What is Retirement Income?

Retirement income is the money you live on after you stop working full time. It can come from Social Security, a pension or annuity, withdrawals from retirement and investment accounts, part-time work, or any mix of these.

The sources fall into two groups. Guaranteed income, such as Social Security and pension payments, arrives on a schedule, typically for life, regardless of what markets do. Portfolio income is whatever you withdraw from your savings, and how long it lasts depends on how much you take and how your investments perform. Much of retirement income planning comes down to how much of your spending each group has to cover.

Sources of Retirement Income

Rental properties, royalties, and business income can also fill part of the gap. They sit between the two groups: more predictable than a portfolio, but not guaranteed.

Retirement Income Strategies

There are three broad ways to turn savings into a paycheck, and they can be combined.

Systematic withdrawals. You take a set amount from the portfolio each year, often starting near 4% of the initial balance and raising it with inflation, as in the 4% rule. It’s simple and keeps your money invested. The risk is timing: poor returns in the first years of retirement can deplete a portfolio even when long-run average returns turn out fine, which is known as sequence of returns risk.

An income floor. You cover essential expenses (housing, food, insurance) with guaranteed sources, adding an annuity if Social Security and any pension fall short, and pay for discretionary spending from the portfolio. A market drop then cuts into the travel budget rather than groceries. The cost is flexibility, since money used to buy an annuity is no longer available for emergencies or heirs.

A bucket strategy. You split savings by when you’ll need them: cash for the next few years of spending, bonds for the middle years, and stocks for later. Selling stocks during a downturn becomes less likely because the near-term buckets carry you through. See the bucket strategy for how the refilling works.

How to Calculate Your Retirement Income Needs

Start from spending, not from income.

Portfolio Income Needed = Annual Spending + Taxes - Guaranteed Income

A couple spending $80,000 a year who expect $40,000 in combined Social Security benefits and estimate $6,000 in federal and state income tax need $46,000 a year from savings. At a 4% withdrawal rate, that points to a portfolio of about $1,150,000 ($46,000 x 25).

The formula also shows why guaranteed income is valuable: at the same rate, every $1,000 of annual Social Security or pension income reduces the savings target by about $25,000.

Social Security Timing and the Bridge Years

The example assumes Social Security has already started. For anyone born in 1960 or later, full retirement age is 67. Claiming at 62 pays 70% of the full benefit for life, while waiting until 70 raises it to 124%.

Delaying makes the guaranteed share of your income larger, but if you stop working before you claim, the portfolio has to cover all of your spending in the meantime. Try a later Social Security claiming age in a retirement plan and the drawdown chart shows, year by year, how much more your accounts have to supply before benefits begin.

Is Retirement Income Taxable?

Most of it is, at least in part. Pension payments, traditional 401(k) and IRA withdrawals (apart from any nondeductible contributions), and wages are taxed as ordinary income. Qualified Roth withdrawals are tax free. Taxable brokerage withdrawals are taxed only on the gains and income they contain.

Social Security depends on your combined income, which is your adjusted gross income plus nontaxable interest plus half of your benefits.

Below the lower threshold, benefits are not taxed. These thresholds are set in law and are not adjusted for inflation.

Retirement Income Tax Planning

Because each source is taxed differently, the order in which you draw on them changes your tax bill. A traditional IRA withdrawal adds to combined income and can make more of your Social Security taxable, and higher income can raise Medicare Part B and Part D premiums. Qualified Roth withdrawals don’t count toward either calculation.

Required minimum distributions (RMDs) eventually take some of the choice away. They begin at 73 if you were born between 1951 and 1959, and at 75 if you were born in 1960 or later, so the years between retiring and RMDs are when you have the most control over taxable income. See required minimum distributions for the details.

States That Don’t Tax Retirement Income

Nine states have no broad individual income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. Washington does tax large long-term capital gains, which can matter if you sell appreciated investments.

Among states with an income tax, treatment of Social Security, pensions, and IRA withdrawals varies widely. Some exempt Social Security or public pensions, some offer an exclusion up to a dollar cap, and some tax retirement income like wages. The rules change often enough that your state revenue department’s current guidance is the place to check.

Frequently Asked Questions

What is a good monthly retirement income? One that covers your projected spending plus taxes. The couple in the example above, spending $80,000 a year with $6,000 in taxes, needs about $7,200 a month before tax from all sources combined. Averages for other households say little about what your own expenses will be.

Is Social Security considered retirement income? Yes. It pays for life and rises each year with a cost-of-living adjustment. Between 0% and 85% of benefits count as taxable income, depending on your combined income.

Does other retirement income reduce Social Security benefits? Only earnings from work, and only before full retirement age. If you claim early and keep working, Social Security withholds $1 for every $2 you earn above an annual limit ($1 for every $3 in the year you reach full retirement age). Pension payments, IRA withdrawals, and investment income do not reduce your benefit, though they can make more of it taxable. Since the Social Security Fairness Act took effect in January 2025, a pension from work not covered by Social Security no longer reduces benefits either.

How do I make my retirement income last? Keep withdrawals at a sustainable rate and be willing to trim them after a bad market year. Delaying Social Security, if you can afford the bridge years, increases the share of your spending covered by income that lasts for life and adjusts for inflation.

What is retirement income planning? Deciding which sources will cover each year of spending, in what order you’ll draw on your accounts, and how to manage the tax cost of those choices. It overlaps heavily with retirement planning, but focuses on the spending years rather than the saving years.