1. Traditional Pension Plan
One of the more traditional sources of income in retirement for many has historically been the traditional pension plan, also known as a defined benefit plan. Pension plans were once the stalwart of income in retirement but they are far less common today, with only one in five workers participating.iv A pension offers a set amount of income in retirement, based on a formula that includes a worker’s salary history and length of employment.
Even if you have a pension, it is important to consider how to subsidize this retirement income with income from other retirement sources to help enhance your retirement security.
2. Social Security
Social Security is the most commonly known form of guaranteed income in retirement. Social Security benefits are typically based on how many years a person worked, how much they earned, and how much they’ve contributed to the program during their working years.
It’s important to know that even though 73% of Americans expect to rely on Social Security to help cover monthly costs in retirement,v it was never meant to be a sole source of retirement funding. Rather, it was originally designed to provide a modest income to help cover basic expenses in retirement.
Here’s some background on how benefits are determined:
- If you’re eligible to receive Social Security benefits, the amount depends on how much you earned during your working years and the age you decide to begin taking benefits.
- Specifically, the amount is calculated using your highest 35 years of earnings. If you work for more than 35 years, your lowest earning years are dropped. If you have less than 35 years of earnings, Social Security uses a zero for each year without earnings.vi
- Your benefits are also different based on your age - while you qualify for benefits at age 62, your benefit increases by 8% each year you wait up to age 70. There is no increase in benefit beyond age 70.
- In 2024, someone who retires at full retirement age (which is age 67 for anyone born 1960 or later) could receive up to $3,822 per month from Social Security.vii
You can learn more about Social Security in Corebridge’s Social Security Action Planner.
Annuities are insurance products that can play an important role when it comes to generating guaranteed income in retirement. They can be purchased with a lump sum payment or via a series of ongoing premium payments.
There are several different types of annuities available today, all of which include the opportunity for guaranteed lifetime income through standard or optional benefits.
- Fixed Annuities offer a guaranteed rate of return over a set period of time. This offers a high level of predictability given returns are not tied to or impacted by the stock market.
- Index Annuities provide interest that is partially based on the performance of a market index, such as the Standard & Poor’s 500 Index, without the risk of loss of premium due to market downturns or fluctuations.
- Variable Annuities offer returns that are tied to professionally managed investment portfolios (variable investment options) that may include stocks, bonds or a combination of investments.
Some annuities - whether they are Fixed, Index or Variable - also offer income benefits, such as Guaranteed Lifetime Withdrawal Benefits and Guaranteed Living Benefit Riders, to help grow retirement income and generate protected lifetime income for an individual as well as a spouse. These benefits may be subject to additional fees, age restrictions, withdrawal parameters and other limitations. Guarantees are backed by the claims paying ability of the issuing insurance company.
You can also consider an Income Annuity, which can be either an Immediate Annuity or a Deferred Income Annuity. They offer a predictable level of income now or in the future. Rather than offering income through annuity withdrawals, these annuities offer a range of annuity payment options, including lifetime income for as long as you live.
Immediate and Deferred Income Annuities are designed for those who are more interested in maximizing their income payments. Because income is provided through annuity payment options vs. withdrawals, it’s important to know that with these types of annuities, the individual no longer has access to their principal.
Purchasing an annuity can help you secure a steady stream of lifetime income to supplement income from other sources, which may make it easier to budget and manage living expenses. And, because they can provide protected lifetime income, purchasing an annuity may help allay concerns you may have about running out of money in retirement.
4. Defined contribution retirement plans
Defined contribution plans - such as 401(k) or 403(b) plans - do not automatically convert to guaranteed income in retirement. However, you have the option to use some or all of the balance in your retirement plan to purchase an annuity, which can provide you with a pension-like stream of protected lifetime income.
i Insured Retirement Institute (IRI), IRI Retirement Fact Book, 2022, based on data from the American Academy of Actuaries and Society of Actuaries, Actuaries Longevity Illustrator (accessed 10/13/21). Assumes a male/female couple.
ii 2023 Corebridge Financial Survey of 2,202 respondents ages 22-75 on Retirement and Longevity, by Morning Consult.
iii 2023 Corebridge Survey on Retirement and Longevity
v 2023 Corebridge Financial survey on retirement and longevity
vi ssa.gov, “Your Retirement Age and When You Stop Working,” accessed 12/4/23