Retirement incomes typically come from three major sources--Social Security, pensions and salary reduction plans, and savings and investments. Those who plan to work part-time can consider those earnings as a fourth source.

Social Security

Most people expect to collect Social Security benefits in retirement, either on their own work record or as the spouse of a worker. The amount of the check you get as a retired worker is based on your covered earnings during your working years.

The normal retirement age for people retiring now is age 65. Social Security calls this a full retirement age, and the benefit amount that is payable is considered the full retirement benefit. Because of longer life expectancies, the full retirement age will be increased in gradual steps until it reaches age 67. This change starts in the year 2003, and it affects people born in 1938 and later. It will be reduced if you retire early, before 65 (or the applicable delayed normal age), and increased if you delay retirement past 65 (or the applicable delayed normal age).

You are eligible to collect Social Security retirement benefits if you are at least 62 and you have covered earnings for enough years. Laws governing eligibility as well as how benefits are calculated have been changed several times and will undoubtedly be changed again, so you need to keep track of changes and how they affect you.

Benefits for work after age 65. Workers who continue working after age 65 without claiming Social Security benefits receive increased benefits. Those who turn 65 in 1994 or 1995 receive 4.5 percent more for each additional year worked. Those reaching age 65 in 1996 or later, will see the size of their benefits increase gradually. The annual increase will rise to 8 percent for those reaching age 65 in 2008. Retirees who start to receive Social Security benefits and continue working for pay may receive reduced Social Security checks. Social Security reduces checks for the months the worker earns more than the maximum allowable amount. Your age determines the maximum allowable amount. The maximum changes each year. In 1995, it is $8,160 annually for individuals under 65 and $11,280 annually for individuals older than 65. If you earn more than these amounts, you lose $1 in Social Security benefits for every $2 earned if you are under 65. Additionally, you lose $1 in Social Security benefits for every $3 earned if you are over age 65. After age 70, you may earn any amount, and Social Security will not reduce your benefit.

Public pension offset. If you work in the public sector, you may become eligible for a public pension rather than Social Security. If you receive a public pension, your spousal or survivor Social Security benefits may be reduced. Pension eligibility results in a $2 reduction in Social Security benefits for every $3 received from the pension. Depending on your age, there are some exclusions from this rule. Be sure to consult your Social Security office if you think this regulation might apply to you.

Additionally, workers who receive a public pension based on employment not covered by Social Security may receive reduced Social Security checks. Social Security does not reduce checks for public-pension workers who have the required amount of earnings under Social Security-covered jobs for most of their adult lives.

Applying for benefits. To receive benefits from Social Security, you must apply. You should apply 2 to 3 months before you retire. If you wait until after you retire, you may have to wait twice as long before your checks start. To apply, you must furnish your Social Security number. Also, you must submit an official record of your birth or a religious record issued before you were 5 years old. Only original or certified copies are acceptable. Social Security will return them to you. If you do not have originals, submit the best record you have. If you do not have the proper documents, consult Social Security.

Social Security records are not always current. Therefore, you should submit your last two W-2 forms. If you are self-employed, submit copies of your last tax return and cancelled check. You may also need your marriage certificate. Also, a former spouse needs records of the duration of the marriage. If you are eligible to receive children's benefits, you will need their birth certificates and Social Security numbers to apply.

Pensions and Salary Reduction Accounts

Pensions. The average company pension in 1991 was $7,490 per year after 20 years of service at a $35,000 income at age 65. If you work for a large corporation, the federal government, the State of Maryland, or the military, your pension may be larger. To be eligible for full benefits, you must be fully vested. This means you have worked for the company from 5 to 7 years, depending on the vesting method described in your plan. Vesting entitles you to the employer's contribution to your pension. However, for defined benefit pensions, the actual size of your pension depends on your wage level. Also, it depends on the number of years you worked, the benefit formula, and the existence of Social Security integration. When your employer integrates your pension with Social Security, your Social Security benefit reduces a portion of your pension benefit. The size of your defined contribution pension and profit-sharing benefit depends on the size of the fund and its earnings over your working years. Your plan will determine your earliest retirement age.

As you plan your retirement income, ask your employer if your pension will increase with inflation. If so, ask about the method used to figure the increase. Corporate pensions frequently have little or no inflation protection. Government pensions typically provide inflation protection, but the actual amount depends on the plan.

