This $360,000 Portfolio Can Replace Social Security Income — If You Get One Thing Right

Millions of Americans rely on monthly Social Security checks to get by. Many claim early due to unavoidable reasons and get locked into lower monthly payments for life.

However, Social Security insolvency risks and concerns about benefits reduction within six years are driving many seniors and dependents to the edge. The Social Security Administration (SSA) forecast that the average monthly retirement checks in January stood at $2,071.

If people see declines in Social Security incomes amid rising living, housing, and medical costs, 'Rich Dad Poor Dad' author Robert Kiyosaki has warned that millions of boomers could face a wave of homelessness in the near future.

In such volatile times and an uncertain job market, creating passive income streams could offer something to fall back on if the worst fears about Social Security insolvency and inflation come true.

The average retired worker's Social Security check of $2,071 is $24,852 annually. In order to replace this income, we must first determine how much capital and yield is required. Considering you have $360,000 to invest, it is possible to generate income equivalent to Social Security checks while keeping the principal amount intact with the right blend of yield.

This is because your expected annual income is equal to capital multiplied by yield. As the yield rises, the required capital for the same income levels declines.

Balanced Yield for Steady Income With no Additional Risks

If you aim for a conservative portfolio comprising dividend aristocrats that yield between 3% to 4%, it will generate an annual income of around $12,600 or $1,050 monthly, on a capital of $360,000. At this yield, you would require $710,000 worth of investments to replace the average Social Security income.

If you are aiming for yields between 5% to 7% through real estate investment trusts (REITs), high-dividend-paying equity funds, or midstream master limited partnerships, the capital requirement to replace your Social Security income drops considerably. For instance, consider an average 6% yield on $360,000, it would fetch you an annual income of $21,000. However, a 7% yield would generate $25,200 annually or $2,100 monthly with the same capital investment.

Note that companies like Realty Income yields 5% with a $0.275 monthly distributions, while Enterprise Products Partners, backed by fee-based midstream contracts, offers a yield of 5.7% on a $0.55 quarterly distribution.

Now, if you plan to secure yields of 8% to 14%, instruments like covered call exchange-traded funds (ETFs), business development companies (BDCs), mortgage REITs, and high-yield bond funds could work for you. At 10%, you can generate $3,000 monthly on $360,000 of capital. At this rate of yield, the capital needed to replace the average Social Security income of $2,071 falls massively to only $248,520. However, these high-yield instruments present risks of principal erosion and volatility in distribution amounts.

If you split $360,000 into four segments of $90,000 each and invest in a net lease REIT at a 5% yield, a midstream MLP at 5.7%, a covered call equity ETF at 8.4%, and a BDC at 9.8%, you benefit from a blended yield of around 7.2% that fetches $25,974 annually or $2,164 a month. This way, you replace your Social Security income while keeping 66% of the portion in businesses with real cash flow rather than option premium.

However, note that low-yield dividend aristocrats often raise their distribution over time, which makes them still relevant despite available options of covered call ETFs. For instance, Realty Income boosted its monthly distribution from $0.247 per share in May 2022 to $0.2705 currently, while Enterprise Products increased its quarterly payout from $0.515 per share in early 2024 to $0.55. It means that a 5% yield that grows 3% to 5% annually compounds, while a 10% covered-call yield that stays flat does not.