Social security benefits are not going to cut it? Here's How To Supplement Your Retirement Income – Motley's Fool

The sad truth is that there are far too many people who are slow to save for retirement. According to a Northwestern Mutual study, one-third of US adults have less than $ 5,000.

As a result, many retirees are forced to rely on Social Security benefits for most of their income once they have left the job market. In fact, according to the Social Security Administration, nearly half of married couples and two-thirds of single beneficiaries rely on their benefits for at least half of their income. More worryingly, however, for 21% of married couples and 44% of single beneficiaries, social security benefits account for at least 90% of their income.

Source of the image: Getty Images.

While it may not be a bad thing to rely on social security to some extent, it is not a good idea to rely on it to pay the bills. The average beneficiary receives only about $ 1,300 per month, which may not be enough to cover your basic living expenses. In addition, by 2034, social security beneficiaries are likely to see their benefits reduced by up to 21% unless the government adopts reforms that will reduce or reduce the benefits of social security. program deficit. If you received $ 1,300 a month and your benefits were reduced by 21%, it would leave you a little over $ 1,000 a month. For someone who does not have any other source of income, it is below the federal poverty line.

Boost your savings before retirement

The best way to avoid having to rely on Social Security benefits is to make sure your personal savings are strong enough to support you during your retirement. However, if you have trouble saving and it is already difficult to collect everything that could be retired, there are two relatively easy ways to boost your savings.

First, if your employer offers contributions equal to 401 (k), take advantage of it. Increasing your contribution rate even by 1% of your annual income can have a bigger impact when your employer pays an equivalent amount.

For example, suppose your employer pays 100% of your contributions up to 3% of your salary and you earn $ 50,000 a year. This means that if you saved $ 1,500 a year, your employer would also receive $ 1,500 in free money, which would bring your total contribution to $ 3,000 a year. Let's also say that, for the moment, you have $ 10,000 in your pension fund and you contribute only 2% of your salary per year. That's $ 1,000 a year, or $ 2,000 when you consider that the employer matches. Assuming you realize an annual rate of return of 7% on your investments, here is what your total savings would look like over time if you always contributed 2% of your salary, if you increase your savings rate to 3% per year to win the full employer match:

Source: Author's calculations.

In other words, $ 500 more per year from you could be $ 100,000 more over a few decades.

Another way to increase your savings before retirement is to invest more aggressively. Many people prefer to play cautiously with their investments (especially after the Great Recession), but more conservative investments also lead to more conservative gains. And if you're already behind in your savings, you can not afford to play too cautiously.

If your portfolio falls on the safe side, you probably invest less in stocks and more in Treasury securities, CDs, money market funds and other types of low risk investments. Although this is not necessarily a bad thing, these types of investments could only generate returns of around 2% to 4% per year.

Shares, on the other hand, tend to have higher returns. Index funds and mutual funds are a great way to limit your risk: they allow you to invest in dozens or hundreds of stocks at the same time. Therefore, if a few of them are winding up, your wallet is not lost. And even though they may fluctuate in the short term, they tend to see a long term average gain of around 7% to 10% per year.

Suppose you are 35 years old and $ 10,000 is saved for retirement. If you contribute $ 1,500 a year (and you earn $ 1,500 more per year from your employer), this is what your total savings would look like over time, generating an annual return on your investment of 3% over 8%.

Source: Author's calculations.

You do not want to play with too much risk and invest all your money in a single title that you expect will skyrocket. But if you are nearing retirement and you have little or no savings, you need to become comfortable with the risk if you want to see rewards that can last until retirement.

And if you start late?

What if you are already in your fifties or early sixties and have only a few decades left to save? First, it's never too late to save and it's better to save at least a few thousand dollars than to do nothing.

But if you are already retired (or are about to retire) and rely on Social Security benefits to make ends meet, there are other ways to earn extra income for you. strengthen your nest egg.

For example, you can take a little time. Whether you're looking for a job in the industry where you've spent your career or in a brand new field, retirement is the perfect time to try new things. Nearly three-quarters of Americans say they intend to work beyond retirement age. So, if you plan to land a part-time job after leaving your full-time career, you're in good company.

For another income increase, you can delay the claim for Social Security benefits. You can start claiming benefits as early as age 62, but for every month past that age until you reach the age of 70, you benefit from an increase benefits.

Suppose, for example, that the total amount of your benefits (or the amount you are theoretically entitled to if you claim at the retirement age) is $ 1,300 per month. If you have reached retirement age at age 67, your benefits will be reduced by 30% if you apply to age 62, leaving you with only $ 910 a month. But if you wait until the age of 70 to apply, you will receive a 24% bonus in addition to the total amount of your benefits. In this scenario, you will receive approximately $ 1,612 per month. And if you plan to benefit from Social Security during your retirement, you might as well get as much as you can.

Social security benefits can be a good cushion for your nest egg, but they should not be your retirement income. It is best to save as much as possible before retiring and then supplement your income during retirement.