Sources of Retirement Income

A big part of your retirement planning should include knowing your potential sources of income and figuring out how they fit in your overall income strategy. As you know, Social Security alone isn't likely to cover the cost of all your retirement living expenses.

If you're like most people, your retirement income will stem from these sources in the following proportions*:

* Fast Facts & Figures About Social Security, 2011. Rep. Vol. 13-11785. Washington, DC: Social Security Administration, 2011

These are ballpark figures that depend on a lot of factors, such as when you started saving, how aggressive or conservative your portfolio is, market place fluctuations, and so on.

Social Security – Uncle Sam's Contribution
Social Security was originally designed as a retirement benefit for a relatively small pool of workers for a reasonably short period of time. But as that pool of workers has grown and life spans have increased, Social Security has grown thin. It's becoming clear that Social Security can't meet the needs of baby boomers whose ranks are swelling as they line up to take a whack at a limited retirement pool

In 1983, the Social Security Act was amended to adjust the retirement age for when you can collect full benefits across a span of birth years. Here's how it works:

  1. If you were born before 1938, your full retirement age is 65.
  2. If you were born 1943 – 1954, your full retirement age for collecting Social Security is 66.
  3. If you were born in 1960 or later, your full retirement age is 67.

You can still begin collecting Social Security at age 62, regardless of your birth year, but you won't receive full benefits. Social Security deducts a percentage of your benefits because they expect you to live longer.

You can find out how much you are entitled to from Social Security by sending for a statement entitled, "Request for Earnings and Benefit Estimate Statement." You can obtain a free form from your local SSA office, call them toll-free at 1-800-772-1213 or visit them online at

Pensions used to be the most common retirement plans provided by employers, but no more. Pensions, technically called "defined benefit plans," were designed to provide a specific benefit for retired employees. Traditionally, pensions offer a guaranteed lifetime income for as long as the employee lives. This benefit often extends to the spouse's life too.

Employers engage professional plan administrators that manage the investments in the plan and calculate the annual amount the employer must contribute each year to fund the plan.

The pension amount the employee receives can depend on a number of factors, including the employee's retirement age, or the employee's salary at retirement or number of years employed. Every plan is customized to meet the needs of the employer.

Defined contribution plans
Traditional pensions have generally proven to be too expensive for most companies, so employers have opted for a more modified approach to providing retirement benefits. These plans include 401(k)s, 403(b)s, 457(b)s, and SIMPLE IRAs.

Your employer may or may not choose to match some or all of the earnings you have accumulated in your defined contribution plan. Employer matching depends upon calculations based on employees participating equally in the plan.

Employers can contribute to their employees' retirement account but don't have to guarantee the benefit the employee will receive. The benefits of these plans differ according to who is eligible to participate, the amount you're allowed to contribute, and how the investments perform.

One advantage of defined contribution plans is that you usually have more control over how your money is invested. Plus, if you change jobs, you can take your retirement plan with you.

Savings and investments
The final piece of your retirement pie will come from your personal savings and investments. These may be personally owned retirement accounts such as IRAs, or other investments.

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