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Since it was first established, Social Security has paid out $18 trillion in benefits, providing millions of Americans with income during retirement, according to the summary of the 2022 annual reports from the Social Security and Medicare Boards of Trustees.
But the program, which is funded through payroll taxes, has dwindling reserves that may affect the monthly benefit available to you by the time you stop working or begin to phase out of your career. Fortunately, there are some alternatives to Social Security benefits that may help you maintain your quality of life in retirement.
How Social Security Retirement Benefits Work
Social Security distributes retirement benefits based on your age. You're eligible to receive your full retirement benefits based on your full retirement age, which varies depending on your birth year.
For example, if you were born between 1943 and 1954, your full retirement age is 66. That number gradually increases for those born after this time period. The earliest you can receive Social Security benefits is age 62, but doing so will reduce your monthly benefit amount.
If you've worked and paid into Social Security, you'll likely receive a monthly benefit that can provide you income in retirement. However, there are other options that you may want to consider when it comes to saving for retirement.
Alternative Ways to Boost Your Retirement Income
As of October 2022, retired workers received an average monthly benefit of $1,669, which is likely less than what most people might need to cover expenses such as housing, utilities, food, transportation, health care and more.
To help supplement Social Security, you may want to consider alternative ways to boost your retirement income:
Open an Annuity
An annuity can provide a regular income in retirement. Annuities are tax-deferred, and you won't pay taxes on the earnings until you withdraw them. (Keep in mind that withdrawals from annuities are subject to any applicable surrender charges and ordinary income tax on your gains, and if you're younger than 59 1/2, you will have to pay a 10 percent early withdrawal penalty.) Since you may have a lower income in retirement than you did when you were employed, you may be in a lower tax bracket and able to retain more of the earnings from an annuity after taxes.
Maximize Your Retirement Contributions
Contributing to an employer-sponsored 401(k) or individual retirement account (IRA) while you're still working may also help increase the money you have available in retirement. For 2022, you can contribute up to $20,500 to a 401(k). For traditional and Roth IRAs, the limit is $6,000 for the year. However, if you're 50 or older, you can make catch-up contributions of $6,500 to your 401(k) and $1,000 to your IRA. This may help you to increase your savings as you get closer to retirement.
Reduce Your Health Care Costs
A Medicare Supplement Insurance policy, also known as Medigap, could also help you pay for health care costs that aren't covered by Medicare. Coverage for this insurance requires premiums to be made, but it may help you stretch what you have saved a bit further.
Pay Down Debt
If you have large debts like a mortgage or student loans, you may want to consider getting more aggressive about paying them off while you're still working. Debt can cut into your retirement savings, and waiting until retirement to pay it off may be more difficult because you may have a fixed income. One way to help indirectly increase your retirement income is to make your financial slate as clean as possible before you head into retirement.
If you're still healthy, another option may be to delay your retirement by a few years. Continuing to work may help give you access to more cash that you can contribute to your retirement income. And if you're over 50, taking advantage of catch-up contributions could help to build your retirement savings.
Securing Your Retirement
If you've spent years working and paying into Social Security, you will likely get a monthly benefit. But the amount will vary based on your lifetime earnings, when you start collecting benefits and, more importantly, the financial status of the Social Security program.
The current financial status of the Social Security program means you may not be able to rely on these benefits alone to support you in retirement. Consider thinking of Social Security as a bonus, or a supplement, to your retirement income — rather than planning your retirement around these benefits.
No one can secure your financial future except for you, so consider looking into other ways to save for retirement. This could help you enjoy the kind of life you've worked so hard to earn.