Types of Retirement Income

Retirement is exciting. But it can be a little scary, too. Your work life was probably pretty predictable in a way that retirement won’t necessarily be.

One aspect that can be less predictable is your income in retirement. But you do have some control over it. First, you need to understand different ways to generate income in retirement – and the ways you can make them work together to help give you the retirement you want.

WHAT IS RETIREMENT INCOME AND WHY DOES IT MATTER?

You surely know what a paycheck is. And one of the biggest benefits of a job is that money hitting your account on a regular schedule.

No job, no paycheck. When you retire, you’ll need to replace that income stream somehow. “Retirement income” refers to all the different ways retirees replenish their bank accounts so they have money for all their living expenses.

Most retirees have several kinds of income from different sources – relying on one source isn’t likely to meet all your needs and could be risky too. After all, as we’ll see, some types of income won’t last forever, or they aren’t increased to account for inflation.

THE ROLE OF A FINANCIAL ADVISOR IN STRUCTURING RETIREMENT INCOME

The retirement income challenge is probably the biggest reason that retirement is a trigger for getting financial advice. Financial advisors can help you determine:

• How much income will you need? It won’t be the same as when you’re working. You won’t have the same taxes or commuting expenses, for example. (And it probably won’t stay the same throughout decades of retirement, either.)
• How much income  you may have? Adding up all your income sources – and seeing how different choices will affect the total – can be more challenging than you’d expect.
• When will you start drawing from different sources? We’ll show why that’s an important strategic decision.
• How “safe” are your income sources? No one can predict the future, but, an advisor can build a plan that accounts for the risk level of different sources.
• How much you may pay in income taxes? Taxation of different retirement income sources varies and might be quite different from how your wages were taxed. An advisor can help you understand the general tax implications and strategies to prepare for them.
• Does your strategy still make sense? Your life and circumstances will change throughout retirement, and by reviewing your plan regularly, an advisor can help you decide when to change course.

An ideal retirement income strategy can help you maximize the amount you have coming in, match it up to your needs, balance your income risk and minimize the amount of taxes and other costs you pay over the course of retirement.

7 COMMON TYPES OF RETIREMENT INCOME

During your working life, you got familiar with active sources of income – they're earned by your labor, like your job or side hustles.

Most sources of retirement income are passive. That’s kind of the whole idea of retirement! Ideally, you no longer need to work to fund your lifestyle.

What are these typical sources of retirement income? Here are 7 common ones.

1. SOCIAL SECURITY BENEFITS

Social Security might be the first thing that pops into your head when thinking about retirement income. Most Americans over the age of 65 receive it and a lot of them rely on it as a major source of income.

Benefits are based on a formula that takes into account how much you earned while working (and thus paid in Social Security payroll taxes). In 2025, the maximum monthly benefit at “full retirement age” (we’ll get to that shortly) was $4,018. It might sound like a lot but those receiving the max would have had a much higher salary when working. Social Security isn’t intended to be a sole source of income you can live off of.

By the time you retire, you won’t have much control over how many years you worked or how much money you made. But you do control one aspect of how much your Social Security checks are, and that’s based on when you start to receive them.

The earliest you can start is age 62, and it comes with a hefty penalty. The max benefit at 62 is $2,831. That amount will be locked in for the rest of your life once you take it (although it will be adjusted for inflation).

On the other hand, if the same person waited until age 70, the max goes up to $5,108. Again, that amount is locked in for a lifetime.

Of course, you need to take into account that the person who began at 62 has already received a considerable amount of income by age 70. There are pros and cons for both ways. So, the right strategy for you depends on your financial situation and how long you think you’ll be around collecting Social Security.

One final note – Social Security can also be claimed by the spouses (including former spouses and surviving spouses) of those who earned them.

2. PENSION PLANS

Pension plans used to be a cornerstone of retirement income, but they’re not as common now. In general, you’ll most often have one if you worked in public service (government, teaching or law enforcement, for example) or if you’re part of a union.

Pensions generally pay you a set monthly amount for life that’s based on years of service and salary. Some also give you the option of taking a lump sum at retirement, which you can add to your own savings and invest.

That decision is based on the math (how long you think you’ll live and how much you expect to  earn) but also depends on how secure you think your pension is. Many private sector pensions have failed (been unable to pay promised benefits). The health of a pension is public information that a financial advisor can help you digest.

3. RETIREMENT SAVINGS ACCOUNTS (401K, IRA, ROTH IRA)

A retirement savings account like a 401k, 403b or IRA can provide “income” in the form of withdrawals, which are penalty-free once you reach age 59½.

Early in retirement, you may have the option of forgoing any withdrawals if you don’t need them to support your spending. But traditional (not Roth) retirement accounts require you to start pulling money from them at age 73. Any money you take from a traditional account, whether it's one of these “required minimum distributions” or any other withdrawal, is generally taxed as income.

Roth accounts are different. Assuming you meet the requirements, withdrawals are tax-free. That can make them a really valuable addition to your income streams in retirement. If you don’t have one and you’re close to retirement (or already retired), take heart. You can convert a traditional IRA to a Roth IRA by paying the income taxes now on the amount of the conversion. Future growth won’t be taxed.

4. INVESTMENT INCOME (DIVIDENDS, INTEREST AND CAPITAL GAINS)

Throughout your working years, you may have had your investment dividends, interest and capital gains automatically reinvested to grow your portfolio faster. For some people, it makes sense to switch to having your income sent to you once you retire if you’re going to be spending it.

