It’s helpful to know which income sources you can fall back on once you’re no longer working.
Retirement can be a scary thing. You’re going from a steady paycheck to not earning a living any longer. And no matter how much money you manage to save before you retire, there’s always the nagging fear of running out of cash reserves.
That’s why it’s so important to have income you can rely on in retirement. But what’s better in that regard — Social Security or dividend stocks? Let’s explore.
Social Security guarantees you a monthly benefit for life — with a catch
If you work and pay into Social Security throughout your career, you’re generally entitled to a monthly retirement benefit for the rest of your life. And that benefit has the potential to rise modestly from year to year thanks to Social Security’s automatic cost-of-living adjustments, or COLAs.
Now that said, Social Security is facing the potential for benefit cuts as it grapples with a financial shortfall. The program’s Trustees say that Social Security may have to start reducing benefits to some degree in 2035, though that timeline could also shift.
However, lawmakers have faced a similarly sticky situation before in the context of Social Security, and they’ve never had to resort to benefit cuts. So hopefully, those cuts will be avoidable this time around, too.
Either way, one thing it pays to do ahead of retirement is create an account on the Social Security Administration’s website and access your most recent earnings statement. It will contain an estimate of your monthly Social Security benefit in retirement so you have a sense of the number you’re looking at.
And remember, if lawmakers manage to take benefit cuts off the table, once you start collecting Social Security, your monthly checks can’t decrease. They can only increase, depending on how inflation trends.
Dividend stocks don’t make any promises — but there could be a lot of upside
Social Security is generally considered a guaranteed source of retirement income. The same can’t be said about dividend stocks.
The reason? Companies that issue dividends are not obligated to pay them.
Sure, there’s pressure to keep paying dividends to make shareholders happy. But there’s a difference between being feeling compelled to do something and actually having to.
Similarly, dividend yields aren’t set in stone. A company could start out with a given dividend and reduce it over time.
But on the flipside, a given company could also start out with a specific dividend and raise it year after year. These dividend kings, for example, have a solid history of dividend increases.
Having both income sources could serve you well
Technically, Social Security is probably a more reliable retirement income source than dividend stocks based on how the program works. But it’s a great idea to set yourself up with dividend stocks even if you have a pretty generous Social Security benefit coming your way.
Social Security recipients have long struggled to maintain their buying power in the face of inflation, and that’s largely due to a big flaw in the way COLAs are calculated. Dividend stocks, on the other hand, could help make up for ineffective COLAs and give you additional income to fall back on.
Of course, it’s never a good idea to buy stocks based on dividends alone. As mentioned, dividend yields aren’t guaranteed, and companies don’t have to continue paying dividends if they don’t want to. But if you happen to find quality businesses with a solid history of paying dividends, then it could very much pay to invest in them.
