Understanding the Different Streams of Post-Retirement Income

Understanding the Different Streams of Post-Retirement Income

Understanding the Different Streams of Post-Retirement Income

By Oscar Casas, CFP®, CRPC®, MPAS®, ABFP℠ 

If you’re nearing retirement, you likely have robust savings in different accounts and perhaps a pension plan lined up for when you retire. The next crucial step to ensure you get the most out of your savings and maximize your income in retirement is creating an income plan. Each source of income has vastly different tax implications and payouts, which can mean your retirement income will come from different sources as you age. Pension plans and Social Security incentivize waiting until a certain age to get higher benefits, which can mean tapping into more of your savings early on. Here are five common post-retirement streams of income you should consider when making an income plan. 

Social Security

Social Security is a significant retirement asset for many Americans, and deciding when to receive benefits is one of the biggest questions our clients face. You can elect to receive benefits as early as age 62, but your benefit amount will be reduced. To receive your full benefit amount, you must delay your benefits until you reach full retirement age as determined by the IRS. (1) To receive your maximum benefit amount, you must wait until 70 years of age.

Social Security is a tax-free benefit as long as your combined income stays within certain limits. If those limits are exceeded, income tax will be charged up to 85% of your benefit amount. (2) This is a very important point to consider because other streams of retirement income can impact your tax liability if you’re not careful. 

Investment Accounts & Savings

This category of income involves drawing from accumulated retirement savings, which can come in many different forms, including:

  • Traditional IRAs
  • Roth IRAs
  • 401(k) plans
  • 403(b) plans
  • Taxable investment accounts

A $50,000 withdrawal from a Roth IRA will have a wildly different tax impact than that same distribution from a traditional IRA or a taxable investment account. 

Generally, distributions prior to age 59½ from any tax-advantaged account (traditional IRA, Roth IRA, 401(k), 403(b)) will result in a 10% penalty, but there are exceptions. All these accounts (except Roth) also implement required minimum distributions (RMDs) starting at age 72. 

Taxable investment accounts do not have these limitations, but the tradeoff is that you will owe income tax and potentially capital gains tax on all distributions taken. There is also an additional 3.8% surtax on net investment income if your modified adjusted gross income is above certain limits. (3)

Pension Income

Pensions, also called defined benefit plans, typically offer income based on a variety of factors, including how long you worked at your company, your income level, and what age you retired. Like Social Security, deciding when to take pension benefits is an important part of retirement planning. 

Since most pension contributions are considered pre-tax, the amount received in retirement is usually fully taxable. With a pension, you must also decide between taking your benefits as a lump sum or annuitizing it over your lifetime. Opting to annuitize comes with even more decisions in the form of what type of annuity to use (single life, single with period certain, joint and survivor, etc.).

Choosing between taking a lump sum or annuitizing could add thousands more to your retirement income, so it’s important to weigh the decision in the context of your full retirement plan.

Royalties & Dividends

Royalties are payments received from patents, copyrights, oil, gas, and mineral properties. Generally, these payments are considered ordinary income and will increase your combined income amount for Social Security purposes.

Dividends are a portion of a company’s profits paid directly to those who own shares of that company’s stock. Depending on the type of dividend paid, they will either be taxed as capital gains (qualified dividends) or as ordinary income (non-qualified dividends). 

Inheritances & Trust Funds

Inheritances, whether cash, investments, or property, are not considered taxable income when received. However, any subsequent earnings received on the inheritance may be taxable depending on the source and structure of the earnings. (4)

Trust funds may also not be taxable as long as the income and assets remain in the trust. If you are receiving annual income distributions from the trust, however, those payments will be considered taxable income. (5)

Build Your Post-Retirement Income Plan

As you can see, there are many streams of income and tax implications to consider when building your retirement plan. This can be an overwhelming and confusing process for many of our clients. At Tranquility Path Investment Advisors, we have the tools to break down each option so you can feel informed and confident in your choices. If you’re ready to build your post-retirement income plan, schedule an introductory meeting online or reach us at (732) 856-4324.

About Oscar

Oscar Casas is the chief executive officer at Tranquility Path Investment Advisors, an independent Registered Investment Advisor firm dedicated to putting their clients first, always. Oscar has over 10 years of experience helping clients plan for a confident retirement. He is known for being an empathetic and compassionate listener and for prioritizing his clients’ needs and goals above all else. He acts as a coach, advising his pre-retiree and retiree clients through all the ups and downs on their financial journey. He loves that he has the opportunity to make a difference in people’s lives and take some of the stress off their shoulders. 

Oscar has a bachelor’s degree in finance, a master’s degree in personal financial planning, and is a CERTIFIED FINANCIAL PLANNER™, Chartered Retirement Planning Counselor℠, Master Planner Advanced StudiesSM and Accredited Behavioral Finance Professional℠ professional.  When he’s not working, you can find him enjoying the outdoors with his three children. He is an avid tennis player who also loves golf, the beach, snowboarding, traveling, and volunteering with the Scouts.

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(1) https://www.ssa.gov/benefits/retirement/planner/agereduction.html

(2) https://www.ssa.gov/benefits/retirement/planner/taxes.html

(3) https://www.irs.gov/newsroom/questions-and-answers-on-the-net-investment-income-tax

(4) https://turbotax.intuit.com/tax-tips/estates/4-ways-to-protect-your-inheritance-from-taxes/L653s0Kyn

(5) https://www.investopedia.com/ask/answers/101915/do-beneficiaries-trust-pay-taxes.asp