You’ll need more than just Social Security to retire comfortably. But there are other potential sources of retirement income.
Social Security won’t be enough to enable you to retire comfortably. It wasn’t even designed to do so. The federal program will, on average, replace only around 40% of pre-retirement income.
Looking for ways to fund retirement other than Social Security? You’re not alone. Here’s what many Americans who haven’t yet retired plan to do, according to the Schroders 2023 U.S. Retirement Income Survey.
1. Draw from savings
Schroders reported that 58% of survey respondents plan to draw from their cash savings to help fund retirement. However, it’s unlikely this option will be nearly enough to supplement Social Security for most retirees.
The average American’s personal savings account balance totals $65,100 (excluding money in retirement plans), according to Northwestern Mutual’s 2023 Financial Planning & Progress study. But averages can be skewed by higher-income individuals with large savings. The Federal Reserve’s Survey of Consumer Finances found that the median savings account balance for U.S. families in 2019 (the most recent year for the survey) was only $5,300.
2. Receive workplace retirement plan benefits
Around 53% of the respondents to the Schroders survey indicated that they expect their workplace retirement plan to help fund retirement. These plans include 401(k) and 403(b) plans offered by employers.
A 2021 survey conducted by the U.S. Census Bureau found that nearly 35% of working-age Americans have 401(k)-style retirement accounts. This percentage increases significantly as individuals grow older, though.
3. Tap investment income
Roughly 40% of individuals plan to tap investment income outside of their employer-sponsored retirement plans during their retirement years. One major source of this income could be Individual Retirement Accounts (IRAs).
Fidelity Investments reported that the average IRA balance in the second quarter of 2023 was $113,800. Roth IRAs, which allow funds to grow tax-free, are the most popular type of IRA.
4. Receive defined benefit/pension plan benefits
The Schroders survey found that 20% of respondents will receive benefits from a defined benefit plan or pension plan. This is much lower than the 57% of current retirees who receive pension income, based on the Federal Reserve’s latest data. Many employers have phased out their pension plans and other defined benefit plans.
5. Use rental income
Rental income will be a source of retirement funds for 14% of Americans, according to the Schroders survey. Although the rental market has cooled somewhat in recent months, higher interest rates and a persistent shortage of single-family homes could provide tailwinds for individuals hoping to use rental income to supplement Social Security and other retirement income sources.
Make a plan
Perhaps the most concerning statistic of all in the Schroders 2023 U.S. Retirement Income Survey is that 49% of respondents said that they don’t have a retirement income strategy. The smartest thing Americans who haven’t retired yet can do is to make a plan for how they’ll fund their retirement.
If your employer offers matching contributions in a 401(k) plan, put at least the amount that will be matched into the plan. Save as much as possible in other tax-advantaged retirement accounts such as IRAs as well.
Carefully consider when you’ll retire. Holding off on claiming Social Security benefits until your full retirement age will ensure that your benefits aren’t reduced. Waiting until you’re 70 can boost your benefits even more.
No, Social Security won’t provide enough for you to comfortably retire. You’ll need other sources of income. However, maximizing how much you receive from Social Security will help reduce how much additional money you’ll require.