planning is often difficult and it's hard to fathom where your sources of income will come from during that time. For many people, retirement income may come from a variety of sources. Here’s a quick review of three main sources you may have during retirement:
- Social Security: A government-administered retirement income program. Workers become fully 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 2022, the average monthly benefit was estimated at $1,625.1,2
- Personal Savings and Investments: Personal savings and investments outside of retirement plans can provide income during retirement. Retirees often prefer to go for investments that offer safer monthly income over potential returns. Examples are Certificates of Deposit (CD), annuities, or money market accounts.
- Individual Retirement Accounts: Traditional Individual Retirement Accounts (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 cases, once you reach age 73, you must begin taking Required Minimum Distributions (RMD) from a Traditional 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.
A slightly different IRA was created in 1997 called a Roth 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 after 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 RMDs from these accounts, but they can be a great income source in your retirement years.
Whether your retirement plans include traveling around the world or staying close to home, make sure your retirement dreams are funded properly. Using these sources of income, you can start building towards the future.
Related: Four Most Overlooked Tax Deductions
- SSA.gov, 2022
- AARP.org, June 8, 2021