Most of us depend on a paycheck to provide the funds we need to cover costs of living. But when you retire, your paycheck ends even though you still need a source of support.
While different retirees may have their own unique income streams, such as money from alimony or from real estate investments, the most common sources of cash for seniors include the following.
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1. Social Security
For 50% of married couples and 70% of unmarried people, Social Security retirement benefits provide at least half of all income after leaving the workforce. And for 21% of married couples and 45% of unmarried persons, benefits account for at least 90% of retirement income.
This is unfortunate, as these benefits are not designed to be such a major source of support. Social Security benefits generally replace around 40% of pre-retirement income, while most experts suggest you need to replace around 80% of what you were earning.
You can maximize the amount of monthly checks by making sure you work at least 35 years, as benefits are calculated based on inflation-adjusted average earnings over this time period. Working longer if you're earning a high income can also boost benefits because you increase your average wage by replacing some years of lower earnings with higher-earning years.
You'll also get a larger check if you wait to claim benefits until at least full retirement age, or until age 70 to earn delayed retirement credits. You can learn more in our guide to how your age at filing affects your Social Security benefit.
2. Retirement savings
Your retirement savings provides another source of income during your golden years.
For many people, this money is kept in a traditional IRA or 401(k), which you invest in with pre-tax income during your working years. Money withdrawn is taxed as ordinary income when you take it out. If you invested in a Roth account, though, you can actually make tax-free withdrawals so your retirement income goes further.
Whatever accounts you have, you want to make sure you don't draw down your retirement savings too quickly. So, it's important to limit the amount you take out of your accounts once you retire.
The traditional rule of thumb was that you could withdraw 4% of your account balance in your first year as a retiree and adjust upwards for inflation each year. However the Center for Retirement Research suggests you instead base withdrawal rates on IRS-prepared tables designed to specify minimum withdrawals from certain accounts required after age 70 1/2.
You also need to be smart about how you handle your savings as a senior. If you have the money invested in the stock market when you work -- which you should in order to earn a reasonable return on investment -- you need to adjust your asset allocation as a retiree because you have less time to hold out for the market to recover in a downturn.
One good rule of thumb is you should subtract your age from 110 to determine the percentage of your portfolio to invest in the market. So when you're 65, you'd have 45% of your funds invested in stocks.
3. Pension income
If you have a defined benefit pension from an employer, you'll receive income through pension checks. In most cases, the amount of your pension is based on the years you work and the salary you receive.
Unfortunately, many people don't have pensions from employers. If you don't, you'll need to make sure you've saved more money to supplement your Social Security retirement benefits.
Identify your sources of retirement income
Early in your working life, you should understand the role Social Security will play in your retirement and should make sure you're saving enough so you don't rely on these benefits alone.
While there's little danger of the Social Security program running out of money, these benefits are simply not enough to live on -- even if you maximize the money you receive.
As you near retirement, you should also make sure you know where your money will come from and confirm you have enough of it before you leave work. If you fear you'll fall short, consider working a few extra years, or relocating in retirement to a lower cost-of-living area so your money stretches further.
