Social Security Cuts Are on the Table: 5 Investments Retirees Should Make To Offset a Potential Loss in Benefits
The Social Security Administration has indicated that benefits usually only replace 40% of your pre-retirement income. Therefore, having additional income sources is essential for a secure retirement. This need is compounded by proposals to change the Social Security program amid a potential funding shortfall.
Social Security: Is the $16,728 Yearly Bonus Real?
Find Out: 3 Ways To Recession-Proof Your Retirement
Some proposals call for raising the full retirement age or changing cost-of-living adjustment calculations. Others involve reviewing a longer average work history or reducing benefits based on earnings or means tests.
If these go into effect, you could face slashed benefits and need to rely more heavily on other sources. To prepare for this uncertainty, take a look at five investment options to consider for your retirement.
1. Annuities
An annuity is an insurance contract you purchase to cover a specified time. In return for your contribution, you can get ongoing income payments anywhere from monthly to annually. These predictable payments can help offset a smaller Social Security benefit.
There are multiple types of annuities available with different returns and rules, so meeting with a financial advisor is helpful for addressing the complexities. However, you might start looking into annuities that you buy for a lump sum and then receive fixed, immediate payments.
2. Dividend-Paying Stocks
If you don’t mind some risk, dividend-paying stocks can provide reliable quarterly dividend payments during your retirement. While a stock’s value can still change with the market, the dividends provide some balance. A downside, though, is a potentially low return, as Nasdaq showed the 12-month S&P 500 dividend yield for August was just 1.51%.
Not all companies offer dividends, but you could start looking into blue-chip stocks since they’re more likely to have them. Additionally, keep in mind that preferred stock is ideal since you’d have priority over common shareholders for dividend payouts.
3. Low-Risk Bonds
Available through companies and governments, bonds are ideal investments for supplementing Social Security benefits since you usually get fixed interest payments twice annually. While they may generate a lower return than stocks, they tend to offer more stability.
Government bonds provide the most security and offer potential tax benefits. Often tax-free at the state and local levels, U.S. Treasury bonds are seen as almost risk-free. According to Vanguard, municipal bonds have a low default risk and may be tax-free at all levels. If you’re OK with more risk, you can also consider high-grade commercial bonds that may offer higher returns.
4. Certificates of Deposit
Ideal for retirement money you don’t need to access immediately, a certificate of deposit (CD) lets you invest your cash for a set term of a month to several years. This option can provide interest income at a competitive rate, and your money is safe as long as you choose an insured institution.
Per the Federal Deposit Insurance Corporation’s July data, CD interest rates usually outperform those for standard savings and money market accounts, with 12-month CDs having the highest national average rate of 1.72%. However, some banks, such as Marcus and Sallie Mae, offer rates exceeding 5%. You can compare rates for different banks and CD terms to find what works for you.
5 Cities Becoming Popular With Baby Boomers: Are They Right for Your Retirement Years?
Discover: How Big Is Donald Trump’s Social Security Check?
5. High-Yield Savings Accounts
Often available through online banks, a high-yield savings account works similarly to — but provides a better — return than the basic savings account you might have. Your money could earn 4% to 5% with the best high-yield account options. And since you can withdraw your money penalty-free, it’s a great choice for storing leftover cash during retirement.
With this option, keep in mind that the interest rate is variable and can fall. Additionally, consider how easily you can withdraw and deposit your money if you go with an online bank.
More From GOBankingRates
This article originally appeared on GOBankingRates.com: Social Security Cuts Are on the Table: 5 Investments Retirees Should Make To Offset a Potential Loss in Benefits
