Main content
Course: Financial Literacy > Unit 7
Lesson 3: Planning for retirementSources of income during retirement
During retirement, people can get money from different sources like Social Security, which is a government program, individual plans they set up themselves, or employer-sponsored plans provided by their job. These sources of income help retirees pay for their living expenses when they're not working anymore. Created by Sal Khan.
Want to join the conversation?
- So don't they already tax our gross income? So isn't taxes already taken out before investing into 401k or anything?(4 votes)
- So, let's assume that you earn $2,000 per month. If $200 of that is put into a 401k or a regular IRA, it won't be taxed until you begin withdrawing it from that account. You will only be taxed on the remaining $1,800.
If, from the remaining $1,800 (which has been taxed), you put a further $200 into a ROTH IRA, the taxes on it will be lower when you retire and begin to withdraw.(4 votes)
- Why is that people who gets paid weekly end up paying lesser in taxes than those who get paid on a biweekly basis?(3 votes)
- That is not so. Income taxes are based on how much you earn over a year's time, not on how much you get in any particular week.(4 votes)
- It sounds like a Roth IRA is better than a normal IRA to me. Is there any reason a traditional IRA would be preferable to a Roth IRA?(2 votes)
- The money put into a traditional IRA is not taxed when you put it in. You pay the taxes on it when you take it out. The money put into a ROTH IRA is taxed before you put it in, but not when you take it out.(2 votes)
- In the long term, which is better to have? A Roth IRA or a normal IRA?(1 vote)
- That depends. If you think that your income now is taxed lower than your retirement income will be, then the Roth is better. But if you envision lower taxes after retiring, the regular is preferrable.(1 vote)
Video transcript
- 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. The 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. When 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. Now, 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. So 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. And 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. Now, 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. And 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. And 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. You 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. So 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.