77% of current retirees are reliant on Social Security to pay for necessary expenses, according to Bankrate’s Social Security Survey.
However, Social Security is designed to replace only a percentage of your income — 43% for medium earners — making it insufficient for most retirees.
Delaying benefits until age 70 can significantly boost payouts, providing a more stable income stream in retirement.
Utilizing 401(k)s, IRAs, brokerage accounts, annuities and HSAs can help supplement Social Security benefits.
Social Security provides a significant number of retirement benefits, the biggest being a growing income stream you can’t outlive. So you won’t face the danger of running out of money in your golden years when you aren’t working for a living. The downside: For all but the most frugal Americans, Social Security alone simply won’t be enough to retire on comfortably.
The Social Security Administration says the program should replace about 43 percent of your pre-retirement income for medium earners. In short, you’ll need more income to maintain your standard of living. That’s why it’s vital to set up alternative income streams for retirement — here’s how.
Social Security won’t be enough
According to a recent Bankrate Social Security Survey, more than half (53 percent) of Americans who haven’t retired yet say they expect to rely on Social Security benefits to pay their necessary expenses once they retire.
However, the same survey found that 73 percent of Americans are concerned that promised Social Security benefits won’t be paid to them upon retirement age.
That concern is rooted in a potential Social Security funding shortfall on the horizon. The 2024 Social Security and Medicare Board of Trustees report projects that without legislative action, the program won’t be able to pay full benefits by 2035, potentially reducing payouts to 83 percent of promised amounts.
With about 68 million Americans depending on Social Security, securing its future is essential. However, there’s no simple fix — various solutions have been proposed but members of Congress have yet to take any meaningful action on the issue.
Despite such warnings, many Americans are woefully under prepared for retirement. Even if your future benefits are unaffected, your monthly Social Security check likely won’t be enough to cover your expenses in retirement.
With the average Social Security check of $1,976 in January 2025, retirees have to pay Medicare premiums as well as other living expenses. It’s a tough road, even if you’re able to avoid taxes on your benefit.
“Social Security was never set up to fully fund someone’s retirement — it was just set up to hedge the risk of a retirement shortfall,” says Eric Bond, president of Bond Wealth Management in Long Beach. “For many Americans, Social Security is the only guaranteed income stream they’ll have in retirement. This means it’s more crucial than ever before to have multiple streams of income in retirement.”
Certainly, workers can try to maximize their Social Security benefits through smart planning.
“Many people can benefit from waiting until 70 to collect Social Security since it is the only government-guaranteed, inflation-protected income source,” says David Schneider, CFP, president of Schneider Wealth Strategies in the New York City area.
Schneider points to the fact that filing for benefits early can hurt your monthly payout, while waiting to claim after full retirement age can boost your benefit 8 percent a year. The upshot: If you claim at age 62, you can earn a check that’s just 70 percent of your full retirement benefit, while if you wait, you can boost your payout to about 124 percent of your full benefit.
But even with a maximum Social Security benefit, retirees will still need alternative income. Here are five accounts to set up retirement income and five investments to build that income.
5 accounts for retirement income
Retirement savers have five key accounts for building income, often with tax advantages to help build wealth faster, though you may have access to other top retirement plans.
The 401(k) is an employer-sponsored account that allows you to invest in potentially high-return assets such as stocks and stock funds. With a 401(k) you’ll avoid taxes on any earnings while the money is in the account. Then when you withdraw the money in retirement, after age 59½, you’ll pay taxes in the traditional 401(k) while avoiding them completely in the Roth 401(k).
For public sector employees, the equivalent of the 401(k) is the 403(b) program.
An IRA is an individual retirement account open to any working American even if they already have another plan. An IRA lets you invest in an even wider selection of potentially high-return assets such as stocks, stock funds, bonds and many other securities. With an IRA you can avoid taxes on earnings while the money is in the account. When you withdraw money in retirement, at age 59½ or later, you’ll pay taxes on money from the traditional IRA and avoid them fully in the Roth IRA.
Even a regular, after-tax brokerage account can help you amass money for retirement, though the account itself doesn’t offer any tax advantages. Still, you can invest in potentially high-return securities such as stocks and stocks funds. You’ll owe taxes on any dividends you receive in the account, though you won’t owe taxes on your capital gains until you sell the security. That means you could hold investments for decades and not owe capital gains taxes.
An annuity is another type of account that can be set up through an insurance company. The key benefit of an annuity is that it can pay you lifetime income, meaning you won’t run out of money in retirement, and it may offer other insurance-like benefits. You can set up an annuity so you receive a fixed rate of return or one that depends on the earnings of the annuity’s underlying investments.
“Annuities can be complex — there’s several options to consider, each with their own unique set of rules — so you really need to understand annuities before you get into them,” says Bond.
