3 Income ETFs to Offset Social Security Shortfalls

Social Security’s annual adjustments have failed to keep pace with inflation, resulting in dwindling purchasing power for retirees who depend on these benefits. With core inflation hovering at 2.9%—significantly above the Federal Reserve’s elusive 2% target—the erosion of retirement income has become a pressing concern for millions of Americans. This persistent gap between Social Security increases and actual living costs creates a critical need for supplemental income streams that can maintain their real value over time.

Rather than relying on a single stock or asset class, a diversified approach using income ETFs provides a strategic solution to offset Social Security shortfalls. The combination of Schwab U.S. Dividend Equity ETF (SCHD), Vanguard High Dividend Yield ETF (VYM), and iShares Core U.S. Aggregate Bond ETF (AGG) creates a balanced portfolio designed to deliver consistent cash flow while managing risk. This trio represents both equity and fixed-income flavors, offering retirees a comprehensive toolkit to strengthen their retirement income beyond what Social Security alone can provide.

The Schwab U.S. Dividend Equity ETF (SCHD) targets the returns of the Dow Jones U.S. Dividend 100 Index with a rigorous focus on fundamental strength, including cash flow requirements for constituent companies. With just over 100 stock holdings and a remarkably low expense ratio of 0.060%, SCHD delivers a trailing dividend yield of 3.79%—significantly surpassing the S&P 500’s average dividend yield of 1.25%. This quality-focused approach provides both potential capital appreciation and reliable cash flow through quarterly distributions of $0.2604 per share.

SCHD’s portfolio includes leading dividend-paying companies across multiple sectors, offering investors exposure to established cash generators like pharmaceutical giant AbbVie (ABBV), defense contractor Lockheed Martin (LMT), biotechnology firm Amgen (AMGN), and healthcare leader Merck (MRK). The fund also holds consumer staple powerhouse PepsiCo (PEP)—a Dividend Aristocrat with a history of consistent dividend payments for at least 25 years—alongside technology stalwart Cisco Systems (CSCO) and energy holdings ConocoPhillips (COP) and Chevron (CVX). This diversified collection of quality dividend payers creates a foundation of steady income that can help replace the dependability of a regular paycheck in retirement.

The Vanguard High Dividend Yield ETF (VYM) tracks the FTSE High Dividend Yield Index, focusing on domestic large-cap companies that fall on the moderate-to-aggressive side of the risk spectrum. While higher dividend yields can sometimes indicate unsustainable payouts, VYM’s emphasis on established cash generators over passing trends helps mitigate this concern. The fund’s portfolio includes hundreds of names across multiple sectors, from financial heavyweight JPMorgan (JPM) to technology leader Broadcom (AVGO) and energy giant Exxon Mobil (XOM), providing comprehensive sector exposure that spreads risk while delivering steady yield.

Beyond its income-generating capabilities, VYM has demonstrated strong performance on the capital appreciation front, generating returns of 12.6% year-to-date—keeping pace with the broader market’s 13.2% advance in the S&P 500 index. This dual benefit of income and growth makes VYM particularly valuable for retirees seeking to offset Social Security shortfalls. However, investors should recognize the trade-offs: value-focused funds like VYM can lag when growth stocks lead the market, and dividend stocks tend to concentrate in sectors like financials and energy. When combined with cash or short-term bond instruments to buffer potential rough patches, VYM serves as a credible core income path to supplement Social Security benefits effectively.

For essential fixed-income exposure, the iShares Core U.S. Aggregate Bond ETF (AGG) targets wide exposure to U.S. investment-grade bonds, ensuring portfolio allocation to credit-worthy instruments. With a dividend yield of 3.8% and monthly distributions, AGG provides predictable cash flow that can help cover retirement expenses without depending solely on Social Security. The fund’s impressive long-term performance is demonstrated by its growth of a hypothetical $10,000 investment to over $20,000 across the past two decades, highlighting its value as a wealth-preserving component in a retirement portfolio.

AGG tracks the Bloomberg U.S. Aggregate Bond Index, holding a diversified mix of Treasuries, agency mortgage-backed securities (MBS), and investment-grade corporate bonds. With an ultra-low expense ratio of 0.03%, this ETF offers both diversification away from stocks and steady monthly income when retirees need predictable cash flow most. While AGG is somewhat sensitive to interest rate movements—with prices dipping when yields rise and rising when rates fall—this characteristic can be managed within a broader retirement income strategy. The fund’s monthly distributions provide regular income that complements quarterly stock dividends, creating a more consistent cash flow pattern throughout the year.

The combination of SCHD, VYM, and AGG creates a robust framework for addressing Social Security’s purchasing power decline. SCHD provides quality dividend exposure with strong fundamental screening, VYM offers broad sector diversification with both income and growth potential, while AGG delivers fixed-income stability with monthly distributions. Together, these three ETFs form a complementary strategy that balances equity market participation with bond market stability, creating multiple income streams to supplement Social Security benefits.

This diversified approach helps mitigate the risks associated with relying on any single income source. While SCHD focuses on quality dividend payers with sustainable yields, VYM captures higher-yielding opportunities across market sectors, and AGG provides the ballast of investment-grade bonds. The different distribution schedules—quarterly for the equity ETFs and monthly for AGG—create a more consistent cash flow pattern that can help retirees budget more effectively. As Social Security continues to struggle against inflation pressures, this strategic ETF combination offers a practical solution for maintaining retirement income purchasing power in an uncertain economic environment.