Millions of seniors look to Social Security as an important source of retirement income. But while it’s OK for Social Security to be one of several sources of income at that stage of life, it certainly should not be your only one.
If you earn an average wage, you can expect the monthly benefit you get from Social Security to replace about 40% of your preretirement earnings. So unless you want to subject yourself to a 60% pay cut in retirement, you’ll need outside income. Here are a few options to explore in that regard.
1. A CD ladder
CDs are a safe, stable investment, because as long as you’re not depositing more than $250,000 per bank and have your money at an FDIC-insured institution, your principal is protected. And right now, CD rates are generous on the heels of interest rate hikes on the part of the Federal Reserve.
Now, it’s hard to say what CD rates will look like in the long run. And you shouldn’t expect the same return on an CD as on a riskier investment. But if you have cash you don’t want to put into assets whose value can fluctuate, a CD could provide some nice extra income, especially during periods when rates are higher.
That said, it’s always best to ladder your CDs so you have money freeing up at different intervals. This gives you consistent access to your cash, and it could also help you avoid losing out on higher interest rates as they become available.
2. Municipal bonds
Although municipal bonds aren’t risk free, they don’t carry nearly the same risk as a stock portfolio might. The nice thing about municipal bonds is that they give you an opportunity to enjoy tax-free interest income, at least at the federal level. And if you buy municipal bonds issued by your home state, you can avoid state and local taxes on that income as well.
As is the case with CDs, you may want to set up a municipal bond ladder rather than put all your money into bonds with the same maturity date. While there’s no penalty for cashing out municipal bonds before their maturity, if market conditions aren’t favorable at the time, you do risk losing money.
3. A job
Working in retirement offers benefits beyond just a paycheck. The extra money might come in very handy in the context of paying your bills. But a job could also offer social and mental health benefits that go a long way toward keeping you happy as a retiree.
That said, if you’d rather not commit to a job that has you on a preset schedule, you could always turn to the gig economy instead. There’s plenty of opportunity for retirees to pick up flexible work, and you can consider everything from monetizing a hobby to consulting in your former field.
If you were an accountant, for example, you could take on specific short-term projects to drum up cash. And if you were a teacher, you could sign up as a substitute and only accept work on the days you want it.
Social Security might end up paying you a fair amount of money in retirement, especially if you opt to delay your filing for a higher monthly benefit. But even so, it’s important to have access to additional sources of income, and all of the above are options worth working into your financial plans.