Where Will Your Retirement Income Come From?

Having retirement accounts is not the same as having a retirement-income plan.

Most people approaching retirement can tell me how much money they have saved.

They may know the balance of their 401(k). They may have an IRA, a pension estimate, or an idea of what they expect to receive from Social Security.

But when I ask a different question, the answer is not always as clear:

Where will the money you use each month actually come from after your paycheck stops?

That is an important question because retirement changes the job your money needs to do.

While you are working, your employer deposits a paycheck into your account. You use that paycheck to cover your mortgage or rent, utilities, groceries, insurance, and everything else that supports your lifestyle.

When you retire, that employer paycheck may stop.

Your Social Security benefits, pension, retirement accounts, insurance strategies, and other resources now have to work together to create what I call your retirement paycheck.

A Simple Way to Picture Your Retirement Paycheck

SOCIAL SECURITY ───────┐ │
PENSION ───────────────┤ │
RETIREMENT ACCOUNTS ───┼──► MONTHLY RETIREMENT INCOME │
ANNUITY INCOME ────────┤ │
WORK OR OTHER INCOME ──┘

The goal is not simply to own several financial accounts.

The goal is to understand:

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  What role each account or benefit will play
  

• 
  When each source of income will begin
  

• 
  How dependable each source may be
  

• 
  How much income may be available after taxes
  

• 
  Whether the income could continue for the rest of your life
  

• 
  What could remain available for your spouse or family
  

That is the difference between having retirement savings and having a retirement-income strategy.

Saving for Retirement and Creating Retirement Income Are Different Jobs

During your working years, the focus is usually on accumulation.

You contribute to a retirement plan. You invest. You save. You try to grow what you have over time.

As retirement gets closer, the focus begins to change.

Now the question is not only:

“How much have I accumulated?”

It becomes:

“How can I use what I have accumulated to support my life without running out too soon?”

For example, knowing that you have $400,000 in a retirement account is helpful. But the balance alone does not answer several important questions:

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  How much can you withdraw each month?
  

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  How long might the money need to last?
  

• 
  How will withdrawals be affected by taxes?
  

• 
  What happens if the market declines early in retirement?
  

• 
  How much should remain available for emergencies?
  

• 
  What happens to the income plan if one spouse dies?
  

A retirement account gives you a pool of money.

A retirement-income strategy gives that money a job.

The Main Places Your Retirement Income May Come From

Most retirees do not depend on one source of income.

Their retirement paycheck usually comes from several places.

1. Social Security

For many people, Social Security will provide part of the foundation of their retirement income.

You can generally begin retirement benefits as early as age 62, but starting before your full retirement age reduces the monthly amount. Delaying beyond full retirement age can increase the monthly benefit until age 70. The Social Security Administration recommends reviewing your personalized estimates before deciding when to claim.

That does not mean everyone should wait until 70.

It means the decision should be made with an understanding of how it affects the rest of the plan.

Questions worth considering include:

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  How much income will you receive at different claiming ages?
  

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  Will you still be working when benefits begin?
  

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  What other income will be available?
  

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  How might your decision affect a spouse?
  

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  Does taking benefits earlier solve a need, or is it simply the default choice?
  

Social Security may be an important income source, but it is rarely the entire retirement plan.

A helpful first step

Log in to your Social Security account and write down your estimated monthly benefit at several different ages.

Do not rely on a guess or an old statement.

2. Pension Income

Some people have access to a traditional pension through a current or former employer.

A traditional defined-benefit pension generally promises a specified retirement benefit, often calculated using factors such as salary and years of service. That is different from a 401(k) or similar defined-contribution account, which provides an account balance but does not automatically promise a specific monthly retirement benefit.

A pension can provide an important layer of predictable income, but there may still be decisions to make.

Depending on the plan, those decisions may include:

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  Whether to receive monthly income or take a lump sum
  

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  Whether to choose a single-life or survivor option
  

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  How much income would continue for a spouse
  

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  Whether the payment increases with inflation
  

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  When the pension should begin
  

The option with the highest monthly payment today may not automatically be the best choice for a married couple.

