Top retirement income sources: A guide for pre-retirees

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.

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—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.

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.

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.

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:

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

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

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

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

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:

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

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.

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.

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:

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.

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

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.