10 Sources of Retirement Income for Americans

Retirement income in the United States can come from many different sources. Social Security may provide a foundation, but many retirees also rely on pensions, retirement accounts, investments, home equity, rental properties, annuities, and even part-time work.

Understanding how each source works—and how it is taxed—can help you build a retirement income strategy that is more flexible and easier to manage. Here are 10 common sources of retirement income for Americans.

1. Social Security Benefits

Social Security retirement benefits provide monthly income based on your earnings history and Social Security contributions during your working years. For many Americans, Social Security is an important foundation of retirement income.

• Eligibility: You generally need 40 credits, which is roughly 10 years of covered work, to qualify for retirement benefits.
• How it's calculated: Your benefit is based primarily on your earnings history, with your highest 35 years of indexed earnings used in the benefit calculation.
• Taxation: Depending on your combined income, up to 85% of your Social Security benefits may be included in taxable income.
• When you can take it: Retirement benefits can generally begin at age 62. Your full retirement age depends on your birth year and is 67 for people born in 1960 or later. Delaying benefits beyond full retirement age can increase your monthly benefit until age 70.

Choosing when to claim Social Security can have a significant effect on your lifetime retirement income. Starting early provides income sooner but results in a permanently reduced monthly benefit. Waiting can result in a larger monthly payment.

2. Employer Pension Plans

Traditional employer pensions can provide a predictable stream of retirement income, particularly when the plan provides a defined benefit.

• Eligibility: Employees who participated in an employer-sponsored pension plan.
• How it's calculated: Defined benefit pensions typically use a formula based on factors such as salary and years of service. Defined contribution plans depend on contributions and investment performance.
• Taxation: Pension payments are generally taxable when received, although the exact tax treatment depends on the type of pension and contributions.
• When you can take it: The starting age depends on the individual pension plan and applicable rules.

If you have a pension, understanding whether it includes survivor benefits, inflation adjustments, and different payment options is important when estimating your retirement income.

3. 401(k) and 403(b) Plans

Employer-sponsored retirement plans such as 401(k) and 403(b) plans are among the most common ways Americans accumulate retirement savings.

• Eligibility: Employees whose employers offer an eligible retirement plan.
• How it's calculated: Contributions are invested according to the options available within the plan. Traditional contributions generally receive tax-deferred treatment, while designated Roth contributions are made with after-tax dollars.
• Taxation: Traditional 401(k) and 403(b) withdrawals are generally taxable as ordinary income. Qualified Roth withdrawals are generally tax-free.
• When you can take it: The general federal rule allows penalty-free withdrawals beginning at age 59½, although exceptions may apply. Required minimum distributions generally apply later in life under current law.

The rules surrounding required minimum distributions have changed in recent years. Under current law, the applicable RMD starting age depends on your birth year, and some younger retirees will not have to begin RMDs until age 75.

4. Individual Retirement Accounts (IRAs)

Individual Retirement Accounts (IRAs) can provide another significant source of retirement income. Traditional and Roth IRAs have different tax characteristics.

• Eligibility: Traditional and Roth IRAs have different eligibility and contribution rules, generally tied to earned income and, for Roth IRAs, income limitations.
• How it's calculated: Traditional IRA contributions may be deductible depending on your circumstances, while Roth IRA contributions are made with after-tax dollars. Investments can grow within either account without annual taxation on unrealized gains.
• Taxation: Traditional IRA withdrawals are generally taxable. Qualified Roth IRA withdrawals are generally tax-free.
• When you can take it: The general penalty-free withdrawal age is 59½, although exceptions exist. Traditional IRAs are subject to required minimum distribution rules, while Roth IRAs owned by the original owner are not subject to lifetime RMDs.

Roth IRAs can be particularly useful in retirement because qualified withdrawals generally don't increase taxable income. This can provide additional flexibility when managing taxes and other income-based costs.

5. Investment Income from Non-Retirement Accounts

Taxable investment accounts can provide another flexible source of retirement income. These accounts may contain stocks, bonds, mutual funds, exchange-traded funds, certificates of deposit, and other investments.

• Eligibility: Available to investors who open taxable brokerage or investment accounts.
• How it's calculated: Income can come from interest, dividends, capital gains, and other investment distributions.
• Taxation: Interest, dividends, and realized capital gains can have different tax treatments. Capital gains are generally taxed when an investment is sold for a gain.
• When you can take it: Funds can generally be accessed at any time, subject to the terms of the particular investment.

