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Top retirement income sources: A guide for pre-retirees

August 28, 2024
Last revised: September 11, 2024

With retirement income sources, there's value in variety. Learn how Social Security, pensions and other savings can support your post-work life.
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SDI Productions/Getty Images

Key takeaways

  1. To meet financial needs in retirement, it often pays to rely on multiple income sources.
  2. You can shore up your foundational income stream—fed by such sources as Social Security and a 401(k)—with additional resources, including annuities and permanent life insurance.
  3. Maximizing your retirement income requires strategic thinking and advance planning.

Saving for retirement may seem like a no-brainer. But knowing whether your nest egg will be large enough to live on? That can be a head-scratcher.

One key planning strategy is to set up multiple retirement income sources. This can help you feel confident about covering your daily expenses—and having money left over to support people and causes you care about.

Common primary retirement income sources

Retirees typically receive income from a few key sources including Social Security and personal or retirement accounts, like 401(k)s, IRAs and pensions.

Social Security

Social Security—a federal government "safety net"— was created to help seniors avoid outliving their savings. If you or your spouse pays Social Security taxes while working, the program provides a guaranteed income stream in retirement. The amount you receive each month depends, in part, on what you (or your spouse) earned while employed.

You can start claiming Social Security as early as age 62. But holding off for a few years results in larger checks. Waiting until age 70 to collect Social Security maximizes your monthly benefit.

401(k)s, IRAs & other retirement savings solutions

If you participate in a 401(k), 403(b) or similar workplace retirement savings plan or have an IRA, you—and perhaps your employer—can contribute money while you're working. You then can take penalty-free withdrawals starting at age 59½. Because your account's value likely will depend on market performance, you can't know in advance how much income it will provide in retirement.

Your account type determines whether you pay taxes on your money before putting it in or after taking it out. Traditional 401(k)s and IRAs take pre-tax contributions, so you must pay income taxes on your distributions. Roth 401(k)s and IRAs are funded with after-tax money, so no income taxes are due on the earnings when you make qualified withdrawals.

Pension plans

If you participate in a pension plan during your working years, you'll receive monthly payments from the start of retirement through the rest of your life or the lives of both you and your spouse. Unlike a 401(k), a pension doesn't allow you to choose how the money is invested, so its potential growth may be limited. But you're protected from loss—and your income amount is guaranteed.

3 ways to add to your retirement income stream

While you may rely on Social Security and a 401(k) as your core retirement income solutions, additional cash flow can be a huge help. Sources can include:

1. Annuities

An annuity is an insurance contract that can provide guaranteed income during retirement. There are several types of annuities:

  • Deferred annuities allow you to put money in over time, offering the potential for long-term, tax-deferred growth. If you're already nearing—or in—retirement, an immediate annuity might be more useful. You can fund it with a one-time lump sum. Soon after, you'll start receiving recurring income payments that can continue for life—unaffected by market volatility.
  • Immediate annuities are funded by a lump-sum payment, such as money from a 401(k) or an IRA. You decide on the frequency and duration of your payouts when you make the purchase. Your initial withdrawal can start in as early as 30 days but must be taken within the first year. An immediate annuity doesn't have an accumulation period, so there's no opportunity to increase its value. But the guaranteed distributions it provides might help you feel comfortable investing other assets more aggressively.
  • Fixed annuities pay a guaranteed fixed interest rate (such as 4%) on your investment for an agreed upon period. Since fixed annuities offer a fixed interest rate, you know in advance how much your annuity will grow and how much income it will pay out. That predictability helps some people feel more comfortable about the long-term stability of their retirement income.
  • Variable annuities can be risker than other annuities as the value fluctuates based on the performance of investment options, called subaccounts. When you purchase a variable annuity, you decide how to allocate your premiums in the available subaccounts based on factors like your risk tolerance and timeline for retirement. Any investment earnings from a variable annuity grow tax-deferred until you begin taking payouts. These annuity payouts can last throughout your life, depending on the option you select.

Learn more about how the various types of annuities work

2. Other investments such as stocks & bonds

If you own stocks that pay dividends—or hold bonds that provide interest payments—those regular distributions can add to your ongoing retirement income.

You also may consider mutual funds or exchange-traded funds (ETFs). They are actively managed by professional fund managers who aim to outperform market averages by carefully selecting investments. This strategy often involves higher fees and possibly higher market risk but may offer greater returns.

Learn more about strategic moves while investing for retirement

3. Part-time work

Entering retirement doesn't prohibit you from working. If you'd like a job—and the extra paycheck it provides—look for an engaging role that suits your health and lifestyle.

If you're early in your retirement years, pay attention to how much you earn from employment. Hitting a certain threshold temporarily will reduce the size of your Social Security checks. Once you reach full retirement age (between 66 and 67, depending on your birth year), income from a job won't lessen your Social Security benefits.

Learn more about income limits for working while on Social Security

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How will taxes affect your retirement income?
Planning for retirement involves more than just saving money—you need to understand how taxes will impact those savings. The amount of taxes you pay can significantly affect your retirement income; how much money you will have to live on and how long your savings will last.

