Retirement can be a scary thought. Gone is the steady paycheck and the ability to make a living. And no matter how much money you’ve saved between now and retirement, there’s always that nagging fear that you’ll run out of cash.
That’s why it’s so important to have an income you can rely on in retirement. But which is better in this regard: Social Security or dividend stocks? Let’s look into this.
Social Security guarantees a monthly retirement benefit for life – with a catch
If you work your entire career and are enrolled in Social Security, you’re generally entitled to a monthly retirement benefit for the rest of your life. And this benefit can increase slightly year after year, thanks to Social Security’s automatic cost-of-living adjustments (COLAs).
Still, Social Security is struggling with budget deficits and facing the possibility of benefit cuts. The program’s trustees have said that Social Security may have to start reducing benefits to some extent starting in 2035, but that schedule could change as well.
But lawmakers have faced similar tricky situations with Social Security before, and they’ve never had to resort to benefit cuts. Hopefully, such cuts can be avoided this time around.
Either way, it’s worth setting up an account on the Social Security Administration’s website before you retire and getting an up-to-date income statement. It will provide you with an estimate of your monthly Social Security benefit after retirement, so you know how much you can expect.
And remember: If lawmakers get away with cutting benefits, your monthly checks may stop shrinking once you start collecting Social Security benefits. It may only go up depending on how inflation develops.
Dividend stocks offer no promises, but they do have a good chance of upside
Social Security is generally viewed as a guaranteed source of income in retirement. The same can’t be said for dividend stocks.
Why? Dividend-paying companies are not obligated to pay dividends.
Of course, there is pressure to keep paying dividends to keep shareholders happy. But there’s a difference between feeling like you have to do something and actually having to do something.
Dividend yields are also up in the air. Companies may start out with a fixed dividend and reduce it over time.
On the other hand, certain companies may start out with a fixed dividend and increase it every year. For example, these dividend kings have a history of solid dividend increases.
You Might Benefit From Having Both Streams of Income
Because of how the program works, technically, Social Security is probably a more reliable source of retirement income than dividend-paying stocks. However, even if you expect a fairly generous Social Security benefit, you may want to invest in dividend stocks.
Social Security recipients have long struggled to maintain their purchasing power in the face of inflation, primarily due to serious errors in calculating COLAs. Dividend stocks, on the other hand, can help make up for inefficient COLAs and provide additional income.
Of course, it’s never a good idea to buy a stock solely for its dividend. As we said before, dividend yields are not guaranteed, and companies don’t have to keep paying dividends if they don’t want to. However, if you happen to come across a good company with a solid dividend history, it could be worth investing in.