Social Security Benefits Won't Cut It? Here's How to Supplement Your Retirement Income

The ugly truth is that far too many people are behind on saving for retirement. A third of American adults have less than $5,000 stashed away, according to research from Northwestern Mutual.

As a result, many retirees are forced to rely on Social Security benefits for the bulk of their income once they leave the workforce. In fact, nearly half of married couples and two-thirds of single beneficiaries rely on their benefits for at least half their income, according to the Social Security Administration. Even more worrisome, though, is that for 21% of married couples and 44% of single beneficiaries, Social Security benefits make up at least 90% of their income.

While it's not necessarily a bad thing to rely on Social Security in some capacity, it's not a great idea to depend on it to pay the bills. The average beneficiary only receives around $1,300 per month, and that may not be enough to cover your basic living expenses. Furthermore, by 2034, Social Security recipients may see their benefits cut by up to 21% unless the government passes reforms that will mitigate or reverse the program's deficit. If you were receiving $1,300 per month and your benefits were cut by 21%, that would leave you with just over $1,000 per month. For someone with no other source of income, that's below the federal poverty level.

Beefing up 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 retirement. If you're struggling to save, though, and it's already tough to scrape together anything to put toward retirement, there are a couple of relatively easy ways to boost your savings.

First, if your employer offers matching 401(k) contributions, take advantage of them. Increasing your contribution rate by even 1% of your annual income can have a greater impact when your employer is matching that money.

For example, say your employer will match 100% of your contributions up to 3% of your salary, and you're earning $50,000 per year. That means that if you saved $1,500 each year, you'd get another $1,500 in free money from your employer on top of that, bringing your total contribution to $3,000 per year. Let's also say that right now you have $10,000 in your retirement fund, and you're only contributing 2% of your salary per year. That's $1,000 per year, or $2,000 when you consider the employer match. Assuming you're earning a 7% annual rate of return on your investments, here's what your total savings would look like over time if you continue to contribute 2% of your salary, compared with if you increase your savings rate to 3% per year to earn the full employer match:

Years Total Savings When Contributing 2% of Your Salary Per Year Total Savings When Contributing 3% of Your Salary Per Year
0 $10,000 $10,000
10 $49,200 $64,000
20 $126,400 $170,300
30 $278,300 $379,300

In other words, an extra $500 per year on your part could amount to an extra $100,000 over a few decades.

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

If your portfolio falls on the safer side, you're probably investing less in stocks and more in Treasury securities, CDs, money market funds, and other types of low-risk investments. While that's not necessarily a bad thing, those types of investments may only see rates of return of around 2% to 4% per year.

Stocks, on the other hand, tend to see higher returns. Index funds and mutual funds are great ways to limit your risk: They allow you to invest in dozens or hundreds of stocks at once, so if a few of them take a nosedive, your entire portfolio isn't a goner. And although they can fluctuate in the short term, they tend to see an average long-term gain of around 7% to 10% per year.

So let's say you're 35 years old with $10,000 saved for retirement. If you're contributing $1,500 per year (and you're earning another $1,500 per year from your employer), here's what your total savings would look like over time, earning a 3% annual return on your investments versus an 8% return.

Age Total Savings With a 3% Annual Return Total Savings With an 8% Annual Return
35 $10,000 $10,000
45 $48,900 $68,500
55 $101,000 $194,900
65 $171,300 $467,700

You don't want to play it too risky and invest all your money in a single stock that you predict will skyrocket in value. But if you're nearing retirement and have little to no savings of your own, you'll need to get comfortable with risk if you want to see rewards that can last you through retirement.

What if you're starting late?

What if you're already in your late 50s or early 60s and don't have decades left to save? First, it's never too late to save, and it's better to have at least a few thousand dollars saved than to do nothing.

But if you've already retired (or are very close to retirement) and you've found yourself relying on Social Security benefits to make ends meet, there are other ways to pick up extra income to strengthen your nest egg.

For example, you could pick up a side hustle. Whether you find a gig in the industry in which you spent your career or are branching out into an entirely new field, retirement is a great time to try new things. Nearly three-quarters of Americans say they plan to work past retirement age in some capacity. So if you plan to pick up a part-time job after you leave your full-time career, you're in good company.

For another income boost, you can delay claiming Social Security benefits. You can start claiming benefits as early as age 62, but for every month you wait past that age up until 70, you'll receive a boost in benefits.

Let's say, for example, your full benefit amount (or the amount you're theoretically entitled to if you claim at your full retirement age) is $1,300 per month. If your full retirement age is 67, your benefits will be cut by 30% if you claim at 62 -- leaving you with just $910 per month. But if you wait until age 70 to claim, you will receive a 24% bonus on top of your full benefit amount. In that scenario, you'll receive around $1,612 per month. And if you're going to be relying on Social Security benefits during retirement, you might as well get as much as possible.

Social Security benefits can make a great cushion for your nest egg, but they shouldn't make up all your retirement income. It's better to save as much as you can before you retire, then supplement your income during retirement.

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