Retirement’s getting closer. Hopefully, you have been saving and investing for your retirement on a regular basis, and you have a good idea of what you want to do during retirement. You probably still have one big nagging question: how can you be sure that your retirement income will last as long as you do?

Improvements in health care and changes in life style generally mean that a person retiring today at age 65 can look forward to 20-30 more years ahead. And while some expenses may decrease over time, others—such as health care--will most likely increase. Here are some key points to consider before you retire to make sure you have an adequate income stream to support your entire retirement.

Sources of Income
Financial advisors often say you’ll need from 70 to 90 percent of your pre-retirement earnings to maintain a comparable standard of living in retirement, but some say the figure is higher than that. Make a list of all your expected sources of retirement income. Your top four sources will probably include:

• Social Security
• Workplace-based retirement plans (traditional pension plans and 401(k), 403(b), 457, and/or profit sharing plans)
• Personal savings (IRAs and other savings and investment accounts)
• Employment

Expected inheritances may be another possible source of income to consider, but you can’t bank on the expectation of receiving a windfall from some relative’s estate. A Social Security Administration study says that only about 3 percent of retirement income comes from sources other than Social Security, retirement plans, savings, and employment.¹

Let’s take a look at each of your potential income sources.

Social Security
If you are an average American who participated in the Social Security system you can expect to receive some kind of Social Security benefit during retirement. Since Social Security replaces only about 40 percent of pre-retirement income for the average worker, it is important to have pensions, savings and investments. ²

In addition to the estimated benefits and information on your annual Social Security statement, you’ll find a lot of helpful information including calculators and links on the Social Security website: go to www.ssa.gov and click on Plan Your Retirement. You can also read more about Social Security in our article entitled “Understanding Social Security."

Workplace-based Retirement Programs
Many workplaces offer some form of defined contribution program such as 401(k), 403(b), and 457 plans. Some workplaces may also offer a pension plan, also known as a defined benefit plan, which is typically paid for by the plan sponsor.

Pension plans generally provide a guaranteed benefit based on a formula in the plan. In a defined contribution program, a participant’s account balance grows tax-deferred and the ending balance will depend on how much has been contributed and how well the investments have performed.

Check the Summary Plan Descriptions (SPDs) for all the retirement plans that cover you. Don’t forget about plans from prior jobs where you still have a balance or accrued benefit coming to you. The SPD will tell you when you can begin taking your benefit and what forms of benefit are available. Distribution rules may vary from plan to plan, so read them all closely. Your most recent benefit statements will also be helpful, and you can request more information from your benefits department or your employer.

By law, some retirement plans dictate that if you are married, you must take your benefit in the form of a joint and survivor annuity unless you and your spouse waive that requirement in writing. Some payment options include death benefits and some don’t. Do you have a spouse or children whom you want to provide for? Consider your current and future needs when deciding which option(s) to choose.

Personal Savings, Investments, and IRAs
You may also have a variety of savings accounts, traditional and/or Roth IRAs, stocks, bonds, mutual funds, and other types of investments, each with its own set of tax implications as you take distributions.

Employment
A recent AARP survey reports that fully 80 percent of “baby boomers” plan to work in retirement, but more because they need the income than strictly for pleasure, as compared with an earlier study five years ago.³  Earnings income accounted for approximately 24 percent of the total income for those age 65 and older, according to the Social Security Administration.⁴ Income from ongoing employment may help fill in any gaps in your retirement income stream.

Timing and Taxes
Reviewing all your potential income sources is the first step. Figuring out when you start tapping into these sources, in what order and in what form can make a big difference in the income you receive and the taxes you’ll have to pay. And don’t forget about inflation. Twenty years from now you’ll need to be drawing down more income to support the same level of goods and services you’re buying today. You have to plan for that, too.

For Social Security, the age at which you can receive your full benefit depends on what year you were born (for anyone born in 1960 or later, the age is now 67). You can begin receiving your Social Security benefits as early as age 62 (however, they will be in a permanently reduced amount – up to 30 percent reduced if you were born in 1960 or later). If you begin receiving payments before your full retirement age and are still working, your benefits can be affected by the amount of money you make. Or, you can delay receiving your benefits, in which case they will be increased for each month beyond your full retirement age that you wait (up to age 70).

Generally speaking, for workplace-based retirement programs, if you take your benefit as an annuity, you are taxed on the amounts as you take them out. If you take a lump sum distribution, the payer will automatically withhold 20 percent of the amount as prepayment of your federal taxes (unless you directly roll over a tax-qualified distribution to an IRA or another tax-qualified plan). You don’t have to start taking any money out until age 70½ at the earliest. At that age, you will have to take at least a minimum amount each year or face a penalty.

Regular after-tax savings accounts are not subject to further taxation when you make withdrawals. Traditional IRAs usually are made with tax-deductible contributions going in, so withdrawals generally are taxable on the way out. Roth IRAs are different: if you’re over age 59½ and have had a Roth IRA for five tax years, all distributions from it are tax-free. Distribution rules and their tax consequences for stocks, bonds, and mutual funds can be complicated; consult a broker or professional tax advisor for help.

Should you tap into your tax-free income sources first? Does it make sense to take at least part of your retirement income as an annuity? Should you start taking Social Security as soon as you are eligible, even if you’re still working? Should you wait? How do you know which is better? A professional financial advisor can help you determine what makes the most sense for your situation.

Keep Planning
Bottom line, proper planning is the key. Start planning early, and understand that the process continues after retirement as you fine-tune your plans and make necessary adjustments to keep up with inflation and your changing needs. Enlisting the assistance of professional financial advisors will help you make the most of your various income sources so you can truly enjoy the retirement of your dreams.

¹ Social Security Administration, “Income of the Aged Chartbook, 2004,” Washington, D.C. 2006.
² Social Secuirty Administration, “Retirement Benefits,” Washington, D.C. 2008.
³ RoperASW for AARP, “Baby Boomers Envision Retirement II,” May 2004, 24.
⁴ Social Security Administration, “Income of the Aged Chartbook, 2004,” Washington, D.C. 2006.