Taxable investment accounts can be particularly valuable because they don't have the same age-based withdrawal restrictions associated with many retirement accounts.

6. Home Equity: Downsizing or Reverse Mortgages

Your home may represent a substantial portion of your wealth by the time you retire. There are several ways to access that equity, including downsizing, selling the home, or using certain home-equity borrowing strategies.

• Eligibility: Homeowners who have accumulated equity in their property. Reverse mortgage eligibility and requirements depend on the lender and product.
• How it's calculated: Downsizing can provide cash from the difference between the sale price of your existing home and the cost of your replacement home. A reverse mortgage allows eligible homeowners to borrow against home equity.
• Taxation: Under current federal rules, eligible homeowners may exclude up to $250,000 of gain from the sale of a principal residence, or up to $500,000 for many married couples filing jointly. Reverse mortgage proceeds are generally loan proceeds rather than taxable income.
• When you can take it: Home equity can generally be accessed through a sale, qualifying refinancing or home-equity borrowing, or an eligible reverse mortgage.

Home equity can be an important retirement resource, but borrowing against your home creates debt and can reduce the equity available to you or your heirs. The costs and repayment requirements should be considered carefully.

7. Part-Time Work

Retirement doesn't necessarily mean stopping work completely. Many retirees choose part-time employment, consulting, seasonal work, freelancing, or occasional contract work.

• Eligibility: Generally available to anyone who is able and willing to work and can find suitable employment.
• How it's calculated: Income depends on the job, hourly rate, salary, contract terms, and hours worked.
• Taxation: Employment and self-employment income is generally taxable.
• When you can take it: You can work during any stage of retirement if suitable opportunities are available.

Working in retirement can provide both income and flexibility. It can also allow you to delay withdrawals from investment accounts or postpone claiming Social Security while continuing to earn money.

8. Annuities

An annuity is an insurance product that can convert a lump sum or series of payments into a stream of income. Depending on the type of annuity, payments may begin immediately or at a future date.

• Eligibility: Available to individuals who purchase an annuity through an insurance company or other authorized provider.
• How it's calculated: Payments depend on factors such as the amount invested, interest rates, the type of annuity, payout option, and—in many cases—the purchaser's age and life expectancy.
• Taxation: Tax treatment depends on how the annuity was funded. Payments from qualified retirement accounts are generally taxed according to retirement account rules, while payments from nonqualified annuities may contain both taxable and nontaxable portions.
• When you can take it: Depending on the product, payments can begin immediately or at a specified future date.

Annuities can provide predictable income, but contracts can differ substantially in fees, guarantees, liquidity, inflation protection, and beneficiary provisions. Understanding the contract is essential before purchasing one.

9. Rental Income

Rental properties can provide ongoing income in retirement and may also appreciate over time. Some retirees use rental properties as an alternative or supplement to traditional investment portfolios.

• Eligibility: Property owners who rent out residential or commercial real estate.
• How it's calculated: Rental cash flow depends on rental revenue minus eligible expenses such as maintenance, property taxes, insurance, management costs, and other operating expenses.
• Taxation: Rental income is generally taxable, although eligible expenses may be deductible. Selling the property can result in taxable capital gain and potentially other tax consequences.
• When you can take it: Rental income can be received while the property is rented, while sale proceeds become available after the property is sold.

Rental real estate can produce attractive cash flow, but it also comes with responsibilities such as maintenance, vacancies, insurance, property taxes, financing costs, and tenant management.

10. Health Savings Accounts (HSAs)

A Health Savings Account (HSA) is primarily designed to help people save for qualified medical expenses, but it can also become a valuable retirement planning tool for people who are eligible to contribute.

• Eligibility: Generally available to eligible individuals enrolled in a qualifying high-deductible health plan who meet the other HSA requirements.
• How it's calculated: Contributions may be tax-deductible, investment growth can accumulate tax-free, and qualified medical withdrawals are generally tax-free.
• Taxation: Withdrawals used for qualified medical expenses are generally tax-free. After age 65, nonqualified withdrawals are generally taxable as income but are not subject to the additional 20% tax.
• When you can take it: Qualified medical withdrawals can generally be made tax-free at any age. After age 65, nonqualified withdrawals can generally be made without the 20% additional tax, although they are included in taxable income.

An HSA can therefore serve as both a healthcare savings account and a supplemental retirement resource. One important distinction is that HSA eligibility generally ends once you enroll in Medicare, so planning contributions around Medicare enrollment is important.

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