JThere is no doubt that Social Security plays a key role in the retirement plans of millions of Americans. But the problem is that the federal program was not designed to fully fund retirement. In fact, the original intention was that it would only cover about 40% of retiree expenses.
The extent of your benefits will vary from person to person. However, Social Security probably won’t be enough for you to retire on. Here’s how to prepare for this reality.
Save as early and as much as possible
Unless you plan to work forever, you’ll need other sources of retirement income besides Social Security. In the past, many companies offered pensions for this purpose. However, pensions have largely been phased out as employers opt for defined contribution schemes.
The most popular type of defined contribution plan is the 401(k). However, public schools and nonprofit organizations sometimes offer 403(b) plans. There are also a handful of other types of defined contribution plans. If your employer has a defined contribution plan of any type, your best strategy is to invest in it at least as much as your employer will give you.
Besides employer-sponsored plans, you also have other ways to save for retirement that offer tax advantages. Individual Retirement Accounts (IRAs) are the most widely used alternative.
There are really only two key rules when it comes to building your retirement accounts. First, start saving as early as possible. Second, save as much as you can.
Maximize your retirement income
The exact amount you will need to comfortably retire depends on your standard of living. No matter the specific amount, however, you’ll want to maximize your retirement income.
Many retirees find investing in dividend-paying stocks a great source of extra income. Many stocks offer attractive dividend yields. Some are companies that have been around for a long time and are known. For instance, Verizon Communications (NYSE:VZ) is a telecom giant with a dividend yield of almost 5.8%.
Other dividend-paying stocks aren’t as well-known, but can also help boost your retirement income. Medical Properties Trust (NYSE:MPW), a healthcare real estate investment trust (REIT), is a prime example. Its dividend yield exceeds 7.2%.
If you don’t want to select individual dividend stocks, another alternative is to invest in a mutual fund or exchange-traded fund (ETF) that holds positions in a basket of dividend stocks. One of the main advantages of this approach is that it provides a greater level of diversification than buying a small number of stocks.
There is also a special type of mutual fund that is arguably an even better way to generate income. Closed-end funds (CEFs) trade on public exchanges in the same way as stocks and ETFs. They cater to investors seeking income by offering exceptionally high returns.
Some CEFs specialize in dividend stocks. For example, the Aberdeen Global Dynamics Dividend Fund (NYSE: AGD) holds dividend-paying stocks in several sectors. The fund increases its distributions by using leverage (borrowing). Its yield currently stands at nearly 8%.
Other CEFs focus on bonds. The AllianceBernstein Global High Income Fund (NYSE: AWF) is a case in point. He mainly holds corporate bonds and offers a yield of more than 7.5%. You can also invest in CEFs along with other ways to generate income, including investing in preferred stocks and selling covered calls.
What if your income is still not enough?
Unfortunately, some people reach the target retirement age, but still do not have enough income to retire. Often the best strategy in this situation is to keep working at least a little longer.
Working just one extra year could significantly increase your Social Security benefits. Delaying retirement can also give your retirement accounts more time to grow.
The $18,984 Social Security premium that most retirees completely overlook
If you’re like most Americans, you’re a few years (or more) behind on your retirement savings. But a handful of little-known “Social Security secrets” could help boost your retirement income. For example: a simple trick could earn you up to $18,984 more…every year! Once you learn how to maximize your Social Security benefits, we believe you can retire confidently with the peace of mind we all seek. Just click here to find out how to learn more about these strategies.
Keith Speights has no position in the stocks mentioned. The Motley Fool recommends Verizon Communications. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.