Single annuity or joint and survivor annuity benefits. Your retirement benefit from a defined contribution or defined benefit plan will be in the form of either a single or a joint and survivor annuity. A single annuity provides benefits until the worker's death, whereas a joint and survivor annuity also provides survivor benefits. To fund these additional survivor benefits, the employer reduces the pension payment. The amount of the reduction sometimes depends on the age difference of the two recipients.

The law requires that married couples take a joint and survivor annuity unless the worker's spouse signs away his or her rights. Consider rejecting it only when the surviving spouse will have income that is at least 75 percent of the current joint retirement income. If you and your spouse have adequate pensions, a joint and survivor annuity is less likely to be necessary. However, the only way to be sure is to have a fully planned retirement budget before you make this important decision.

Section 401(k), 403(b), and other salary reduction plan benefits. You may be able to receive your benefits from a salary-reduction plan in one of several ways. These include an annuity, a lump sum, or a combination of the two. Many plans allow you to choose the way you will receive your benefit. If you work for a company, you may have a 401(k) plan. You will probably have all of the available choices. If you work for a nonprofit organization such as a school or hospital, you may have a 403 (b) plan or tax-sheltered annuity. In 403(b) plans, you can elect how you will receive the part of the plan resulting from your voluntary contributions. These plans usually distribute nonvoluntary contributions as an annuity. If you work for a state or local government, you may have a 457 plan. These plans typically offer all of the choices. If you work for the federal government, you may participate in Thrift Plan of both federal retirement plans. federal employees may take their contributions as a lump sum or a partial lump sum with the remainder as an annuity.

As you begin to sum your retirement income, separate income received as an annuity from amounts that will you receive as a lump sum. Add lump sum amounts to assets (to be liquidated), which lists your potential sources of retirement income.

Tax effects on withdrawals from tax-deferred accounts. Carefully consider your options when withdrawing funds from your tax-deferred accounts at retirement. The decision you make will affect the amount of taxes you must pay on the amount withdrawn. Here are five tax rules that could affect your choice.

First, all withdrawals from pensions and tax-deferred plans are subject to taxes at ordinary rates. The exception is the amount set aside from pretax income.

Second, any amounts withdrawn as a lump sum are subject to a 10-percent early-withdrawal penalty if you are not yet age 59½. You can avoid this penalty when leaving a job by taking the balance as an annuity based on one of three methods. Consult your tax advisor for these rules.

Third, regardless of age the law requires that your employer or custodian of your tax-deferred plan withhold 20 percent of all lump-sum withdrawals for federal income taxes. This may not be the tax you actually pay. It could be more or less. You figure the exact amount when you prepare your yearly income tax return.

Fourth, you can defer withdrawals from tax-deferred accounts until age 70½. At age 70½, withdrawals must begin based on the life-expectancy of you or joint life expectancy with your spouse.

Finally, 5-year averaging on lump sum withdrawals may reduce your taxes. Through 5-year averaging, you may be able to reduce the aforementioned taxes. You can use 5-year averaging when taking a lump sum from corporate plans, self-employed plans, and the Federal Thrift plan. However, you can only use it once after you are 59½, and you must have been a member of the plan for at least 5 years. To use 5-year averaging, divide the lump sum by five. Then, look up the tax rate on the single taxpayer schedule and multiply the result by five. Pay this tax with your regular yearly taxes. If you turned age 50 before January 1, 1986, you can also use 10-year averaging. However, you must look up the single taxpayer tax rate in effect in 1986. Figure your taxes both ways to determine which save the most taxes.

Reducing taxes on withdrawals. There are several strategies that you can use to continue deferring taxes. First, you can ask your employer to transfer funds directly from your employer to an IRA, a "conduit" IRA, or a new employer's plan. An IRA allows you to roll over the amount of the lump sum in the plan that you will have to include in taxable income if not rolled over. When you roll over this sum, it remains tax-deferred. The exception is withdrawals made by public employees from Section 457 plans that cannot be rolled over. A "conduit" IRA is an IRA used to hold the funds temporarily until you can transfer them to your new employer's plan. It may be necessary to keep the custodian of the rolled-over funds from mixing them with a regular IRA. To prevent mixing, be sure you have only the conduit IRA at the chosen financial institution. You no longer have 60 days to make the transfer yourself without being taxed. When requesting a direct transfer from your employer, you must inform your employer of the name and address of your rollover IRA. Your employer must make out the check directly to the IRA, not jointly with your name. Some employers deliver the check directly to the employee who then must forward it to the IRA or new pension plan. If you have to transfer the check yourself, it is critical that you do so within 60 days of receiving the check. The IRS will not allow you to roll over the funds if you miss this deadline. A rollover IRA allows you to withdraw money as you need it, now or in the future.

