3 ways to supplement Social Security in retirement

For the average American, Social Security could replace 40% of your income in retirement. But this number varies, and for some it could make up an even smaller portion.

This means that avoiding living on a fixed income after you've stopped working could require having other income sources. Here are three ways you can supplement your Social Security payment in retirement.

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1. Work part-time or contractually

It may not seem like retirement if you're working. But work during this time of your life can look completely different from the work you do now. Right now you may clock in and out of your 9-to-5 job because it pays your bills. But once you've retired, you could make money doing something that you've always been passionate about but couldn't do before because it didn't yield enough income.

Because your working income after you retire will be a supplementary source of income instead of your primary source, you can also work a lot less. How much you'll have to work will depend on the gap between your expenses and income. Here's an example:

• Your expenses in retirement equal $30,000 a year.
• Your income from Social Security is $24,000 a year.
• You need $6,000 extra so that you can afford your lifestyle.
• If you can find a job paying $20 an hour, you can work 10 hours a week and make about $10,000 a year.

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2. Save more while you're working

You could be stretched to the limit already and saving as much for retirement as possible. But if there's any wiggle room, small amounts over time could accumulate by a lot. And if you can come up with the equivalent of $100, $200, $300, or $400 monthly, you could save anywhere from $100,000 to $500,000 or more for retirement.

But that may seem easier said than done if you're having trouble finding spare cash. The first thing you can do that could help is create a budget. By making a list of your monthly spending and differentiating between your wants and needs and your variable and fixed spending, you can truly find out if saving and investing more is possible.

You probably can't eliminate essential needs but if you find that a good portion of your income goes toward discretionary spending, some of it could be redirected toward saving. Your variable expenses could be both wants and needs, and reducing usage could lower these bills so that you can save more.

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You can also look for programs like an employer match at your job. With this type of incentive, your company will match contributions you make to your 401(k) up to a max. So if you make $50,000 and your company has a 5% match program, you could get up to $2,500 each year in contributions from your job as long as you save the same amount.

3. Create other income streams with investments

As you start thinking about retiring, your personal finance goals may shift. You may find that you're less concerned about growing your money and more interested in preserving it. As a result, your asset allocation model could naturally shift toward investing in instruments like bonds more than in stocks.

But this move could do more than just make your accounts more conservative. It could also provide you with income that you can use in retirement.

But it's important to understand that there is also a risk/reward dynamic that exists with safer investments: The higher the yield, the higher the potential risk. A high-yield bond fund could pay you a 5.5% dividend yield whereas an investment-grade bond might only pay you 2%. But the better-paying bond could also lose more in a bad year, like in 2008 when high-yield bonds lost 26% of their value and U.S. fixed income gained 5%.

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Your retirement should be a time that you can look forward to. But stressing out about how you'll finance it can take away from this enjoyment. The earlier you can plan for shortfalls that you may have, the better your chances will be of solving them.

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