What are the Main Sources of Retirement Income?

 
 
 

Austin Carroll is a financial advisor at Cornerstone based in Reno, NV. Austin has passed his Series 65 Securities Registration Examination. He helps clients create customized financial plans based on their unique financial goals by addressing topics such as income, investments, and taxes.

 

WHAT ARE THE MAIN SOURCES OF RETIREMENT INCOME?

If we are looking to define what the main sources of retirement income are, we need to first clarify what types of income are available to a retiree. There is a lot of confusion and I often hear retirees, media, and other financial professionals use incorrect terminology to describe the income taken by a retiree in retirement.

The IRS defines many differing types of income. However, most retirees will find that their income will come from any of the following: earned income, investment income, and retirement income. The last two are where most of the confusion comes from because a lot of people use them interchangeably.

To better understand the difference, we’ve created a short guide that outlines those three income sources. This can help you determine which ones may be in your best interest and give you more clarity the next time you talk with your financial advisor. Here’s a breakdown of the main sources of retirement income.

 

1.      EARNED INCOME

Earned income is simple and easy to explain because most people have spent their lives receiving a paycheck that was taxable under the earned income tax brackets. The IRS says that any income that comes from wages, salaries, tips, and any other taxable pay is earned income.

For a retiree, this might look like a part time job or maybe doing some consulting work on the side. No matter what it is, the money received doing a job is counted as earned income. So, if you want to continue working through your retirement, you should consult your financial advisor to get help with your retirement income plan. Doing so, can help you comprehensively understand how much you’ll get each month and the potential tax challenges that you may run into.

2.      INVESTMENT INCOME

Unlike the clarity of earned income, investment income is where the waters begin to get a bit murky. To start, the IRS defines investment income as any of the following:

  • Interest

  • Dividends

  • Capital Gains

  • Rental Income

  • Any income from passive activities

This is where some retirees make their first misstep, by trying to create stable and predictable income from one or more of the sources listed above. The problem with that is that none of those listed above are guaranteed lifetime income that can help create stable and predictable income sources. Investment income can be an integral part of your retirement plan, but most likely shouldn’t be the basis of your plan.

3. RETIREMENT INCOME

If investment income is not guaranteed, and earned income comes from our time spent working, that leaves us with retirement income. Sources of retirement income typically include:

  • IRAs

  • Social Security

  • Profit sharing plans

  • Retirement plans (i.e., pensions)

  • Insurance contracts (i.e., annuities)

For many, this is where most retirees will get their income from during their retirement years.  Of those sources listed above, three are currently guaranteed: Social Security, annuities, and pensions. Everything else, including investment income, is subject to some sort of risk.

Whether it is dividends, rental income, taking money from your IRA, etc., they are all subject to certain risks involved with each type of investing. That’s why talking with your financial advisor at Cornerstone can be essential for curating a comprehensive retirement plan.

Our advisors look at the big picture, and use that among several best-in-class resources to curate a personalized plan for you. We want to help you live the life you want to live through fiduciary-based financial planning. Call us today at (775)-853-9033 if you’d like to see how Cornerstone could help you.

 
 
 
TaxesAustin Carroll