Retirement income can be broken down into three general categories: income from investments, income from pension plans, and income from social security. Of course, many decide to continue working during retirement so employment, self employment or business income may be available as well.
Investments can be used to to fund retirement needs by either generating dividend and interest income or by gradually liquidating the assets over the course of retirement. The main advantage of the first method is preservation of principal, and its disadvantage is that it results in lower income than the second method. The advantage of the second method is larger income, and the disadvantages include depletion of principal and longevity risk related to the assets lasting throughout retirement. In certain cases this longevity risk can be managed by means of insurance contracts such as annuities, however such contracts require the policy owner to give up control over the principal.
Income from pension plans
Defined benefit pension plans are another source of retirement income. Benefits paid are typically a function of age, income received while employed with the company or organization associated with the defined benefit plan, and years of service provided to the employer or organization. Other factors can also impact the income provided by the plan, including whether or not a spousal survivor benefit is included in the plan. Pension plan income is advantageous in that there is no longevity risk associated with the benefits, as benefits are in most cases paid throughout the life of the pensioner. Careful planning should be done with respect to coordinating survivor benefits of the pension plan. In certain cases, life insurance contracts can be purchased in lieu of activating survivor benefits on pension benefits, however a careful analysis should be done before doing so.
Income from social security
Income from social security is the most common source of income for Americans, providing 40 percent of income for persons 65 years old and older according to the Social Security Administration. When to file for social security benefits is an important decision and should be coordinated carefully with other retirement income sources in order to maximize retirement income.