For most people, retirement income comes from a combination of four sources: pension plans, Social Security, tax-qualified plans, personal savings and investments. Together these form a retirement income "pie." The importance of the retirement pie is that it helps you identify the amount of your retirement income for which you will be responsible. Knowing this leads you toward a plan of action. For many people, pension and Social Security benefits will account for around 40% of their retirement income. The remaining income is your responsibility. Here is some additional information that you must know when planning for retirement.
On average, we now retire at age 62 and our life expectancy has increased to age 85. Our retirement income resources have shifted so that now we can expect only 40% to 60% of our required retirement income to be funded by pensions and Social Security. Therefore, we need to supplement the balance from personal savings, and sometimes part-time employment.
Pension Plans. If you have one, contact your employer to determine how much you will receive from your defined-benefit plan.
Social Security. Each year Social Security sends a benefit estimate to those over the age of 25. This is called the Personal Earnings & Benefit Statement (Form SSA 7004). If you do not have that statement, run a rough estimate online with Social Security. The Retirement Planning Quick Report will estimate this benefit for you.
Tax-Qualified Plans. Your employer-sponsored tax-qualified plan is a fundamental building block of a successful retirement plan. These plans allow you to save for retirement on a pretax basis (payroll pretax deduction) with the assets growing tax deferred. Income taxes are payable upon withdrawal. Federal withdrawal restrictions and tax penalties may apply to early withdrawals. These plans are the most powerful way to save for retirement and can also reduce your current taxes. To see the benefits of a tax-deferred arrangement, see the Tax-Deferred Comparison Calculator.
Personal Savings and Investments. This category represents the money you have saved and accumulated over the years. This would include bank accounts, savings accounts, mutual funds, Individual Retirement Accounts (IRAs) and other investments.