Social Security has long been the backbone of American retirement, and many working Americans look forward to the day they can sit back and enjoy collecting a Social Security check. But Social Security was never meant to fund 100% of retirement expenses, and in the future, it may fund much less.
The most recent report from the Social Security Trustees indicates that the Social Security Trust Fund will be depleted by 2033, meaning a reduction in future benefits is likely unless lawmakers take measures to avoid this. Regardless, to enjoy a fully funded retirement, supplemental sources of income are usually required. Here are a few of the best options.
Your Personal Nest Egg
The best option when it comes to supplementing Social Security income is to have your own retirement nest egg. If you worked for a larger company in your life, you likely had access to a 401(k), 403(b) or 457 plan. If you worked on your own, you may have contributed to an IRA, or perhaps even a solo 401(k) plan.Whatever the case, with diligent saving you can usually build up a nest egg over time that exceeds the amount you'll draw from Social Security. If you're still far away from retirement, use this time to maximize your contributions to these types of tax-advantaged plans so you don't have to rely on Social Security.Take Our Poll: Do You Think You Will Be Able To Retire at Age 65?
Over the past few decades, most companies have moved away from traditional pension plans toward 401(k) plans and the like. However, if you began your work career a long time ago, or if you work for an old-line company that still maintains a pension, you may be in line for a lifetime of payments after you retire. If you work for the police department, fire department or any other public service job, such as a government job, you're more likely to have access to a traditional pension. Some of these pensions can be quite lucrative. For example, if you served 20 years in the military, you're likely in line for a pension worth as much as 2.5% of your highest 36 months of basic pay.
Passive income is a great way to supplement your Social Security payments, and rental income is one of the most commonly used options. There are lots of options when it comes to generating rental income. Perhaps the easiest is to rent out a room in your own house that you no longer need or use. Other options include buying a short-term rental unit in a resort area, or a long-term rental unit in an area with a shortage of worker housing.
Side gigs are often thought of as a way for workers to supplement their incomes, but it can also be used by retirees as an adjunct to Social Security. Side gigs don't have to be a grind, however. When you're retired, you can use the skills and talents you acquired during your career and turn that knowledge into something profitable. Teaching classes either in-person or online, for example, is one way to get paid for talking about something you know and love. You could also turn your talents into something marketable, whether as an artist or interior designer or woodworker. Many people are likely craving to learn something you have to offer, so find out what you enjoy most and see if there's a market for doing it.
Downsizing might not seem like a way to generate retirement income, but it can be. Imagine you have a 3,000-square-foot house but live all alone. By selling that home and moving into an 800-square-foot condo or smaller house, you'll likely put hundreds of thousands of dollars in your pocket. With careful investment, that can provide a significant boost to your retirement income when withdrawn monthly.
An annuity is by definition a way to supplement your retirement income. To "annuitize" an investment means to convert it from a pool of capital to an income stream that lasts for your lifetime. If you die prematurely, the insurance company keeps the remainder of the payments. But if you outlive your anticipated lifespan, the insurance company is responsible to continue paying you for the rest of your life. In this way, you can never outlive your income, making an annuity a good option for those looking to guarantee a lifetime of payments to augment Social Security.
Relocating won't generate any additional income per se, but it can achieve a similar effect. By relocating to the right place, you can permanently reduce your expenses across the board, from your housing costs to utilities, food, entertainment and transportation. The amount you save effectively amounts to an additional income stream, as you now get to keep the money you would have otherwise been spending on a monthly basis. For some retirees who relocate, this can amount to a "raise" of thousands of dollars per month.
Spousal Social Security
If you don't qualify for Social Security on your own, or if your benefit is low, you may be able to raise it by claiming spousal Social Security instead. When you're married, you're entitled to a benefit of 50% of your spouse's payout, if it's more than you qualify for on your own. This benefit applies even if you are divorced, as long as you were initially married for at least 10 years.
If you're in the field of entertainment or the performing arts, among others, you might be able to set up a royalty stream for yourself in retirement. A royalty is an ongoing payment for the use of your assets or body of work. For example, if you act in a movie, you may continue to receive payments every time that film is shown on television or streaming services. If you publish a book, you may receive a royalty payment for every book sold. Royalties are not always predictable, but they can be a good supplement for Social Security payments if you come from the field of arts and entertainment.
A reverse mortgage isn't for everyone, but for some retirees, it's a great way to generate income in retirement. A reverse mortgage is essentially a way to tap the equity in your home, either as a lump sum or as a series of monthly payments. The money you take out is a mortgage against your home that will have to be paid back in full with the remaining equity in your home after your death. There are some pitfalls to reverse mortgages, including their cost, but for some seniors over age 62 — which is a requirement to qualify — they can serve as a good supplement to Social Security.More From GOBankingRates5 High-Quality Costco Items To Buy Now
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This article originally appeared on GOBankingRates.com: Social Security Alternatives That Will Provide Income in Retirement