Contrary to what many believe, Social Security isn't designed to sustain older Americans in retirement on its own. Although roughly 25% of retirees rely on the program as their sole source of income, Social Security is only meant to represent about 40% of the average worker's pre-retirement salary. The amount of money you'll ultimately need in retirement depends on factors such as your health and lifestyle choices, but most people need a minimum of 70% (and in reality, probably more like 80%) of their pre-retirement income to sustain themselves financially once they're no longer working. This means it's important to save independently to bridge that gap.
Unfortunately, Americans aren't doing a great job in that area. Almost one-third of Americans have no retirement savings whatsoever, and among those who have saved, a large percentage are still falling short. But if you're among the many workers who haven't saved adequately, there are still other ways you can generate extra income in retirement to supplement your Social Security benefits. Here are four to start with.
1. Start a business
You'll hear a lot of financial experts tell you to work part-time in retirement if you need the extra income, but for many people, working part-time means taking some low-paying, unfulfilling job just to make a few bucks. Instead of going that route, why not take the opportunity to pursue something you'll actually enjoy? You might, for example, put your organizational skills to good use by establishing an event-planning business, or open that bakery you always dreamed of. Starting a business in retirement is a great way to bring in additional income on your own terms.
2. Sell a paid-off home
Even if you manage to enter retirement mortgage-free, there are other costs associated with homeownership that can tax your limited budget. From insurance to property taxes to maintenance and repairs, even a completely paid-off home can feel more like a burden or liability than an actual asset in retirement. Selling that home, on the other hand, could be a good way to generate a chunk of income that can go a long way toward supplementing those monthly Social Security checks.
3. Rent out space in your home
Perhaps you're not ready to get rid of the big house with the extra bedrooms you're not actually using. If you can't bring yourself to sell your home, or the market just isn't right, your next best bet might be renting out a room or floor in your current home. This is especially doable if your home has a finished basement or other area that's clearly separated from your main living quarters.
4. Invest in dividend stocks
Older Americans are often told to shy away from stocks because they're too risky an investment in retirement. And while you probably shouldn't put most of your money in stocks, it's actually a good idea to hold some stocks in your portfolio -- particularly dividend-paying stocks. When you own stocks that pay dividends, you get a similarly reliable income stream to that offered by bonds or Treasury bills, only at a much more favorable rate. And given that today's retirees are living longer, holding stocks in your portfolio may not be as risky a prospect as you once thought. Of course, not all dividend stocks are created equal, but here are a few you may want to consider.
Of course, the best and most reliable way to supplement your Social Security benefits in retirement is to save as much money as you can during your working years. Even if you only have a few years left in the workforce, any amount you sock away is guaranteed to come in handy once you start living on a fixed income. Those who are 50 or older can currently contribute up to $24,000 a year to a 401(k) or $6,500 to an IRA.
If you're still mid-career or have a decade or more left before you hope to retire, you have an even better opportunity to make a real difference in your eventual financial picture. Saving just $200 a month over 20 years, for example, will give you an extra $110,000 to play with in retirement if your investments generate an average annual 8% return.
No matter what you do, don't make the mistake of relying too heavily on Social Security in retirement. While those benefits can certainly play an important role in helping you cover your living expenses, if you bank on them alone, you run the very real risk of coming up short.