What is retirement income and how to create a plan for yours

When you're employed, you earn an income. But once you’re retired, the word “income” includes more than just a paycheck. In fact, your retirement “income” is a catch-all that refers to all the funds—earned, withdrawn, or received as a benefit—that you have at your disposal to pay for your retirement expenses.

It could be a mistake to wait until you’re near or in retirement to consider all your potential sources of retirement income. In fact, the earlier you learn about all the retirement income options, the earlier you can choose and plan for what works best for you and your financial goals.

What is guaranteed retirement income?

A guaranteed source of retirement income is simply a source that provides you the same amount, month after month. It is not tied to the market (so doesn’t move up or down) and because the total is dependable, you can rely on it to pay for fixed expenses such as utilities or housing. Most guaranteed retirement income sources also provide benefits through your lifetime, so you can count on them for however long your retirement lasts.

What is non-guaranteed retirement income?

Non-guaranteed sources of retirement income typically come from accounts that may still have potential to grow, often because they’re tied to the market. They may include a traditional savings account or funds in a 401(k), for example. With growth potential comes the ability to help you pay for the extras of retirement that may not be covered by guaranteed income—travel, for example—and to also help potentially offset inflation.

What are the different types of guaranteed retirement income?

Of the three main types of guaranteed retirement income, one is a federal benefit, one is an employer benefit, and one is a product you can purchase. 

• Social Security is a retirement benefit provided by the government. As you work, you pay into Social Security, and when you retire, you draw benefits from Social Security. (Spouses and others may also be able to draw benefits; find more details on who may be eligible.) One additional bonus for Social Security: Its benefits are periodically adjusted for inflation. Social Security is not, nor has it ever been, intended to pay for all the income you need in retirement; the average monthly benefit is $1,907.
• A pension or defined benefit plan is an optional retirement plan that’s funded by your employer, but very few private companies offer one. How much you receive typically depends on your length of service, salary, and age. (You can get an estimate of your payout from your HR department.) As with Social Security and an annuity, the monthly payout is guaranteed, but most pensions are not inflation-adjusted.
• Annuities are insurance contracts you purchase for your retirement income. Annuities convert a portion of your retirement savings (either a one-time lump sum or series of payments) into a guaranteed income stream. After a period of time, you choose how and when to begin receiving regular payouts from your annuity; some annuities may also have survivor benefits.

What are the different types of non-guaranteed retirement income?

Some non-guaranteed retirement income sources are tied to market performance. Because of their potential for growth, they may help you keep pace with inflation, but their value can also go up or down, meaning the funds you may withdraw or receive are not guaranteed. 

• An employer sponsored plan or 401(k), sometimes called a defined contribution plan, may be available as part of your employment; you contribute to your 401(k) savings and your employer may match a portion of those funds. You are required to make withdrawals by a certain age, and will pay taxes on the funds when they are withdrawn.
• Traditional individual retirement accounts and Roth IRAs are retirement accounts that you set up and fund, so they travel with you, no matter your job. Traditional IRAs are taxed in the same way as a 401(k) (when you make a withdrawal) while Roth IRAs are created with funds that have already been taxed, so withdrawals are tax free.
• Investments and savings typically include things like mutual funds, stocks, bonds, and brokerage accounts that are outside of other retirement savings accounts. These are often tied either to a stock market or to the prevailing interest rate, and are taxable.
• Income from a job, if you phase into retirement. Three out of four employers see phased retirement as a growing trend, according to a 2023 Principal Future of Retirement Survey.
• Assets or items you intend on selling in retirement, such as a house.

As you think about retirement income and all the ways you can plan for the funds you’ll need in your post-work years, know that you don’t have to tackle all of them at once. A phased approach can help you save what you can, when you can. For example, you might start by enrolling in and contributing to a workplace plan, if you have one. Then, you could consider setting up an IRA. As you draw closer to retirement, an annuity might help you reach your goals. What specific mix you pursue on your financial situation and your post-work plans. Everyone’s comfort with risk is different, so it’s important to make the decisions that are right for you.