Many seniors end up relying quite heavily on Social Security to pay their bills once they stop working. But that's a dangerous thing.
Not only is Social Security facing potential benefit cuts in the not-so-distant future, but the average monthly benefit today is only $1,663. That's just shy of $20,000 on an annual basis.
Even if you plan to maintain a frugal lifestyle in retirement, there's a good chance you'll end up needing an annual income that's more generous than that. But the good news is that you can set yourself up to rely less on Social Security and more so on outside income sources. These two sources, in fact, could wind up paying you far more generously than Social Security will.
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1. Your personal savings
If you invest in an IRA or 401(k) plan consistently for many years, you could wind up with a sizable balance. And that could, in turn, give you a fair amount of financial freedom during retirement.
Let's imagine you contribute $500 a month to a retirement savings plan over 40 years, and that your investments in that plan generate an average annual 8% return (which is a bit below the stock market's average). At that point, you'll be looking at a nest egg worth around $1.5 million.
Now, let's say you decide to withdraw from your savings at an annual rate of 4% during retirement, which is what many financial experts recommend. That would leave you with $60,000 in annual income, which is a lot more than what the typical recipient can expect from Social Security today.
2. An income property
Buying an income property isn't without risk. You'll have to pay to maintain that property and hope that your tenants pay rent on time and treat that home with respect. But if you're willing to do the work and take on the risk, you could set yourself up quite nicely for retirement.
Imagine you invest in an income property during your 30s so that its mortgage is fully paid off by the time you retire. Let's also imagine that it costs you $10,000 a year to maintain that home between upkeep, insurance, and property taxes, but that you're also able to command $3,000 a month in rent. At that point, you're looking at a profit of $26,000, which is more than the average senior on Social Security gets today.
Furthermore, you may, at some point, decide to sell your income property. If you're able to walk away with $600,000 for that home after real estate agent fees and applicable transfer taxes, and you treat that $600,000 lump sum the same way you would your savings, you'll still get $24,000 a year of income if you take 4% annual withdrawals.
You can do better than Social Security
Social Security might serve as a nice supplementary income source during retirement. But it really shouldn't be your only income source, or even your primary one. If you take steps to secure a more robust stream of income, you'll have more to look forward to once your time in the workforce comes to an end.
