There's no question that Social Security plays a key role in the retirement plans for millions of Americans. But the problem is that the federal program wasn't designed to fully fund retirement. Actually, the original intention was that it would cover only around 40% of retirees' expenses.
Just how far your benefits will stretch will vary from person to person. However, Social Security probably won't be enough for you to retire. Here's how to prepare for that reality.
Save as early and as much as possible
Unless you plan to work forever, you'll need other sources of retirement income in addition to Social Security. In the past, many companies provided pensions for that purpose. Pensions have largely gone by the wayside, though, as employers shifted to defined contribution plans.
The most popular type of defined contribution plan is the 401(k). Public schools and nonprofit organizations, though, 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, regardless of what type it is, your best strategy is to at least put as much in it as your employer will match.
You also have other ways outside of employer-sponsored plans 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 up your retirement accounts. First, start saving as early as you can. Second, save as much as you can.
Maximize your retirement income
Exactly how much you'll need to retire comfortably depends on your standard of living. No matter what the specific amount is, though, you'll want to maximize your retirement income.
Many retirees find investing in dividend stocks to be a great source of additional income. Lots of stocks offer attractive dividend yields. Some are companies that have been around for a long time and are household names. For example, Verizon Communications (VZ +1.72%) is a telecom giant with a dividend yield of nearly 5.8%.
NYSE: VZ
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Other dividend stocks aren't as well known but also can help boost your retirement income. Medical Properties Trust (MPW +0.28%), a healthcare real estate investment trust (REIT), is a great example. Its dividend yield tops 7.2%.
NYSE: MPW
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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 owns positions in a basket of dividend stocks. One key advantage of this approach is that it provides a greater level of diversification than buying a small number of stocks.
There's also a special type of mutual fund that's arguably an even better way to generate income. Closed-end funds (CEFs) trade on public exchanges the same way that stocks and ETFs do. They cater to income-seeking investors by offering exceptionally high yields.
Some CEFs specialize in dividend stocks. For example, the Aberdeen Global Dynamics Dividend Fund (AGD +0.17%) owns dividend stocks in multiple industries. The fund boosts its distributions by using leverage (borrowing). Its yield currently stands at nearly 8%.
NYSE: AGD
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Other CEFs focus on bonds. The AllianceBernstein Global High Income Fund (AWF -0.92%) is a case in point. It primarily owns corporate bonds and offers a yield of more than 7.5%. You can also invest in CEFs with other ways to generate income, including investing in preferred stocks and writing covered call options.
What if your income still isn't enough?
Unfortunately, some individuals reach their target retirement age but still don't have enough income to retire. Often the best strategy in this situation is to continue working at least a little longer.
Working just one extra year could boost your Social Security benefits quite a bit. Delaying retirement also can give your retirement accounts more time to grow.
