You are capable of much more than what those monthly benefits provide.
Once they stop working, many seniors end up relying heavily on Social Security to pay their bills. However, this is a dangerous thing to do.
Not only is Social Security at risk of benefit cuts in the near future, but the average monthly benefit is currently only $1,663. That’s just under $20,000 per year.
Even if you intend to live frugally in retirement, there is a good chance you will require a more generous annual income. However, the good news is that you can position yourself to rely less on Social Security and more on alternative sources of income. Indeed, these two sources may end up paying you much more generously than Social Security.
1. Your individual savings
If you invest consistently in an IRA or 401(k) plan over a long period of time, you could accumulate a sizable balance. And this, in turn, may provide you with a reasonable amount of financial freedom during retirement.
Assume you contribute $500 per month to a retirement savings plan for 40 years and that your investments earn an average annual return of 8% (a little less than the stock market’s average). At that point, your nest egg will be worth approximately $1.5 million.
Now, suppose you decide to withdraw 4% of your savings annually during retirement, as many financial experts recommend. This would leave you with an annual income of $60,000, which is significantly more than the average Social Security recipient receives today.
2. A rental property
Purchasing an income property entails some risk. You’ll be responsible for property maintenance and hope that your tenants pay rent on time and treat the property with respect. However, if you’re willing to put in the effort and risk, you can position yourself quite nicely for retirement.
Consider investing in an income property during your 30s with the goal of completely paying off the mortgage by the time you retire. Assume that maintaining that home costs you $10,000 per year in terms of upkeep, insurance, and property taxes, but that you can charge $3,000 per month in rent. At that point, you’re looking at a profit of $26,000, more than the average senior on Social Security currently receives.
Additionally, you may decide to sell your income property at some point. If you can walk away with $600,000 for that home after real estate agent fees and applicable transfer taxes, and you treat that $600,000 lump sum similarly to your savings, you’ll still earn $24,000 per year if you take 4% annual withdrawals.
You are capable of doing better than Social Security.
Social Security may provide a welcome source of additional income during retirement. However, it should not be your sole or even primary source of income. If you take steps to establish a more stable source of income, you’ll have more to look forward to after your time in the workforce ends.