Retirement income is the total cash flow from all sources that funds your life after you stop working — portfolio withdrawals, Social Security, pensions, annuities, and other income. The mix and timing of these sources determines both your lifestyle and your portfolio's longevity.
Retirement income encompasses all the money a retiree receives to fund living expenses after leaving the workforce. Unlike working years where income comes primarily from employment, retirement income typically comes from multiple sources — each with different start dates, tax treatments, inflation adjustments, and reliability. Understanding how these pieces fit together is the foundation of retirement planning.
How It Works
Retirement income sources fall into three categories:
Guaranteed income (doesn't depend on markets):
- Social Security — government benefits based on lifetime earnings
- Pensions — employer-sponsored defined benefit plans
- Annuities — insurance products converting savings to income streams
Portfolio income (depends on investment performance):
- Withdrawal strategies from savings and investment accounts
- Dividend and interest payments from investments
Other income:
- Part-time work or consulting
- Rental property income
- Inheritance or family support
Each source has different characteristics:
| Source | Inflation-Adjusted? | Guaranteed? | Tax Treatment | Typical Start Age |
|---|---|---|---|---|
| Social Security | Yes (COLA) | Yes | Partially taxable | 62–70 |
| Pension | Varies | Yes | Ordinary income | 55–67 |
| Portfolio withdrawals | Strategy-dependent | No | Varies by account | Any age |
| Annuity (fixed) | Usually no | Yes | Partially taxable | Any age |
Why It Matters for Retirement Planning
The composition of retirement income directly affects portfolio survival:
- More guaranteed income = less reliance on portfolio withdrawals = lower withdrawal rate = higher success rate
- Income timing matters: a pension starting at 55 but Social Security delayed to 70 creates a 15-year gap that the portfolio must bridge
- Income gaps are common: many expenses start at retirement, but Social Security or pension benefits may not kick in for years
In Monte Carlo simulations, income streams are modeled with configurable start and end ages, amounts, and inflation adjustments. The simulation shows how portfolio withdrawals must fill the gap between total expenses and guaranteed income — and whether the portfolio can sustain that gap for the full retirement horizon.
A Practical Example
A couple retiring at 65 with $1,500,000 in savings and $72,000/year in expenses:
| Income Source | Monthly Amount | Start Age | End Age |
|---|---|---|---|
| Husband's pension | $2,000 | 65 | Lifetime |
| Wife's Social Security | $1,500 | 67 | Lifetime |
| Portfolio withdrawals | Variable | 65 | As needed |
- Ages 65–66: Only the pension provides guaranteed income ($2,000/month). The portfolio must cover $4,000/month — a $48,000/year withdrawal rate of 3.2%.
- Ages 67+: Social Security adds $1,500/month. Portfolio withdrawals drop to $2,500/month — only $30,000/year, a 2% withdrawal rate.
This drop in withdrawal rate dramatically improves long-term portfolio survival. Delaying Social Security or structuring pension start dates can significantly reshape how much the portfolio must carry — and for how long.
Frequently Asked Questions
- What are the main sources of retirement income?
- The primary sources are portfolio withdrawals (from savings and investments), Social Security benefits, employer pensions, annuity payments, and part-time employment. Most retirees rely on a combination of these sources, with the mix depending on their career, savings history, and country of residence.
- How much retirement income do I need?
- A common guideline is 70-85% of pre-retirement income (the replacement ratio). However, actual needs vary widely — some expenses decrease in retirement (commuting, work clothes) while others increase (healthcare, travel). The best approach is to build a detailed retirement budget based on your specific planned lifestyle.
- Does retirement income need to keep pace with inflation?
- Yes — over a 30-year retirement, 3% annual inflation cuts purchasing power in half. Income sources like Social Security include cost-of-living adjustments, but many pensions and fixed annuities do not. Portfolio withdrawals using inflation-adjusted or dynamic spending strategies help maintain purchasing power over time.