Sources of income during retirement

0:01- Let's talk a little bit about sources of income during retirement. So we're assuming you're retired, you're not working, so you're not gonna get that income. But one of them is perhaps just your straight-up investment income. You saved money over time. You've invested it in, let's say, dividend-paying stocks.

0:18The dividend is income. Maybe you have bought rental properties. Those rents after paying all the expenses, those can be income, but there's also things that are special purpose for retirement. Probably most common is social security. You pay into social security.

0:35When you get your paycheck, you'll see that some of it is essentially taken out for social security. And then when you become the age when you can start collecting that social security, you get a payout and up to a cap, it is related to how much you have actually paid into social security.

0:51Now, above and beyond social security, many employers will have employee employer sponsored plans. And that is money that you pay in. And oftentimes the employer will add some money to that. They'll match some percentage of what you put into that plan. For example, a 401K, and then you can put money into it on a pre-tax basis.

1:15So what does that mean? Normally, let's say you make an incremental $10,000 and your marginal tax rate is say, 20%. Well, you're going to have to pay $2,000 of tax on that $10,000. But something like a 401K, you could put that $10,000 into the plan and not have to pay taxes on it upfront.

1:38And then you can invest it within the plan. You can find out different types of investment vehicles, ways to invest that money within the plan. There's not unlimited choices, but they usually have several choices within the plan. And then when you're of retirement age, you can take it out and then you pay taxes.

1:54Now, you might say, well, I'm gonna pay taxes one way or the other. But when you pay taxes when you're retired, one, you deferred those taxes by many years, usually many, many decades. And also when you're retired, it's possible that your income is lower and so your marginal tax rate is lower.

2:11And so you might actually have to pay fewer taxes on those same dollars. So you have social security, you have employer sponsor plans like 401Ks, and then you have individual retirement plans. The most common one is that what's called an IRA, individual retirement account.

2:29And that's an individual plan that you usually go and get with a bank or a broker on your own. It's not connected to an employer. And there's two types. There's a traditional IRA where similar to a 401K, you can put money in on a pre-tax basis up to a cap. And 401Ks also have a cap.

2:46You can invest it without taxes, and then some future date you're going to pay the taxes on it. There's also something called a Roth IRA which you pay the taxes upfront, put the money in, but then you can invest it tax free. And then when you take it out at retirement, you don't have to pay taxes on it.

3:02So those are the the basic ways that you're going to get income in your retirement. So it's good to start thinking about them early.