While health savings accounts were established to pay for health care expenses, they can also function as a way to save for retirement, and many financial advisors put HSAs near the top of the list for retirement savings. An HSA offers you a triple tax break:
In an HSA, you can save with pre-tax money, meaning you can skip the tax on your contributions.
The money can compound tax-free inside the HSA.
Finally, you can withdraw the money tax-free if you use it for health care expenses.
But if you wait until age 65, the HSA effectively becomes like a traditional IRA. At that time the money can be withdrawn and used for any purpose while paying only ordinary income taxes. So for savvy savers and those who don’t need to use the funds, the HSA can function as an additional retirement account and you may even be able to invest in high-return assets.
5 ways to set up alternative income streams
Inside the account types above — with the exception of the annuity, which itself is an income stream — you can invest in securities that can produce income for you. You have two main strategies here.
Current income now: If you need the highest current income today — if you’re a retiree now, for example — you can invest in income-paying securities such as bonds, bond ETFs and preferred stocks. In exchange for more yield today, you’ll be sacrificing growth later, but it can be worth the trade-off if you’re really under pressure for income.
Growing income for later: If you can afford to wait for income, you can potentially grow your wealth even more. This approach works well with dividend-paying stocks and S&P 500 funds, where yields are lower today but should grow over time. This approach likely leads to more total wealth for you.
But it’s critical that you understand how taxes affect these strategies. Whenever you receive income such as dividends or interest, you’ll owe tax on that income unless it’s received inside a tax-advantaged account. On the other hand, if you focus on income for later, you may be able to grow your wealth without having to pay taxes on much of your gains, even in a taxable account.
“It’s crucial that you talk with your tax preparer along with your financial professional as you determine your retirement income plan to ensure you have an eye on the tax implications of your various income streams,” says Bond.
Here are five key securities for setting up your alternative income stream.
Bonds are the classic example of an “income now” strategy. Your total return for a bond is typically the interest rate paid by the bond’s issuer, and when the bond matures you’ll get your principal back. You can use your income from the bond to pay your expenses, or you can reinvest into other bonds, as you like. If you’d prefer not to buy individual bonds, you can purchase a bond fund and enjoy the reduced risk due to diversification.
Bonds or bond ETFs may be a better fit for tax-advantaged accounts, given that interest is the key part of their total return.
Dividend stocks may offer a bit of both worlds, some income today and the potential for capital gains and a higher dividend later. The trade-off is that income received from the dividend stock today is likely to be lower than what you could receive from an income-only investment such as a bond. But if you’re able to be patient, you’re likely to have a more powerful income stream, since the best dividend stocks can grow their payouts for decades, boosting your income later.
If you’d prefer to not pick individual stocks, it’s easy to purchase a top dividend-paying fund. You can enjoy a yield that’s likely to grow while having increased safety due to diversification. Dividend stocks may be a better fit for tax-advantaged accounts, given the payout.
Despite the name, preferred stock acts more like a bond than stock. Preferred stock pays income at a specified rate and may have a maturity like a bond, so it functions more like an “income now” strategy. The payouts on preferred stock may be higher than typical bond yields, and they may also be eligible for lower tax rates, depending on the exact security.
For a lower-risk way to invest in preferred stocks, search for the best preferred stock funds. Because of their high income, preferred stocks may be better in tax-advantaged accounts.
REITs are popular with investors looking for income today and some growth later. REITs own real estate inside a tax-advantaged structure, so as long as the company pays out most of its cash flow to shareholders, it pays no corporate tax. REITs have a strong, long-term track record, and they’re popular with many older investors due to their larger payouts.
Investors here may want to turn to a top diversified REIT fund rather than analyze and invest in individual names. Because of their payouts, REITs may work better in tax-advantaged accounts.
An index fund based on the Standard & Poor’s 500 index contains hundreds of America’s top companies and is focused more on growth than paying dividends today. It can be a great vehicle for those looking to build wealth and while its dividend is small today, it can grow massively with enough time. So an S&P 500 fund is a great strategy for those looking to build income later.
The best S&P 500 funds are a good fit for taxable and tax-advantaged accounts. Because the dividend is a relatively small part of the total return, investors won’t be sacrificing too much return in a taxable account, and they won’t be hit with capital gains taxes until they sell anyway. Of course, inside a tax-advantaged account, you can avoid the drag from taxes.
Bottom line
Retirement savers need to establish alternative income streams because they can’t only rely on Social Security to maintain their standard of living. Those who start early — ideally as soon as they begin working — will have the best chance to build a powerful income stream that can sustain them through their golden years.
The Bankrate Social Security survey was conducted by YouGov Plc from Oct 9-11, 2024 using a total sample size of 2,492 U.S. adults. The figures have been weighted and are representative of all U.S. adults (aged 18+). The survey was carried out online and meets rigorous quality standards. It employed a non-probability-based sample using both quotas upfront during collection and then a weighting scheme on the back end designed and proven to provide nationally representative results.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.