The real question is:

What role should the pension play in supporting both spouses throughout retirement?

3. Retirement Accounts

Retirement accounts may include:

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  401(k)s
  

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  403(b)s
  

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  Traditional IRAs
  

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  Roth IRAs
  

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  Other investment and savings accounts
  

These accounts can become important sources of income, but they do not automatically function like a paycheck.

You still need a process for deciding:

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  How much to withdraw
  

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  How often to withdraw it
  

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  Which account to use first
  

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  How the remaining money will be invested
  

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  How taxes may affect the amount available to spend
  

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  How withdrawals may change during a market decline
  

A 401(k) or IRA balance can rise and fall with the value of its investments. Unlike a traditional pension, a defined-contribution plan does not promise a particular amount of monthly retirement income.

Traditional retirement accounts may also become subject to required minimum distributions. Under current federal rules, many account owners generally begin required distributions at age 73, while Roth IRAs and designated Roth accounts generally do not require distributions during the original owner’s lifetime.

That does not mean a person should wait until required distributions begin before using the money.

It means taxes and future distribution requirements should be considered as part of the income plan.

Illustration: Savings Is Not the Same as Income

RETIREMENT SAVINGS
The money you have accumulated │ ▼
RETIREMENT-INCOME PLAN
How much to use, when to use it,
where it comes from, and how long it may last │ ▼
RETIREMENT PAYCHECK
The money available to support your life each month

A large account balance may provide comfort.

But confidence often comes from understanding how that balance may support your actual expenses.

4. Annuity Income

For some people, an annuity may play a role in creating retirement income.

An annuity is a contract with an insurance company. Depending on the contract, the insurer may provide periodic income immediately or at a future date. Annuities can have different costs, restrictions, income features, surrender periods, and levels of access to the money. The insurer’s contractual guarantees depend on its financial strength and claims-paying ability.

An annuity is not automatically right for everyone, and every annuity does not work the same way.

Before considering one, it is important to understand:

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  What problem the contract is intended to solve
  

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  Whether the goal is growth, protection, or income
  

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  How and when income may begin
  

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  What access you will have to the money
  

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  Whether surrender charges apply
  

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  Which features are guaranteed and which are not
  

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  What fees or limitations may be involved
  

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  How the annuity fits with your other income sources
  

The most important question is not:

“Is an annuity good or bad?”

A better question is:

“What job would this annuity perform in my overall retirement strategy?”

A financial tool should be evaluated based on the problem it is intended to solve—not simply because it offers an attractive rate, bonus, or feature.

5. Work and Other Sources of Income

Retirement does not look the same for everyone.

Some people stop working completely. Others gradually reduce their hours or continue earning income through:

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  Part-time employment
  

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  Consulting
  

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  A small business
  

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  Rental property
  

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  Interest or dividends
  

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  Other personal assets
  

Continued income can sometimes reduce the amount that needs to be withdrawn from retirement accounts during the early years of retirement.

But work income should still be evaluated realistically.

Ask yourself:

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  Do I plan to work because I want to or because I will need to?
  

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  How dependable is that income?
  

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  How long do I realistically expect to continue working?
  

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  What happens if my health or family responsibilities change?
  

Work can be part of the plan.

It should not be the entire backup plan unless you are confident that it is sustainable.

Predictable Income and Flexible Income

One of the clearest ways to organize retirement income is to separate it into two categories.

More predictable income

This may include:

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  Social Security
  

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  Pension payments
  

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  Certain annuity income
  

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  Other contractual or recurring sources
  

More flexible or variable income

This may include:

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  Withdrawals from invested retirement accounts
  

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  Business or consulting income
  

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  Rental income
  

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  Interest and dividends
  

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  Part-time employment
  

The goal is not necessarily to make every dollar predictable.

The goal is to understand which expenses require dependable support and which expenses can be covered with more flexible income.

