You’ll need to do some legwork to get these supplements for your Social Security.
Regarding retirement savings, it’s always better to be overprepared than underprepared. Unfortunately, around 38% of American workers are concerned about outliving their retirement savings, according to the Transamerica Center for Retirement Studies.
One of the best ways to secure your financial future in retirement is to have streams of income outside of Social Security or your 401(k) plan. Here are three crucial sources you should look to take advantage of.
1. Individual Retirement Accounts (IRAs)
A 401(k) plan is by far the most popular retirement account, mostly because many employers automatically provide it as part of their benefits package. Although a 401(k) is the retirement go-to for many, it shouldn’t be your only retirement account. It’s also beneficial to use IRAs and take advantage of their tax benefits.
There are two types of IRAs: Roth and traditional. A Roth IRA allows you to contribute after-tax money and take tax-free withdrawals in retirement. With a traditional IRA, you can deduct your contributions, depending on your filing status, income, and whether you’re covered by a retirement plan at work, but the money is taxable when you withdraw in retirement.
Which one you choose mainly depends on your current versus projected tax bracket in retirement. If your current tax bracket is lower than what you expect your tax bracket to be in retirement, you’ll probably want to go with a Roth IRA so you can pay taxes now while it’s cheaper. If your current tax bracket is likely your peak, you should consider a traditional IRA, so you can pay taxes in retirement at a cheaper rate.
IRAs essentially work like brokerage accounts because you can invest in any stock trading on the stock exchange unlike a 401(k), where your plan provider gives you investment options to pick from. For tax year 2023, the maximum amount you can contribute to an IRA, Roth and traditional combined, is $6,500 ($7,500 if you’re 50 or older).
2. Dividend payouts on stocks
Dividends are paid to shareholders quarterly from a company’s profits, and they can make up a good portion of an investor’s total returns, especially when reinvested using a dividend reinvestment program (DRIP). To get to the point where dividends can be good supplemental income for you in retirement, you need to have a sizable stake in dividend-paying stocks. The best way to do this is consistently investing over time.
Let’s imagine you invest $500 monthly (just below the annual IRA limit for people under 50) in a fund that averages 8% annual returns and a 3% dividend yield over 25 years. Your investment would be worth just over $686,400 even though you only personally invested $150,000 over that span. If we assume the dividend yield stays at 3%, that fund could produce over $20,500 in yearly dividend income.
In this scenario, that extra $1,700 each month could give you a big financial boost in retirement. And depending on how early you begin investing in dividend stocks and how much you manage to accumulate, it could be much more. If you upped your investment to $1,000 monthly over those 25 years, you’d have over $1.37 million (assuming the same returns and dividend yield). That’s over $41,100 annually.
3. Working while taking Social Security benefits
I know, I know…but hear me out on this one. Working in retirement, by choice, is not a bad thing. In fact, many people love it because it keeps them busy. Retiring — and specifically, taking Social Security benefits — doesn’t mean you have to stop working. It just means you may need to monitor how much you make.
For 2023, if you’re under your full retirement age (67 for people born in 1960 or later), the most you can earn without having your Social Security monthly benefit reduced is $21,240. After that, $1 of your annual benefits gets withheld for every $2 above the earning limit you are. If you reach your full retirement age in 2023, the most you can earn in the months leading up to it is $56,520. After that, $1 is withheld for every $3 over.
Again, if you’re working in retirement, it should be because you choose to and not out of necessity. If you’re looking to make a few extra dollars and do something with your time, have at it. You’ve earned the right to do so.
