How will you generate your retirement income? 6 key sources explained

By David Hudson, Senior Wealth Strategist | Citizens Wealth Management

_{David has more than two decades of experience guiding high-net-worth individuals, families and businesses through complex planning strategies designed to support their financial goals.}

It's a fundamental question, but a critical one: Once your regular paycheck stops, how will you generate your retirement income?

With retirement often lasting into a retiree's 80s or 90s, it's important to create a well-balanced mix of income streams that can support your lifestyle for decades to come.

From Social Security and income annuities to fixed income investments and even part-time work, there are many potential sources for a reliable retirement income. Whether you're planning ahead or already retired, understanding where your retirement paycheck could come from is a good first step in building a secure future.

1. Social Security: an income foundation

For many retirees, Social Security is an important source of guaranteed lifetime income. For those who qualify, you can begin collecting benefits at age 62. However, your monthly benefit amount will be reduced unless you wait until "full retirement age." This is either age 66 or 67, depending on the year you were born.

Additionally, if you claim benefits before full retirement age and continue working, your benefits may be temporarily withheld if your earnings exceed certain income limits.¹

Generally speaking, it's advantageous to delay collecting Social Security if you're able. Waiting until full retirement age could be beneficial, but if you can wait even longer, your monthly benefits can increase by 8% each year up until age 70.

If you're married, you and your spouse may each have your own Social Security benefit. Typically, the spouse with the larger Social Security benefit should delay claiming because that Social Security benefit may count for two lives. If the higher-earning partner passes away first, the surviving spouse may qualify for survivor benefits and be able to receive their deceased spouse’s larger benefit amount in place of their own.

While Social Security likely won't cover all your retirement expenses, it can help create your income foundation. Understanding how it fits into your plan is key to making the most of it.

2. Income annuities: turning savings into income

Income annuities are a financial product that can turn a lump-sum payment (or series of premium payments) into future monthly payments that are guaranteed by the issuing insurance company.

Depending on the type of annuity, these payments can last for a set period of years or your entire lifetime. Similar to Social Security benefits, lifetime income annuities can be used to help cover essential monthly expenses and reduce longevity risk — the risk of outliving your money. Income annuities can also be structured to include a death benefit that's paid out to a beneficiary after the annuity holder passes away.

How much do income annuities pay? That amount is based on the size of your purchase, age, the current interest rate environment, how long you want payments to last, and other factors.

It's important to understand that once you purchase an income annuity, your premium is paid out to you in income payments. The money used to purchase the annuity is locked into a contract and you may not be able to get your payment back as a lump sum, depending on the contract terms.

3. Fixed income investments: CDs, bonds and U.S. Treasuries

Fixed income investments can also provide a set return on your money that can be used to create retirement income. There are a few different types to consider.

Certificates of deposit (CDs)

A CD is a financial product typically offered by banks. You agree to deposit your money for a set period and earn interest on your deposit. For example, a 3-year CD might yield 3% annually for three years. If you deposit $100,000, you'd receive $3,000 a year in income as well as your $100,000 deposit back after three years.

Like savings and checking accounts, CDs are FDIC insured when offered from FDIC-insured banks. They typically pay more than other deposit accounts, but if you cancel before the end of the term, you could owe an early withdrawal penalty.

One option to create retirement income is to create a CD ladder, combining a mix of different term length CDs. For example, consider if you split your funds across a 1-year CD, 2-year-CD, and 3-year CD. When the 1-year CD matures, you could use those funds to open another 3-year CD. Then, when the 2-year CD matures, use those funds to open another 3-year CD. The process can continue and help build an annual income stream.

Bonds and U.S. Treasuries

Bonds are another fixed income option. You lend money to a government or institution for an agreed-on term of years or decades. You receive the listed interest rate for that time before getting your principal back.

U.S. Treasuries are issued by the U.S. Department of the Treasury and backed by the full faith and credit of the U.S. government. They are exempt from state and local taxes, but subject to federal income tax.

Municipal bonds are issued by state and local governments. They often have tax advantages too — the interest income is typically exempt from federal income tax and may be exempt from state and local income taxes too (depending on the bond and state of residence).

Corporate bonds are issued by companies and usually offer a higher interest rate than government bonds. However, if the issuing company runs into financial trouble, it could miss payments or even forfeit returning your money. Also, the interest income from corporate bonds is generally fully taxable at the federal and state levels.

4. Dividend stocks: income-producing equities

Dividend stocks are another way to generate retirement income. Many stocks pay quarterly or annual dividends to shareholders as a share of the company's profits.

Not all stocks offer reliable dividends. Dividend stocks tend to be established, secure companies with reliable earnings and profits, also known as "blue-chip stocks." You can check a stock's historic dividend rate to see what it typically pays and how many years in a row it has paid out.

Instead of individual stocks, dividend mutual funds can also provide a stream of income based on the stocks that they hold. This can help diversify your investment across a broader range of companies instead of investing in a single dividend stock.

Keep in mind that dividend payments are not guaranteed, even with previously reliable companies. Stocks can also lose value. Dividend stocks are riskier than fixed income investments but may have the potential for a larger return on your investment.

5. Withdrawals from retirement accounts

One common way to generate retirement income is by making systematic withdrawals from retirement accounts like 401(k)s, IRAs, or Roth IRAs. The key is finding the right balance: withdrawing enough money to cover your living expenses while ensuring that the accounts can last over your retirement.

A common guideline for making retirement withdrawals is the 4% rule. The rule suggests that you can withdraw 4% of your portfolio in the first year of retirement, then adjust that withdrawal amount for inflation each year.

For example, with a $1 million portfolio, your first year would allow for $40,000 of withdrawals. If there was 3% inflation in the first year, next year's annual withdrawal amount would increase by 3% to $41,200.

While the 4% rule is simple in theory, reality is more complex. The right withdrawal amount varies based on age, expenses, life expectancy and other factors. Additionally, retirees usually have multiple retirement or investment accounts, which have their own distinct rules and tax treatments.

Consulting a financial advisor can help you create a personalized withdrawal strategy that supports your long-term goals.

6. Part-time work in retirement or working longer

If your health permits, working later in life or taking on part-time work in retirement can strengthen your financial situation.

Working longer gives you more time to put money aside and let your nest egg grow from investing. It also means you have fewer years where you will be spending down your savings, helping to make that money last.

You could search for part-time roles in your area, or try consulting, freelancing, gig work or starting your own business. Every little bit of extra income helps take pressure off your portfolio.

Determine your retirement income strategy

While there are many potential retirement income sources, creating a retirement income strategy can be complex.

Not only must you select the right combination of investments and financial products, but you also need to account for tax rules and other considerations. For something as important as retirement, you need a well-crafted plan.

Fortunately, you don't have to do it alone. A Citizens Wealth Advisor* can help you determine your income needs and create a personalized plan to generate retirement income. The right plan today can provide financial confidence for decades to come so you can enjoy your retirement to the fullest.

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