Illustration: Two Retirement-Income Buckets

BUCKET 1 BUCKET 2
ESSENTIAL EXPENSES FLEXIBLE EXPENSES Housing Travel
Utilities Entertainment
Food Gifts
Insurance Hobbies
Healthcare Lifestyle upgrades Often supported by: Often supported by:
• Social Security • Account withdrawals
• Pension income • Business income
• Certain annuity income • Other flexible sources

This does not have to be a rigid system.

It is simply a useful way to ask whether the income supporting your most important expenses is dependable enough.

Calculate Your Retirement-Income Gap

A retirement-income gap is the difference between what you expect to spend and the predictable income you expect to receive.

The basic calculation looks like this:

Expected monthly retirement expenses
− Predictable monthly income
= Monthly retirement-income gap

Consider a simple example.

Monthly retirement spending goal

$6,000

Expected predictable income

• 
  Social Security: $2,300
  

• 
  Pension: $1,200
  

Total predictable income: $3,500

Remaining income gap

$6,000 − $3,500 = $2,500

This household may need to create another $2,500 per month from retirement accounts, annuity income, work, or other resources.

That does not automatically tell us which strategy they should use.

But it gives us a clearer problem to solve.

Instead of asking:

“Do we have enough money?”

They can begin asking:

“How will we consistently create the additional $2,500 we need, and what risks could affect it?”

That is a much more useful conversation.

Why the Pieces Need to Be Coordinated

Retirement-income planning is not a series of isolated decisions.

The decision about when to claim Social Security may affect how much you withdraw from savings.

The pension option you choose may affect the income available to your spouse.

The amount withdrawn from a traditional retirement account may affect taxes.

A market decline may affect how much income an invested account can comfortably support.

An insurance or annuity decision may affect liquidity, beneficiaries, or income reliability.

This is why someone can own several good financial products and still feel uncertain.

The problem may not be that the individual pieces are bad.

The problem may be that nobody has helped connect them.

Five Numbers to Know Before You Retire

You do not need to have every detail figured out.

But knowing these five numbers can give you a much clearer starting point.

1. Your expected monthly spending

How much will it take to support your basic needs and desired lifestyle?

2. Your estimated Social Security income

Review your personalized estimate at more than one claiming age.

3. Your expected pension income

Include the option you are considering and any amount that may continue for your spouse.

4. The amount your savings may need to provide

Subtract your predictable income from your expected spending.

5. The income that would continue for your spouse

Do not look only at the income available while both spouses are living.

Create Your Retirement-Income Inventory

Use this simple worksheet to begin organizing what you have.

Potential income sourceEstimated monthly amountStarting dateHow predictable is it?Continues for spouse?Social SecurityPension401(k) or IRA withdrawalsAnnuity incomeWork or business incomeRental or other income

You may not know every answer yet.

That is okay.

The unanswered spaces show you which questions deserve attention.

Final Thought

Retirement income rarely comes from one account or one decision.

It usually comes from several pieces that need to work together.

Social Security may be part of the answer.

A pension may be part of the answer.

Your retirement accounts may be part of the answer.

Insurance or annuity strategies may be part of the answer.

Work and other assets may also play a role.

The goal is not simply to own more financial products.

The goal is to understand:

• 
  What you already have
  

• 
  What role each piece may play
  

• 
  How much income may be available
  

• 
  Which risks could disrupt that income
  

• 
  Whether the pieces support the retirement and family life you want to protect
  

That is where clarity begins.

And in my experience, greater clarity often leads to greater confidence.

Ready to Take a Closer Look?

You do not need to know which product or strategy you need before beginning.

If you are approaching retirement and are unsure how your accounts and benefits may work together to create income, an introductory conversation can help you identify the questions that deserve attention first.

Schedule an Introductory Call

Virtual appointments are available.

Important Information

This article is provided for general educational purposes and should not be considered individualized investment, legal, or tax advice. Canady Financial Group does not provide legal advice or legal representation. Insurance and annuity guarantees are backed by the claims-paying ability of the issuing insurance company.