Many folks spend years dreaming of their retirement. From spending more time with loved ones to travelling the world, retirement is often seen as the chapter of life where you are rewarded for your decades of hard work with time to rest, relax, and enjoy the things you love.
However, a peaceful and fulfilling retirement isn't a guarantee. In fact, in a recent Bankrate poll from August 2023,
56 percent of working Americans indicated feeling behind in saving for retirement. You don't have to feel behind – we are here to help!
The first step in creating a comprehensive financial plan is understanding how you will fund your retirement. While everyone's personal circumstances are different, there are several key sources of income that collectively build the financial foundation for your retirement years.
There are six main sources of income during retirement:
Social Security. For many, Social Security is the backbone of retirement income. Administered by the government, this program provides regular, dependable payments based on your work history and the age at which you start claiming benefits. Workers become eligible after paying Social Security taxes for 10 years, and 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. Understanding when and how to claim your Social Security benefits is crucial to maximize this income source. It's also important to note that Social Security benefits are currently expected to be payable in full on a timely basis until 2037. After that date, benefit payouts may be lower than scheduled. To learn more about how to apply for benefits, age requirements, and the future financial status of the Social Security Program, visit ssa.gov/apply.
Personal Savings and Investments. Personal savings and investments are another critical component of retirement income. Building a robust portfolio is important, and diversification is key to help protect your assets against market volatility. Retirees often prefer investments that offer monthly guaranteed income over potential returns.
Individual Retirement Accounts (IRAs). IRAs are a common source of retirement income as they are not tied to an employer. There are two types of IRAs – Traditional and Roth.
- Traditional IRAs are best for people who expect to be in the same or lower tax bracket when they start making withdrawals as they may allow you to make pre-tax contributions. However, there are deduction limits for folks who are covered by a retirement plan at work. Learn more about these limitations by visiting irs.gov/retirement-plans.
- Roth IRAs are best for those who expect to be in a higher tax bracket when they start making withdrawals as they allow you to make after-tax contributions. However, only folks with earned income below a certain threshold are eligible. Learn more about Roth IRA contribution limits by visiting irs.gov/retirement-plans. As mentioned, both Traditional and Roth IRAs have annual contribution limits, and the maximum contribution is the same whether you have one IRA or both types of IRAs. In 2023, you can contribute a maximum of $6,500 if you are under age 50, and a maximum of $7,500 if you are over age 50.
Defined Contribution Plans. Many individuals are eligible to participate in an employer-sponsored retirement plan such as a 401(k), 403(b), or 457 plan. Eligible workers can set aside a portion of their pre-tax income into an account, which then accumulates tax-deferred. This means you do not pay taxes on the money you save until you withdraw it, which gives your savings more opportunity to earn compound interest.
Withdrawals from your 401(k) or other defined contribution plans are taxed as ordinary income, but if taken before age 59 ½, may be subject to a 10% federal income tax penalty. In most circumstances, you must begin taking required minimum distributions from your 401(k) or other defined contribution plan in the year you turn 73.
Defined Benefit Plans. A defined benefit plan is another employer-sponsored retirement plan. Pensions are the most common type of defined benefit plans, and they provide predetermined monthly payments based on your salary history and duration of employment. Though they are not offered as widely as they once were, pensions remain a reliable income source for retirees. Pensions are typically offered in sectors such as utilities, education, government, and the military.
Continued Employment. Many people choose to continue working even after they retire. Some make this choice as they find work and daily routines fulfilling, while others do so because they need the income. According to the U.S. Bureau Labor of Statistics,
the number of U.S. workers age 75 or older is expected to increase by 96.5% by 2030.
While imagining their retirement, people may have certain expectations for their future sources of income. They envision a steady stream from Social Security, a well-funded 401(k), and flourishing investments. However, reality can differ greatly from these expectations. For instance, unexpected medical expenses, market fluctuations, or changes in employment status can significantly impact your actual income.
Though planning for retirement can be an overwhelming topic, you don't have to walk this journey alone. Whether you are in the beginning stages of planning or putting the finishing touches on a well-developed plan, the financial advisors at South Carolina Federal Investment Solutions, through CFS1
, are here to help.
Your local advisor can provide personalized planning and support, offering you guidance on optimizing Social Security benefits, managing your savings and investments, and making informed decisions about IRAs and employer-sponsored plans.
Navigating your retirement income sources can be challenging, and the decisions you make now will significantly impact your financial agility in the future. Luckily, the CFS1
financial advisors are here to help you plan for your golden years with confidence. Call 843-569-4917 to schedule your complimentary consultation today!
Sources: U.S. Bureau Labor of Statistics, Bankrate