Dive deeper into our Taxes in Retirement Guide

3 other ways to boost your retirement income

Securing multiple streams of steady payments may meet your everyday needs in retirement. But to cover extra expenses or achieve certain goals, you may want to be able to access additional cash. These resources might include:

1. The cash value of permanent life insurance

Your life insurance death benefit may be most important when you're younger, especially if you have children who require financial support. In retirement, cash value—a component of permanent life insurance—might be your policy's biggest upside. You can draw from it to cover one-time expenses or supplement your monthly retirement income.

In many cases, withdrawals from a permanent life insurance policy are tax-free. Keep in mind, though, that they reduce your contract's cash value and death benefit.1

2. Home equity

After years of paying a mortgage, owning your home outright gives you an asset you can tap for cash. You can take out a home equity loan or a reverse mortgage if you want to borrow money that must be repaid later. Or you can downsize your home by moving into a residence with a lower price tag and pocket the difference.

3. Savings accounts & CDs

To prepare for unexpected one-time expenses, consider stable, low-risk solutions such as a high-yield savings account or certificate of deposit (CD).

Even high-yield savings accounts may not offer the highest return, but they allow you to access your cash immediately if a financial crisis arises.

A CD may require a higher minimum balance, but it provides less liquidity—you can't take money out (without penalty) until its maturity date. Its interest rate, however, may exceed that of a high-yield savings account.

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Strategies to maximize your retirement assets

To stretch your retirement income as far as possible—and make the most of its buying power—it's important to develop strategies for how and when you'll take money from your accounts. This helps you:

  • Meet financial needs as they arise
  • Ensure your income lasts throughout retirement—which may span decades
  • Maximize the total amount you accumulate so you not only support yourself but can also be generous with your wealth if you wish

To meet those goals, you may benefit from considering these approaches:

Have diverse income sources

Having multiple retirement income sources is most effective when they vary in key ways. An ideal mix might include accounts that provide guaranteed, predetermined payments, along with sources that pay less predictable amounts but have greater potential to grow in value.

Make wise withdrawals

To make the most of your savings and investments, try to withdraw only as much money as you need, when you need it. Keeping money in your accounts for as long as you can helps you build wealth, which you can tap later in life—or pass to others upon your death.

Some income sources—including workplace retirement plans and traditional IRAs—impose required minimum distributions (RMDs) after you reach age 73 or 75 (depending on your birth year). If you don't take those RMDs, you'll be subject to steep tax penalties.

Learn more about different retirement withdrawal strategies to consider

Plan with tax efficiency

It's important to understand—and anticipate—all the tax ramifications of your retirement income choices. For example: You might favor accounts that take pre-tax contributions if you expect to be in a lower tax bracket later than in your peak earning years. On the other hand, you might appreciate accounts that require after-tax contributions so you can avoid tax bills on withdrawals during retirement when you'll likely have a limited income.

Conclusion

To build up a retirement income stream that uses several sources to cover your expenses and support your goals, you'll want to develop a plan and take early steps to set it in motion. For help weighing your options and executing a strategy, contact a Thrivent financial advisor.
1 Loans and surrenders will decrease the death proceeds and the value available to pay insurance costs which may cause the contract to terminate without value. Surrenders may generate an income tax liability and charges may apply. A significant taxable event can occur if a contract terminates with outstanding debt. Contact your tax advisor for further details. Loaned values may accumulate at a lower rate than unloaned values.

Thrivent financial advisors and professionals have general knowledge of the Social Security tenets. For complete details on your situation, contact the Social Security Administration.

Thrivent and its financial advisors and professionals do not provide legal, accounting or tax advice. Consult your attorney or tax professional.

CDs offer a fixed rate of return. The value of a CD is guaranteed up to $250,000 per depositor, per insured institution, per insured institution, by the Federal Deposit Insurance Corp. (FDIC). An investment in a money market fund is not insured or guaranteed by the FDIC or any other government agency. A money market fund seeks to maintain the value of $1.00 per share although you could lose money. The FDIC is an independent agency of the US government that protect the funds depositors place in banks and savings associations. FDIC insurance is backed by the full faith and credit of the United States government.

Holding an annuity inside a tax-qualified plan does not provide any additional tax benefits. Withdrawals made prior to the age of 59 ½ may be subject to a 10 percent federal tax penalty. Withdrawals and surrenders will decrease the value of your annuity and, subsequently, the income you receive. Any withdrawals in excess of 10% may be subject to a surrender charge. The taxable portion of each annuity distribution is subject to income taxation. If a taxpayer is younger than 59½ at the time of distribution, a 10% federal tax penalty will apply to the taxable portion of the distribution unless a penalty-tax exception applies.

Contracts have exclusions, limitations and terms under which the benefits may be reduced, or the contract may be discontinued. For costs and complete details of coverage, contact your licensed insurance agent/producer.

Investing involves risk, including the possible loss of principal. The product prospectus, portfolios' prospectuses and summary prospectuses contain more complete information on investment objectives, risks, charges and expenses along with other information, which investors should read carefully and consider before investing. Available at thrivent.com.
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