Retirement income is generally from three main sources: Social Security, employer-sponsored pension plans, and individual savings. The following is an overview of retirement accounts, retirement income, and the advantages of each plan.
 

SOCIAL SECURITY
        Social Security provides a foundation for retirement or a safety net. Unfortunately, many retirees, especially women, rely on Social Security as their primary source of income during retirement. Social Security payments are based on the number of years you have worked and the salaries earned during your years of employment. Benefits are paid on either your earnings or on the income of your spouse, depending on which payments are larger. You cannot collect both sets of benefits. You are also eligible for Medicare, which is the government health insurance program for those over age 65.

        The current age for benefits is 65, but the retirement age will be increasing in the next few years. Beginning in 2003, the full retirement age will be at age 67. You can also elect to collect your benefits at age 62, but the amount paid will be a reduced benefit. Also, if your spouse is deceased, you may be eligible for a benefit at age 60 and children with a deceased parent can receive a survivor's benefit. You must apply to the Social Security Administration before any benefits can be received and most people will receive a statement from the SSA showing your projected benefits. The payments continue for the length of your life and are adjusted for inflation annually.

        Your Social Security benefits may be taxable if you earn other income. Your benefits may be taxable if your joint income is between $32,000 and $44,000. All benefit taxes are capped at 85%.

        For more information on Social Security, please visit the Social Security website.
 

PENSIONS & RETIREMENT PLANS
         Employer-sponsored retirement plans are an excellent source of retirement income. The plans are established during your years at your job and the employee and/or employer make contributions to the account. The funds are invested and are available to the employee upon retirement. The pension payments are dependent on the plan form, but options include a monthly payment set up like an annuity, a lump-sum payment, or annual withdrawals.

            Pension plans can either be a defined benefit (DB) plan or a defined contribution (DC) plan. The DB plan is where your employer provides the money in the plan and an administrator determines the investments. When you retire, you'll receive a specific monthly benefit that's usually based on years of service and an average of your highest five years of pay.

            In a DC plan, which includes 401Ks and 403Bs (plans for tax-exempt organizations), the employee provides the funds and the employee makes the investment decisions. In some plans, the employer will make matching contributions, but their portion is usually capped. The bulk of the funds in these accounts is contributed by the employee.

            Usually you need to work for the same company for anywhere between three and seven years in order to receive your full benefits. Each plan and company has "vesting" schedules so a portion of employer contributed funds may not be available to you if you retire or leave your job.  All of YOUR contributions are considered "portable" and you can take the funds with you if you change jobs. However, you will need to roll the money over to an IRA in order to avoid tax liabilities and penalties.

            In a 401K or 403B plan, the funds are allowed to grow tax-deferred until the money is withdrawn. The contributions also reduce your current taxable income since the money deposited to the 401K is not part of the earnings that will be reported on your W2.  Once you begin to make withdrawals, the money is subject to taxation and any withdrawals before age 59 1/2 are also subject to penalties.

            Some plans also have something known as Social Security Integration. That means that the benefits paid to employees upon retirement can be reduced because of Social Security benefits. The company can subtract a portion of your SS benefit from the benefit they pay you from your company plan.
 

SAVINGS AND PERSONAL ASSETS
        The assets an individual accumulates over their life is becoming an increasingly important factor in retirement planning. It is essential to start saving early and to invest carefully. This means choosing investments that are appropriate for your age, risk tolerance, and current cash flow needs. Stocks often produce a larger return, but they also carry more volatility. As retirement approaches, there may be a need for the investments to start paying out larger dividends in order to meet cash flow needs.

          Investment accounts available to the individual include IRAs, Roth IRAs, Keogh Plans, and SEP IRAs. All offer tax advantages as well as tax-deferred growth and several withdrawal options.
 

• TRADITIONAL IRA: This IRA contribution is often deductible and the growth is tax-deferred until you begin making withdrawals. Again, any money withdrawn before age 59 1/2 is subject to penalties unless it meets one of the hardship requirements (college tuition, catastrophic illness, or $10,000 for the purchase of a first home). You are also allowed to make 60-day withdrawals, but the funds must be replaced within 60 days or there will be penalties.

 
• ROTH IRA: The Roth offers its tax benefits at retirement. Contributions to the Roth are not deductible, but the entire account, including the earnings, is tax-free upon withdrawal. There are no penalties unless you withdraw the funds in the first five years of the account. It is available those who fall below the income caps of $95,000 for single filers and $150,000 for married couples.

 
• SPOUSAL IRA: This is available to a full-time homemaker and will receive the same tax benefits as the traditional IRA. The couple's adjusted gross income must also fall below the $150,000 limit.

 
• SEP-IRA: The Simplified Employee Pension is designed for self-employed people as well as for small business owners and their employees. The owner can contribute up to 15% of their self-employment income and it is deductible on their tax return. The plan also allows for the tax-deferred growth.

 
• SIMPLE IRA: Businesses with 100 employees or less can offer the Savings Incentive Match Plan for Employees, which is a salary-reduction plan similar to the 401K plan.

 
• KEOGH PLANS: These are again for self-employed individuals and you are allowed to contribute up to 20% of the net self-employment income to these accounts. The contribution is tax-deductible and the money grows tax-deferred until retirement.