Social Security has long been the backbone of American retirement, and many working Americans look forward to the day when they will be able to sit back and collect a Social Security check. However, Social Security was never intended to cover 100 percent of retirement expenses, and it may cover much less in the future.
According to the most recent Social Security Trustees report, the Social Security Trust Fund will be depleted by 2033, implying that future benefits will be reduced unless lawmakers take steps to avoid this. Regardless, supplemental sources of income are usually required to enjoy a fully funded retirement. Here are a few of the best alternatives.
Your Individual Savings Account
When it comes to supplementing Social Security income, having your own retirement nest egg is the best option. If you’ve ever worked for a large corporation, you’ve probably had access to a 401(k), 403(b), or 457 plan. You may have contributed to an IRA or even a solo 401(k) plan if you worked on your own. In any case, with careful saving, you can usually accumulate a nest egg that exceeds the amount you’ll receive from Social Security over time. If you’re still a long way from retirement, take advantage of this time to maximize your contributions to these tax-advantaged plans so you don’t have to rely on Social Security.
Most businesses have shifted away from traditional pension plans and toward 401(k) plans and the like over the last few decades. However, if you started your work career a long time ago, or if you work for an old-line company that still offers a pension, you may be eligible for lifetime payments after you retire. If you work for the police, fire, or any other public service, such as the government, you are more likely to have access to a traditional pension. Some of these pensions can be very profitable. For example, if you served in the military for 20 years, you could be eligible for a pension worth up to 2.5 percent of your highest 36 months of basic pay.
Passive income is a great way to supplement your Social Security payments, and one of the most common options is rental income. When it comes to generating rental income, there are numerous options. The simplest option is to rent out a room in your own home that you no longer require or use. Other options include purchasing a short-term rental unit in a resort area or a long-term rental unit in an area where worker housing is scarce.
Side gigs are commonly thought of as a way for workers to supplement their incomes, but they can also be used by retirees as an additional source of income to supplement Social Security. However, side jobs do not have to be a chore. When you retire, you can put your skills and talents to good use and turn your knowledge into something profitable. One way to get paid to talk about something you know and love is to teach classes, either in person or online. You could also turn your skills into a marketable product, such as an artist, interior designer, or woodworker. Many people are probably eager to learn something you have to offer, so figure out what you enjoy doing the most and see if there is a market for it.
Downsizing may not appear to be a viable option for generating retirement income, but it can be. Assume you own a 3,000-square-foot home but live alone. You’ll save hundreds of thousands of dollars by selling your home and moving into an 800-square-foot condo or smaller house. When withdrawn monthly, this can provide a significant boost to your retirement income if invested carefully.
An annuity, by definition, is a means of supplementing your retirement income. An investment is “annuitized” when it is converted from a pool of capital to a lifetime income stream. If you die too soon, the insurance company keeps the remaining payments. However, if you outlive your expected lifespan, the insurance company must continue to pay you for the rest of your life. As a result, you can never outlive your income, making an annuity a good option for those looking to supplement Social Security with guaranteed lifetime payments.
Relocating will not generate additional income in and of itself, but it can have a similar effect. You can permanently reduce your expenses by relocating to the right location, from housing to utilities, food, entertainment, and transportation. Because you now get to keep the money you would have spent on a monthly basis, the amount you save effectively amounts to an additional income stream. This can amount to a “raise” of thousands of dollars per month for some retirees who relocate.
Social Security benefits for spouses
If you don’t qualify for Social Security on your own, or if your benefit is low, you may be able to increase it by filing for spousal Social Security. If you’re married, you’re entitled to half of your spouse’s payout if it’s more than you qualify for on your own. This benefit is available even if you are divorced, as long as you were married for at least ten years.
If you work in entertainment or the performing arts, for example, you may be able to set up a royalty stream for yourself in retirement. A royalty is a recurring payment made in exchange for the use of your assets or body of work. For example, if you play a character in a film, you may continue to be paid each time the film is shown on television or streaming services. If you write and publish a book, you may be paid a royalty for each copy sold. Royalties are not always predictable, but if you work in the arts or entertainment, they can be a good supplement to your Social Security payments.
A reverse mortgage isn’t for everyone, but it can be a great way for some retirees to supplement their income in retirement. A reverse mortgage is essentially a way to access the equity in your home, either in the form of a lump sum or a series of monthly payments. The funds you borrow are a mortgage against your home, which must be repaid in full with the remaining equity in your home after your death. Reverse mortgages have some drawbacks, including their high cost, but for some seniors over the age of 62, which is required to qualify, they can be a good supplement to Social Security.