I’m a Retirement Planning Expert: Use These 3 Strategies To Avoid Relying On Social Security
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Andrew Lisa
7 min read
According to the Social Security Administration (SSA), Social Security pays the average retiree about $1,860 per month. Even though most people spend less in retirement than they did while they were working, $22,320 a year makes for a slim budget with very little wiggle room.
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GOBankingRates spoke with Marty Burbank, an estate planning and elder law attorney and the founder of OC Elder Law in Orange County, California. He sits on several prominent boards and has been recognized for his work helping veterans and retirees plan for their financial futures.
Start With Whatever You Have, No Matter How Little, Right Now
If you’re putting off saving until you own a home or earn more income or any other justification for stalling, remember that time is money — and thanks to interest-on-interest wealth-building, when you waste one, you waste the other.
“Encouraging clients to start early allows the power of compounding to work in their favor, potentially leading to a more comfortable retirement,” said Burbank.
With compounding, you don’t just earn interest on your principal. Your interest earns interest, too.
If you put $1,000 in a savings account with a 5% APY, you’d earn $50 in interest in one year and start year two with $1,050. By the end of that year, the same 5% would have earned you $52.50, leaving you with $1,102.50 for your 5% to get to work on in year three, and so on.
It’s a tiny snowball just starting to roll downhill. Given enough time, it will become a boulder.
The previous example used an interest-bearing savings account, which is the right place for an emergency fund because it’s fully liquid, you can’t lose your principal and FDIC insurance keeps your money safe — and you might need your emergency fund at any moment.
But you won’t need your retirement fund until you retire, so you have time to ride the ups and downs of the investment markets in pursuit of gains that put 5% to shame.
“One effective way to save for retirement beyond relying on Social Security is through establishing a diversified investment portfolio,” said Burbank. “This can include stocks, bonds, mutual funds and real estate.”
Stocks
According to Motley Fool, the S&P 500 delivered average annual returns of 10.2% between 1972 and 2023, more than double even today’s two-decade-high savings account yields.
The S&P 500 is an index that tracks the performance of the 500 largest American companies. With fractional-share investing, a few bucks can buy you a slice of all 500 with a single ETF, like the dirt-cheap Vanguard S&P 500 ETF (VOO).
You won’t earn interest like with a savings account, but your money will compound as the value of your holdings grows — and many stocks pay dividends, too.
Burbank also mentioned real estate. If owning physical property is out of reach and you don’t like the illiquidity, risks and minimum investments common to crowdfunding, real estate investment trusts (REITs) are as simple as stocks, bought and sold in shares on the open market with however much you have to invest. Motley Fool says REITs earned an annualized average of 12.7% between 1972 and 2023, even better than the S&P. Unlike stocks, which may or may not pay dividends, all REITs are required by law to distribute at least 90% of their taxable income back to shareholders.
Dividend Reinvestment — Drip Your Way to Wealth
Most brokerages offer dividend reinvestment plans (DRIPs), which redirect dividend payouts back into your account, where they’re automatically used to buy more shares.
Instead of taking dividend payouts as cash, enroll in a DRIP to accelerate compounding — it can turn modest but regular distributions into a fortune. According to Charles Schwab, $100,000 invested in an S&P 500 index fund in 1990 would have grown to $1.1 million in 2022. With the DRIP turned on, it would have been $2.1 million, nearly double the returns despite the S&P’s relatively paltry 1.33% dividend yield.
Master Consistency With Dollar-Cost Averaging
Time and consistency are the keys to long-term investing, and dollar-cost averaging makes inconsistency impossible. According to Schwab, the key is to invest a fixed-dollar amount on a regular basis — say, $100 on the third Tuesday of every month — regardless of market performance or share price. Your $100 will buy less or more depending on whether your ETF or REIT or whatever is up or down. Over time, you’ll buy less when it’s expensive and more when it’s cheap, which is a desirable outcome that you couldn’t achieve by trying to time the market.
Don’t Give the IRS Money You Should Be Spending in Retirement
Now that you know how to inflate your nest egg by investing your money for long-term growth — no matter how little you have to contribute — grow it in an account that incentivizes retirement savings.
“My experiences have taught me the benefits of Roth IRAs and 401(k) plans, which offer tax advantages that can significantly impact your retirement savings,” said Burbank.
Squeeze Every Dollar Out of Your 401(k)
If your company offers a 401(k), enroll in it. That might seem like obvious advice, but Bureau of Labor Statistics (BLS) data shows that 69% of private industry employers have access to a 401(k) but only 52% participate. That’s a take-up rate of just 75%, meaning one in four who have access pass on the opportunity.
And always maximize your employer match.
According to Forbes, an employee earning $50,000 a year who contributes $3,000 annually to a 401(k) with a 6% one-half partial company match and earns 8% returns would have $660,000 in matching contributions alone after a 45-year career. The total account balance would be $1.97 million. With a dollar-for-dollar match, employer contributions alone would be $1.3 million and the total nest egg would be $2.6 million.
No 401(k)? No Excuse
If you don’t have a 401(k), you can open an individual retirement account (IRA) for free with a few clicks at a bank or brokerage’s website. Like 401(k)s, IRAs are funded with pre-tax cash, which reduces your taxable income now, but you must pay taxes on your distributions when you retire. Burbank also mentioned Roth IRAs. They’re funded with after-tax money, which lets you grow your investments tax-free and make tax-free withdrawals in retirement.
Which is right for you depends on factors like your tax bracket and what your tax bracket might be when you retire. As with all things related to securing a stable retirement, talk to a professional like Burbank to craft a plan that’s right for you.
