As pensions continue to recede from the workplace, Social Security is the only guaranteed source of retirement income that a lot of Americans can count on. Unfortunately, those government checks don’t provide the level of support that most adults will need during their later years.
The average monthly benefit offered under the Old-Age, Survivors, and Disability Insurance Program (Social Security's official moniker) is $1,360 for retired workers and $703 for spouses. That means a typical couple is only bringing in $24,756 per year. Chances are that won’t be enough to cover all your bills, especially if you’re still paying a mortgage.
And, unfortunately, many Americans haven't funded their 401(k)s and IRAs enough to make up the difference. If that's you, what are other ways to supplement your income during your post-working years? Here are some sources you’ll want to consider. (For more, see 5 Ways to Fund Your Retirement.)
If you’re fortunate enough to contribute more than the 401(k) and IRA limits allow, taxable investments such as stocks, bonds and mutual funds are another great way to save for retirement. Index funds and exchange-traded funds are particularly appealing, as they offer low expenses and built-in diversification.
The key is creating an appropriate mix of asset classes. Leaning too heavily on stocks can be risky for people with fewer years to recover from bear markets. However, a portfolio comprising only fixed-income securities, such as bonds, won’t provide the growth potential that most people need for a longer retirement.
A typical rule of thumb is to hold a portion of stocks equal to 110 minus your age. That means a 65-year-old would have a portfolio with 45% of its overall value in stocks and 55% in bonds. Of course, you can make modest adjustments to this formula based on your risk tolerance. (For more, see Is ‘100 Minus Your Age’ Outdated?)
Living a long life may seem like a great proposition, but it’s not so great for your finances. A lot of people don’t have enough assets to support their lifestyle if they make it into their late 80s or 90s.
A fixed annuity, which offers a lifetime income stream at a set rate of interest, is one way to manage that risk. You can even buy deferred annuities that don’t pay out until you reach a certain age. Once they kick in they offer bigger payouts than immediate-annuity products.
Do you have a spare bedroom in your home now that your kids have moved out? Renting it can be an easy way to generate cash every month, as long as you can make peace with your new roommate. Finding people you either know or have good references for can help eliminate headaches down the road.
Another idea: downsizing into an apartment or condo while renting out your original home. One of the perks of becoming a landlord is that you can deduct things such as mortgage interest, depreciation and utilities, lowering your income tax bill. There are risks, of course, such as the inability to find a tenant or unforeseen maintenance costs.
As you get older there’s a good chance your basement or garage has filled up with things you no longer need. Selling those items on eBay or Craigslist can be a great way to earn a little extra cash – not to mention clear out your home. If you’re handy you can use websites such as Etsy to market your crafts and other homemade goods, creating a nice side business for yourself.
When other sources of income are in short supply, many seniors use the equity in their home to get access to instant cash. One way to do this is with a home equity line of credit. A HELOC can help you address short-term needs, as long you anticipate having the income later on to pay it back. And because it's a line of credit, you only have to use as much as you need. (For more, see Is It Time to Get a HELOC?)
Another way to tap your home equity is with a reverse mortgage, which lets you stay in your home and borrow against its value. When you eventually sell the property, your proceeds are reduced by the amount of the loan that’s still outstanding. Before agreeing to a reverse mortgage, however, know that they can be complicated agreements with significant loan origination fees and other costs. (For more, see 5 Signs a Reverse Mortgage Is a Good Idea.) And if you're married, be aware of how your spouse fits into the plan. Reverse Mortgage: Could Your Widow(er) Lose the House? explains the risks.
Because many Americans of retirement age don’t have enough investment income to live on, a significant number choose either to work longer or find a part-time job when they leave their career. The U.S. Bureau of Labor Statistics predicts that nearly a third of adults between the ages of 65 and 74 will work in some capacity by the year 2022.
For some retirees, working a reduced schedule in retirement is just what they need – an opportunity to be in a low-stress environment and meet new people.
Instead of working for someone else, you may decide you'd rather become your own boss once you retire. That could mean working in your previous field as a consultant or developing a whole new set of new skills. Perhaps you've always wanted to start up your own bakery or handyman service. Maybe you'd like to set up a tax-preparation business, so you only have to work part of the year. The advantage of being the CEO: You can mold the position to your existing lifestyle.
The Bottom Line
Social Security is a nice safety net for retirees, but it’s usually not enough to cover all your costs. If you’ve left the workforce and find yourself pinching pennies, it might be time to get creative and pursue other ways of bringing in additional cash. (For more, see Working During Retirement: Making the Most of It.)