As a side note, we believe your portfolio’s allocation shouldn’t change dramatically just because you retire. You don’t need to switch to income-paying investments like bonds in order to create an income stream from your portfolio. We strongly advocate for continuing with a balanced portfolio that matches your risk tolerance and withdrawing from it as needed to support your spending.

5. ANNUITIES

In general, an annuity is a type of insurance policy that lets you trade away a sum of money in exchange for regular payments that are intended to last a lifetime. For example, you might pay $1 million to get guaranteed $5,000 monthly payments for as long as you live. Keep in mind however, that the guarantees related to annuity payouts depend on the claims-paying ability and strength of the issuing insurance companies.

Immediate annuities start payments right away, while deferred annuities start at some future date.

If Social Security and any pension or retirement account income don’t cover your ongoing basic needs, you might want to consider an annuity to hedge against the risk that you’ll run out of money someday.

But if you have an adequate stream of monthly income, we’d probably recommend skipping an annuity. For one thing, they come with costs and fees. For another, they raise the risk that you could pass away before many (or any) payments are made. In most cases, unless you can elect a death benefit rider at an additional cost, your heirs won’t get anything from the policy, so money they could have otherwise inherited is gone.

6. REAL ESTATE INCOME

Rental property often comes up when people search for passive retirement income opportunities. We don’t generally recommend you directly buy real estate as an investment. However, you may already own a rental property and intend to rely on it for a stream of income, especially if it's paid off.

When thinking about how real estate income fits into your retirement picture, consider how long you plan to keep it and, if you’re managing it yourself, how long you may be able to physically do the necessary work.

Real estate investment trusts are another category of real estate, where you can buy shares of companies that own rental property and participate in the profits. We believe in the power of diversification and as such, our client portfolios often own investments in real estate firms. That said, we don’t generally recommend REITs as a standalone investment.

7. PART-TIME WORK OR CONSULTING

Many retirees actually continue to work or pursue a phased retirement! Besides giving you an income boost, a part-time or consulting job can add structure to your day and allow you to continue using your skills and stay engaged.

Income from work can impact your financial picture in other ways. For example, Social Security could be temporarily reduced. Wages are also taxed at higher rates than some other kinds of income. A financial advisor can help you determine the best ways to help maximize your post-retirement working income.

HOW TO DIVERSIFY YOUR RETIREMENT INCOME SOURCES

As we mentioned, it can be risky to rely on only one source of income, and it may not actually support your needs. Here are some things to consider.

BALANCING GUARANTEED AND MARKET-BASED INCOME

In an ideal world, your guaranteed sources of income will cover any nondiscretionary expenses. Which income sources are guaranteed? Social Security (unless the trust fund depletes by 2034 as it is currently projected to do), pensions (although see the warning above) and annuities (ditto) can fit this category because you should get a predictable, regular check from them.

Income from part-time work or consulting could feel guaranteed because you control whether you choose to do it, but keep in mind that hours can dry up, you could become injured or ill and at some point, you likely won’t want to – or become unable to – continue working.

What about other income sources? You can rely on them to pay for discretionary expenses like travel, entertainment, charitable giving and other categories you could cut back on if necessary.

This mix of guaranteed and variable income can be a hedge against market volatility while still giving you the chance to participate in market growth for the next few decades.

TAX EFFICIENCY AND WITHDRAWAL STRATEGIES

You could easily have three or four of the seven income streams we’ve talked about. But a retirement income strategy isn’t as simple as sitting back and collecting money from wherever it comes. Or at least it shouldn’t be.

Different kinds of income are taxed differently, and this complexity creates an opportunity to use tax optimization strategies that can help minimize your overall tax burden in retirement. For example, conventional wisdom says to withdraw from taxable investments first, then start withdrawing from traditional retirement savings, and then use Roth money last.

For many people it also makes sense to rely more on withdrawals early on and delay Social Security so you get higher payments down the road.

But you have to look at your own situation to know your best option, and you have to watch out for actions that might seem smart in the moment (like converting a lot of money to a Roth so your heirs will have a tax-free inheritance) but could negatively impact some other piece of your financial puzzle (for example, the conversion being considered income, pushing you into a higher tax bracket, thus causing your Medicare costs to go up).

CREATING A PERSONALIZED INCOME PLAN WITH A FINANCIAL ADVISOR

How do you solve the retirement income puzzle? That’s when many people find a financial advisor to be invaluable. They can run retirement projections and stress tests to see how your money may fare under different scenarios. They can also tell you how a decision could impact other aspects of your financial plan and suggest strategies designed to help you optimize long-term outcomes, even if they don’t give you the biggest boost in the short term.

PLANNING FOR INFLATION, LONGEVITY AND HEALTH CARE COSTS

You can do a lot of things right at the beginning of retirement and still have problems later on.

What if you plan for a food bill of $300 and it ends up being $500 in 10 years? What if you live to age 100? What if you need to move to assisted living when you’re 80?

Your life will evolve in ways both expected and unexpected in retirement. So, your income plan needs to be flexible and regularly reviewed to account for the changes.

TAKE CHARGE OF YOUR RETIREMENT INCOME STRATEGY

When it comes to retirement income, understanding your options before you retire is essential  to helping you make your money last, minimize taxes and spend retirement the way you want to. Collaborating with a trusted financial advisor for retirement income can provide expert guidance, help diversify your risk and create a personalized plan that aligns with your lifestyle and goals.

Guarantees related to annuity benefits or payouts depend on the claims-paying ability and strength of the issuing insurance companies.