Step 2: Assembling Your Income Sources

Once you know your monthly income target, it’s time to look at the other side of the equation: the money you have coming in. Most retirees have income from several different sources, which we can group into three main buckets.

Bucket 1: Guaranteed Income (Social Security & Pensions)

This is your foundation. Guaranteed income sources are reliable, predictable, and typically last for the rest of your life. The two most common are Social Security and traditional pensions.

Social Security is the bedrock of retirement for most Americans. The amount you receive depends on your lifetime earnings and when you choose to start benefits. You can claim as early as age 62, but your monthly benefit will be permanently reduced. If you wait until your Full Retirement Age (which is between 66 and 67 for most people) or even longer, up to age 70, your monthly check will be significantly larger. Coordinating your claiming strategy with your spouse is a critical part of retirement planning. You can get your personal estimates and learn more at the Social Security Administration’s website.

Pensions, also known as defined benefit plans, are less common today but provide a powerful stream of guaranteed income if you have one. Your former employer pays you a set monthly amount for life. Be sure you understand your payout options, such as single-life versus survivor benefits.

Bucket 2: Investment Withdrawals (401(k)s, IRAs)

This is the money you’ve saved in accounts like 401(k)s, 403(b)s, and IRAs. Unlike Social Security, this money is not guaranteed to last forever. How you withdraw it is a key decision in your retirement income plan.

For years, a common guideline was the “4% rule,” which suggested you could withdraw 4% of your starting portfolio balance in your first year of retirement, and then adjust that amount for inflation each year after. While it can be a useful starting point for discussion, it’s not a set-it-and-forget-it rule. Your ideal withdrawal rate will depend on your age, asset allocation, and market performance. Being flexible—perhaps taking a little less in a down market year—can greatly improve your portfolio’s chances of lasting.

Bucket 3: Other Sources

This bucket includes everything else. It could be part-time work, rental income from a property, or income from an annuity. Some retirees also plan to use home equity later in life. We’ll discuss annuities and other passive income ideas in more detail later.

Your action step is to make a list of every income source you have. For Social Security and pensions, write down the definite monthly amount. For your investment portfolio, calculate a rough starting withdrawal. For now, you can use a conservative percentage like 3.5% or 4% of your total balance to get an estimated annual income figure. Divide that by 12 for a monthly estimate.