Second, keep the funds in your former employer's account. Your employer may want you to take the money now. However, your employer cannot force you to withdraw the funds if your account is worth more than $3,500 and you are under age 62 or under the plan's retirement age.

Third, take the money as company stock. Company stock is not subject to the 20 percent tax.

Finally, rather than taking a lump sum or rolling the sum over, take the sum as annuity or as series of at least 10 annual payments. If you have fewer than 10 annual payments, your employer must withhold twenty percent from each payment.

Savings and Investments

Your savings and investments include those assets listed above including IRAs, SEPs, Keoghs, and tax-deferred funds you choose to take as a lump sum. At retirement you have three choices for use of assets under your control. You can let these assets grow if your other retirement income is enough. You can add the earnings on these assets to your other retirement income. Finally, you can start to spend the principal as well as the interest. At some point in retirement you may need to liquidate most of your assets to maintain your lifestyle.

Are you concerned that you will outlive your savings if you start to live on your principal? You can determine how many years your savings will last. However, you need to choose a specific interest rate and the percentage of your total savings that you will withdraw each year when consulting Table 3. For example, suppose your savings and investments earn an annual return of 8 percent and you withdraw 10 percent per year. Then, your savings will last 21 years. If you only withdraw 8 percent of your savings each year, you will never deplete your fund. The reason is that you will be living on the interest only. If you plan to withdraw interest to cover living expenses, remember that federal and state income taxes will reduce the amount you have to spend.The reply you receive from the Social Security Administration will include the following:

• the number of quarters (there are four quarters per year) you have worked on record;
• your total Social Security recorded earnings since 1937;
• the total of FICA taxes you have paid through the years;
• your annual earnings each year since 1957;
• an estimate of your benefits should you become disabled;
• a projection of your retirement benefits if you start to receive them at age 62, 65, or 70; and
• an estimate of survivor's benefits.

You should think carefully about retiring before age 65, the age at which you become eligible for Medicare. You may have to pay a hefty health insurance premium if your employer does not continue your health insurance until you are eligible for Medicare.

Benefit eligibility. A full benefit is formally called the primary insurance amount (PIA). You can retire at age 65 with your PIA. Also, you can retire as early as age 62, with 80 percent of your PIA. Social Security pays spouses 50 percent of the working spouse's benefits at age 65 and 37.5 percent of the benefit at age 62 provided that the spouse's earned benefit is not larger. Some spouses enter or reenter the labor market later in life and work until retirement. The spouse should determine if his or her earned benefit is larger than a dependent-spouse's benefit. A spouse's 50-percent benefit also is available if the spouse is caring for a child under the age of 16 or a child who became disabled before age 22. Surviving spouses receive 100 percent of the worker's benefit at age 65 and 71.5 percent of the benefit at age 60. If the surviving spouse becomes disabled, he or she will be eligible for 71.5 percent of the benefit at age 50.

Earnings

About one-fourth of men and one-seventh of women aged 65 to 69 are still in the labor force. Some of these people are delaying retirement, while others are returning to work for various other reasons. Obviously, access to employment and earnings can make a big difference in retirement income.

You should remember, however, that until you are 70, the Social Security system does place a limit on how much you can earn before Social Security benefits are reduced. Check with the Social Security office for the amount you are allowed to earn before the penalty is imposed, and consider the trade-offs between potentially reduced benefits and increased income from earnings. Also consider any additional expenses you might have if you go back to work, such as transportation, meals, special clothing, or dues.

Assets That Could Be Liquidated

Retirement income can also come from liquidating or selling off some of your assets. Real estate, jewelry, antiques, and collections are just a few of the examples of assets that could be turned into current income. In some cases, however, you may be responsible for long term capital gains taxes on these assets.