Most Americans are relying on Social Security to help make ends meet during retirement. But with the program increasingly under pressure, it may be prudent to plan for a retirement without it.
The latest Social Security Trustees report says the program only has enough money in the trust fund to pay out 100% of benefits through 2033. After that, it'll rely on income to pay 77% of scheduled benefits. That could be an absolute disaster for the 82% of nonretirees expecting Social Security to be a meaningful source of income in their golden years, according to Gallup.
If you plan ahead, though, you may be able to get by with a smaller benefit, or no Social Security at all. Here are three ways replace those monthly checks and secure your retirement on your own.
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1. Boost your savings
If you need to replace your Social Security checks in retirement, you'll have to save more. How much more, though?
You could use the 4% rule to estimate how much bigger your retirement portfolio will need to be in order to safely replace the Social Security shortfall. The 4% rule states that you can safely withdraw 4% of a portfolio evenly split between stocks and treasury bonds without endangering your portfolio's solvency during a 30-year retirement.
To figure out how much more to save, you'll have to do a little bit of math.
First, determine your expected Social Security retirement benefit. The Social Security Administration provides a tool to estimate your monthly benefit check.
Second, determine how much you'll need to replace. If you don't expect Social Security to be around at all when you reach retirement, you'll need to replace the whole thing. If you expect to receive a chunk of your benefit (like the Social Security Trustees' estimated 77%), you'll only need to replace a portion of it.
Multiply the amount you'll need to replace by 25 (which is the same as dividing by 4%). That'll give you the amount you'll need at retirement to replace Social Security.
Work backward from retirement to today to determine how much more you'll need to save each month or year to reach your new goal. Use a reasonable expectation for your portfolio growth like 5% or 6% (which accounts for inflation).
For example, a 47-year-old might expect to receive the average Social Security benefit of $1,781 per month when they retire at age 67 and claim Social Security. But in 20 years, they may only receive 77% of the benefit, which means an annual shortfall of $4,915. They'll need an extra $123,000 (about 25 times $4,915) in their retirement savings to replace that shortfall. A reasonable savings goal to reach that number by retirement is to save an extra $280 per month.
2. Buy your own annuity
Social Security is an annuity. It pays a monthly amount to the beneficiary until death. If you want a straightforward replacement for Social Security, you can buy your own private annuity.
There are several benefits of using an annuity as a Social Security replacement.
- You receive guaranteed income for life. You can even attach a cost-of-living rider to ensure that income gets adjusted for inflation every year just like Social Security.
- The upfront cost is typically less than what you'd have to save to replace Social Security with the 4% rule.
- You don't have to manage a portfolio. There is no withdrawal strategy and no rebalancing necessary. The insurance company issuing the annuity takes care of everything.
The downside of using an annuity is that you're guaranteed to end up with $0 left from the investment. If you saved through a retirement account like a 401(k) or IRA, it's possible you end up with money you can leave to your heirs or donate to charities that are important you. Additionally, the fees for annuities aren't always transparent and can be very high in some cases.
3. Buy cash-producing assets
You may look to alternative investments as a way to diversify your portfolio, and some can make great replacements for Social Security.
Buying a rental property can set you up to have a significant cash-generating asset when you retire. Even if you operate the rental at breakeven while you pay down the mortgage, once you've paid it down, you'll start booking profits each month.
It's important to note that investing in a rental property is a lot more hands-on than investing in securities or buying an annuity. You could hire a property manager to take care of things for you, including placing tenants, but you'd still have to manage the manager. Moreover, while rental income can be very steady, you could face periods of time without tenants, which means no income coming in.
The upside is that you'll own a property with real value, and you could sell it if you wanted. Alternatively, you could pass it on to your heirs who will receive the property with a step-up in cost basis, so they can minimize taxes if they sell it down the road.
There are lots of paths to consider when it comes to shoring up your retirement savings and protecting against any negative changes to Social Security. Finding the one that fits your savings goals and lifestyle is important.
