Most Americans anticipate retiring at 65, the traditional retirement age in the U.S. However, life circumstances may often disrupt those plans. Research reveals that the median retirement age in the U.S. is 62, with nearly six in 10 retirees stepping back from the workforce earlier than they had planned.1 This means many workers leave the workforce several years sooner than anticipated or before the Social Security full retirement age of 67. Retiring earlier means living longer in retirement, underscoring the need for assets saved during your working years to stretch farther.
With Social Security benefits replacing about 39% of past earnings for retirees who claim payments at age 65, the difference is often made up with retirement savings, a pension, earned income from part-time work, or another source.2 Generating income doesn’t necessarily mean you must keep working, although that is one way to do it. Read on to learn about the different ways you can create income in retirement.
But first, start with a budget
A practical first step is to be mindful about your spending in the years leading up to retirement. Start by separating your spending into two buckets – mandatory expenses (the items you need) and discretionary expenses (items on your “want” list). Once you’ve reviewed your expenses, determine where the money will come from to pay for these items when you’re retired. Building a realistic budget can help increase the likelihood you’ll fulfill your future goals and enjoy your retirement years. Read our smart strategies to budget and track spending here.
Diversify your income stream
During retirement, you’re likely to rely on two types of retirement income: regular and variable.
- Regular income sources include Social Security, pensions, or income annuities purchased privately. Benefits from these sources of income include predictable payments and inflation protection on Social Security and perhaps a pension. Additionally, research shows that retirees feel more at liberty to spend regular income than spending down retirement accounts.3 Drawbacks include limited flexibility, lack of liquidity for big purchases, and low growth potential.
- Variable income comes from your retirement accounts including 401(k) plans, IRAs, and other savings. While these provide spending flexibility and growth opportunities, they require disciplined withdrawals to avoid depleting your savings.
A blend of these income streams can help create a balance of stability with growth and flexibility.
Understand the difference between active and passive income
When planning for retirement, understanding the distinction between active and passive income is crucial. Active income is essentially what you earn in return for your time and services. On the other hand, passive income stems from assets like dividends, interest, rental income, and capital gains from stocks or real estate.
During your working years, the focus should be on active income and generating account growth. However, in retirement, your priority should shift to generating passive income with growth to outpace inflation.
One way to earn passive income is through real estate. Many investors buy and hold rental properties, benefiting from rental income and potential appreciation. If managing rentals isn’t for you, consider investing in a real estate investment trust (REIT). These companies own and manage income-producing properties like buildings, office spaces, and malls, providing income to stakeholders through leasing and renting.
Other passive income avenues include savings accounts, certificates of deposit (CDs), and money market accounts. These options typically offer lower risk and are insured by the Federal Deposit Insurance Corporation (FDIC), making them suitable for the most conservative portions of your portfolio.
Lastly, passive income also includes selling stocks, mutual funds, and/or ETFs that have appreciated over time. It is outdated to think income only comes from interest or dividends. A dollar of capital appreciation will spend at the grocery store just the same as a dollar of dividends. The tax consequences of long-term capital gains and qualified dividends are the same and trading fees are essentially zero at most discount brokerage firms.
Maximize Social Security benefits
Social Security forms a critical part of many retirees’ income. Payments are guaranteed and adjusted for inflation. Although you may be eligible to collect Social Security as early as 62, the potential financial benefits of waiting till age 70 may be greater. Here’s how delaying your benefits can increase your monthly payout:
- Filing at full retirement age (65–67) can help provide up to 20–30% more than claiming early at age 62.4
- Waiting until age 70 can help boost payments up to 8% annually after full retirement age.5
To learn about tax strategies that can help maximize Social Security benefits, read our article. Online tools like the Social Security Estimator at ssa.gov can also help you plan your claiming strategy.
Consider part-time work
Not all retirees want to stop working altogether. Part-time work in retirement can provide additional income, reduce reliance on savings, and help keep you active. However, once you earn over a certain threshold, money from a part-time job could cut into your federal benefits. For example, if you are under your full retirement age, are collecting Social Security retirement benefits, and made more than $22,320 in earned income in 2024, Social Security can help reduce your benefit by $1 for every $2 you earned above that amount. Earning above $103,000 (or $206,000 if you’re married and file a joint tax return) can also trigger increases in your cost for Medicare coverage.6
For help ensuring your income in retirement can meet your needs, let’s talk.
1 Picchi, Aimee. “Planning to retire at 65? Most Americans stop working years earlier – and not because they want to.” Money Watch, CBS News, 2 December 2024.
2 Burkhalter, Kyle, and Karen Rose. “Replacement Rates for Hypothetical Retirement Workers.” Actuarial Note, Social Security Administration, May 2024.
3 Blanchett, David M., and Michael S. Finke. “Retirees Spend Lifetime Income, Not Savings.” SSRN. 30 Dec. 2024.
4 “Retirement Benefits.” Social Security Administration. Accessed 8 January 2025.
5 Lankford, Kimberly, and Donna LeValley. “Boost Your Social Security Benefit Every Month You Delay.” Kiplinger.com, Kiplinger, 31 October 2024.
6 “2025 Medicare Costs Fact Sheet.” Medicare. Accessed 30 December 2024.
