Retirees’ actual experience with six key income sources

What workers anticipate in terms of retirement income sources may differ considerably from what retirees actually experience. For many people, retirement income may come from a variety of sources. Here’s a quick review of the six main sources.

Social Security

Social Security is the government-administered retirement income program. Workers become 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 & Investments

Personal savings and investments outside of retirement plans can provide income during retirement. Retirees often prefer to go for investments that offer monthly guaranteed income over potential returns.

Individual Retirement Accounts (IRAs)

Traditional IRAs have been around since 1974. Contributions made to a traditional IRA may be fully or partially deductible, depending on individual circumstances. In most circumstances, once the owner of a traditional IRA reaches age 73, they must begin taking required minimum distributions. 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. The owner of a traditional IRA may continue to contribute past age 70½, as long as they meet the earned-income requirement.

Roth IRAs were created in 1997. 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 minimum annual withdrawals.

Defined Contribution Plans

Many workers are eligible to participate in a defined contribution plan such as a 401(k), 403(b), or 457(b) plan. Eligible workers can set aside a portion of their pre-tax income into an account, which then accumulates tax deferred.

In most circumstances, a defined contribution plan holder must begin taking required minimum distributions in the year they turn 73. Withdrawals from 401(k) or other defined contribution plans are taxed as ordinary income, and if taken before age 59½ may be subject to a 10% federal income tax penalty.

Defined Benefit Plans

Defined benefit plans are “traditional” pensions – employer-sponsored plans under which benefits, rather than contributions, are defined. Benefits are normally based on factors such as salary history and duration of employment. The number of traditional pension plans has dropped dramatically during the past 30 years.3

Continued Employment

In a recent survey, 71% of workers stated that they planned to keep working in retirement. In contrast, only 31% of retirees reported that continued employment was a major or minor source of retirement income.4

Expected vs. Actual Sources of Income in Retirement

Bottom line: What workers anticipate in terms of retirement income sources may differ considerably from what retirees actually experience.

Citations.
1. SSA.gov, 2022
2. AARP.org, June 8, 2021
3. Investopedia.com, July 18, 2022
4. EBRI.org, 2022

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG, LLC, is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright FMG Suite.

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