There are 4 key sources of income at retirement: social security benefits, employer pension benefits, tax deferred retirement benefits, and individual savings. Each are discussed in detail below.

Social Security Benefits
You see it withheld from every single paycheck; FICA (Social Security) taxes. This money contributes to a fund that pays retirement, disability, survivor and death benefits to individuals currently entitled to receive these benefits.

Theoretically, current workers will one day have their benefits paid by the future workers behind them.

Social Security Benefits can represent a significant source of income during your retirement, depending on your level of retirement needs, typically as follows:

• Single low income workers ($30,000 or less) can expect Social Security benefits to provide 42% of retirement needs.
• A married low income worker with a same age non-working spouse can expect Social Security to provide 63% of retirement needs.
• A single high income worker ($100,000 or more) can expect Social Security to provide 13.5% of retirement needs.
• A married high income worker with a same age non-working spouse can expect Social Security benefits to provide 20.25% of retirement income needs.

Why the disparity? There is an earnings limit above which workers do not continue to pay Social Security taxes ($80,400 in 2001). Also, the calculation of the retirement benefit is based on a decreasing percentage as your AIME (Average Indexed Monthly Earnings) increases. In other words, the more money you earn, the more you will need to be able to provide for your own retirement needs.

Employer Pension Benefits
Some employers have retirement plans that will pay you a monthly amount over your life or over you and your spouse's joint life expectancy. Although there are many different types of pension plans, they generally are based on two factors: your years of service and your compensation. You are paid a monthly amount based on a formula that includes these two factors. Retirement plans can vary widely, however, so if you have one at your employer, make sure you understand the benefits, terms, and conditions and include it in your retirement planning accordingly.

Two other terms worth knowing are defined benefit and defined contribution plans.
A defined benefit plan promises to pay a benefit during retirement, and the employer is usually responsible for the actuarial funding and investment of the plan. Compare this to a defined contribution plan, where the employee is responsible for investing funds into the plan (an amount defined by the employer but actually invested by the employee, generally through payroll deduction). The source of income during retirement depends on employer contributions, if any, and the tax deferred earnings on the balance in the investment account. Keep in mind that a defined contribution plan offers no guarantee surrounding the balance in the employee's account at retirement. In other words, bad investing, poor earnings performance or even inadequate funding can have a negative impact on the amount in the account at retirement.

Tax Deferred Retirement Benefits (IRA's, 401(k)'s, 403(b)'s)
To help supplement Social Security and Employer benefits (if any), you can also fund your own retirement through direct contributions or salary deductions. This is accomplished through IRAs, 401(k)s, and 403(b)s. The bonus of these types of plans is that they have tax benefits.

IRAs are typically available as an option to those who are not participating in an employer-sponsored plan. You can only contribute a small amount each year (a maximum of $3,000 in 2003) compared to other retirement plans. You also cannot contribute to an IRA if you already participate in an employer-sponsored plan and earn more than $35,000 if you’re single or $50,000 per married couple.

Employers are increasingly offering 401(k) plans, also known as CODAs (Cash or Deferred Arrangement). The advantage over regular IRAs is that you can contribute a higher amount. In addition, employers will sometimes offer as part of employee benefits and compensation packages a matching component to the program: whatever you put in to your 401(k), your employer will match (generally up to a certain percentage). Another advantage over regular after-tax savings is that your contributions are tax deferred, as are any investment earnings within the 401(k). Note that you as an employee are responsible for choosing the investment vehicle, meaning that there is no guarantee surrounding the savings that will accumulate in this type of account.

A 403(b) is a variation of the 401(k) offered by public schools, colleges, and certain tax-exempt private organizations.

Individual Savings
A fourth source of retirement funds is individual savings accumulated after tax. Generally speaking, this is the most difficult way to save for retirement, since most people tend to spend all take home pay. In addition, there are no tax deductions offered for this type of savings. However, if you are able to be disciplined enough to save excess funds that are not needed elsewhere, this can be a great long-term source of additional retirement funds.