Social Security provides a significant number of retirement benefits, the biggest being a growing income stream that you can’t outlive. So you won’t face the danger that you’ll run out of money in your golden years when you aren’t working fo2r a living. The downside is that for all but the most frugal Americans Social Security alone simply won’t be enough to retire on comfortably.
The Social Security Administration says the program should replace about 40 percent of your pre-retirement income. In short, you’ll need more income to maintain your standard of living. That’s why it’s absolutely vital to set up alternative income streams for retirement – here’s how.
Social Security won’t be enough – What to do instead
Despite such warnings, many Americans are woefully underprepared for retirement. According to various studies conducted by the Social Security Administration, between 20 and 25 percent of Americans aged 65 or older received at least 90 percent of their income from Social Security. With the average Social Security retirement check in December 2023 of $1,905, retirees have to pay Medicare premiums as well as other living expenses, which have been soaring in the last few years. It’s a tough road, even if you’re able to avoid taxes on your benefit.
“Social Security was never set up to fully fund someone’s retirement – it was just set up to hedge the risk of a retirement shortfall,” says Eric Bond, president of Bond Wealth Management in Long Beach. “For many Americans, Social Security is the only guaranteed income stream they’ll have in retirement. This means it’s more crucial than ever before to have multiple streams of income in retirement.”
But a recent Bankrate survey revealed that 56 percent of American workers – including 69 percent of Generation X – have insufficient savings, meaning the need for retirement income is great. While Gen X is just on the cusp of retirement, most feel they’re nowhere near prepared.
Certainly, workers can try to maximize their Social Security benefits through smart planning.
“Many people can benefit from waiting until 70 to collect Social Security since it is the only government-guaranteed, inflation-protected income source,” says David A. Schneider, CFP, president of Schneider Wealth Strategies in the New York City area.
Schneider points to the fact that filing for benefits early can hurt your monthly payout, while waiting to claim after full retirement age can boost your benefit 8 percent a year. The upshot: If you claim at age 62, you can earn a check that’s just 70 percent of your full retirement benefit, while if you wait, you can boost your payout to about 124 percent of your full benefit.
But even with a maximum Social Security benefit, retirees will still need alternative income. Here are five ways to set up retirement income and four key accounts to use to do so.
5 accounts to use for retirement income
Retirement savers have five key accounts for building income, often with tax advantages that can help them build wealth faster, though you may have access to other top retirement plans.
401(k)
The 401(k) is an employer-sponsored account that allows you to invest in potentially high-return assets such as stocks and stock funds. With a 401(k) you’ll avoid taxes on any earnings while the money is in the account. Then when you withdraw the money in retirement, after age 59 ½, you’ll pay taxes in the traditional 401(k) while avoiding them completely in the Roth 401(k).
For public sector employees, the equivalent of the 401(k) is the 403(b) program.
IRA
An IRA is an account open to any working American even if they already have another plan. An IRA lets you invest in an even wider selection of potentially high-return assets such as stocks, stock funds, bonds and many other securities. With an IRA you can avoid taxes on earnings while the money is in the account. When you withdraw money in retirement, at age 59 ½ or later, you’ll pay taxes on money from the traditional IRA and avoid them fully in the Roth IRA.
Brokerage account
Even a regular, after-tax brokerage account can help you amass money for retirement, though the account itself doesn’t offer any ket tax advantages. Still, you can invest in potentially high-return securities such as stocks and stocks funds. You’ll owe taxes on any dividends you receive in the account, though you won’t owe taxes on your capital gains until you sell the security. That means you could hold investments for decades and not owe capital gains taxes.
Annuity
An annuity is another type of account that can be set up through an insurance company. The key benefit of an annuity is that it can pay you lifetime income, meaning you won’t run out of income, and it may offer other…
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