Which retirement investments can supplement Social Security income?
July 05, 2016
Q: I am 60 years old, and plan to retire at age 62. Because Social Security won't be enough to live on, I am continuing to put money into a 401(k) for extra income. Can you recommend an investment product for me?
A: Naturally, you should start with income-producing products, since you are looking for something to supplement the annual income you will get from Social Security. As you start to look into the possibilities more closely, what you find should indicate whether you can afford a more diversified approach than one devoted to income production - and this process might even affect your retirement plans.
Retirement income and inflation
Low-risk investment options
Every 401(k) retirement savings plan offers a menu of investment options that represents a range of risk levels, and you should be focusing on the portion of your plan's menu dedicated to income-producing vehicles. Some of these are likely to be stable-value vehicles. Though as with savings accounts and other conservative investments these days, the main drawback of stable-value options is an extremely low income yield.
Bonds for a higher source of income
A higher-yielding source of income should be bonds. Your 401(k) likely has long-term bond options, and these should be offering a higher income yield than the stable value options. Just be advised that both the price and the yield of bond funds are variable, so you will be subject to market fluctuations. You can mitigate this risk somewhat over the long-term by choosing a fund dedicated to high-quality bonds only.
If you find a bond fund that produces enough income to meet your projected needs, you might consider putting any excess 401(k) balance into a stock fund, to give you some element of inflation protection. Retirement is likely to be just the beginning of a long period in which you will be living off your investments. This means some inflation protection for the long run would not be out of place, if you can afford it after you have taken care of your income needs.
Use time to your advantage for retirement savings
Choosing an investment vehicle could be an instructive exercise, not just for the present but for the future. Looking at how much income current yields would provide will allow you to gauge the extent to which your current 401(k) balance is sufficient to meet your income needs.
Why delay retirement to boost retirement income
If it is not sufficient, you might want to consider delaying retirement long enough to build more savings and increase your Social Security benefit. That may not be what you want to hear, but if you you don't feel physically or mentally ready to continue working past the age of 62, at least consider downshifting to part-time work. Even that may be sufficient to buy you enough time to improve your retirement income.
In summary, income investments should be a central part of the answer if you are looking to supplement Social Security income. Just how much of your 401(k) should be devoted to income investments, and how soon you should access it, depend on the extent to which your income needs would be met by current yields.
Comment: How do you plan to supplement your Social Security income?
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