Are your retirement savings coming up short? If so, you're not alone. Among people in their 40s, the average individual has only $63,000 in retirement savings, and a staggering one in five Americans hasn't saved a dime for retirement. Bridging the gap between income and expenses in retirement won't be easy for many, but these three strategies may help.
1. Embrace dividend stocks
Do you dabble in dividend stocks? If you don't, you might want to consider adding them to your portfolio as you approach retirement. Dividend-paying stocks aren't sexy, but they're often mature companies in stable markets, and the extra income you can receive in dividends can add up.
Studies have also shown that investing in dividend stocks can be a smart way to generate positive returns, and companies offering the highest dividend yields can produce greater gains than their peers that pay lower dividends.
If dividend-stock investing interests you, there are plenty of dividend-paying companies to choose from. About 3,000 publicly traded companies send at least some money to their shareholders in the form of dividends every year, including many that have a track record of increasing those payments every year over the past 25 years. Investing in companies with a long history of increasing dividends like that, or dividend aristocrats, can be smart. For instance, annualized returns for the ProShares S&P 500 Dividend Aristocrats ETF over the past five years exceed 10%.
There's no telling if double-digit returns will continue. But knowing that you're pocketing some cash every year that can be used as income is reassuring, and it may help you avoid having to liquidate stocks in your retirement account in order to make ends meet. If you have $500,000 invested in dividend paying stocks and their dividend yield on average is 2.4%, then your portfolio would produce $12,000 in annual income. Focus on stocks with a higher yield, say 4%, and your portfolio would kick out $20,000 in income.
A word of caution, though: Some companies with high dividend yields are far riskier than they may seem. Dividend yield is calculated by dividing the dividend paid by the stock price, so a falling stock price because of structural business problems can result in a high dividend yield that winds up being unsustainable.
The most recent example of this that jumps to mind is General Electric. The industrial conglomerate was once a staple holding in dividend portfolios, but weakness in its business forced it to eliminate its dividend almost entirely in 2018, dealing a big blow to investors in the process. Therefore, don't invest in dividend stocks solely because of the dividend yield. Make sure the company is on solid ground first.
2. Become an entrepreneur
Ever wanted to take the path less traveled and become your own boss? Retirement offers a wonderful opportunity to embrace entrepreneurial projects that can bump up your retirement income.
There are plenty of opportunities available to retirees that don't require a lot of up-front money or crazy 80-hour workweeks. Thanks to advances in technology, many businesses have popped up that allow you to work on your own terms. These gig-economy jobs include driving for a car service, such as Uber or Lyft; renting a room in your home through Airbnb or a vacation property through VRBO; or helping time-strapped people with basic chores, like assembling bookcases, through websites like TaskRabbit. If you spent your career crunching spreadsheets, editing articles, writing marketing content, or building websites, there are plenty of one-off job offers available on sites like Upwork, too.
The amount of money you make at these jobs will vary, but they can provide a steady stream of extra income while giving you a sense of purpose that many retirees say they lose in retirement.
If you go this route, though, remember that if you claim Social Security earlier than full retirement age, you're subject to Social Security's earnings test. You'll only be able to earn up to a specific amount each year in income before Social Security starts holding back some of your benefits. In 2019, the limit for people between age 62 and their full retirement age is $17,640, or 3.5% more than in 2018. Social Security will hold back $1 for every $2 earned above that amount, and any withholding will be used to boost your benefit amount after full retirement age.
3. Patience is a financial virtue
If you're healthy, longevity runs in your family, and you have a stable job, delaying when you claim your Social Security is one of the best income-pumping options available.
You can claim Social Security as young as age 62, but you'll only collect a reduced amount of your benefits if you claim earlier than full retirement age, which varies between 66 and 67 for people born after 1954. If you wait to claim until after full retirement age, then Social Security will bump up your monthly benefit amount by two-thirds of 1% for every month you hold off up to 70. This works out to an 8% increase in benefits per year for people born after 1943.
For example, let's say your Social Security benefit is $2,000 and your full retirement age is 67. If you wait to claim until 70, then your monthly haul would increase 24% to $2,480, and your annual income would improve from $24,000 per year to $29,760.
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