Planning for Social SecurityWritten by Nolan Baker Mark Clair | | firstname.lastname@example.org
According to the Congressional Budget Office, Social Security will pay out an estimated $29 billion more than it is going to take in this year in payroll taxes.
Not even the government has been spared in the most recent economic downturn. Although, the train wreck in Washington may be out of your control, American’s young and old can take steps when planning for Social Security benefits.
The younger a family is, the less they should rely on Social Security as a source of retirement income. Around one-third of retirees today rely on Social Security alone to provide 90 percent or more of their retirement income, according to the Social Security Administration. Most people realize that the Social Security system is in trouble, but you may not be aware of how fast things are getting worse. At www.USDebtClock.org, it shows the current unfunded liability of the Social Security system and it is now at a staggering $12 trillion-plus.
Raising taxes on working Americans may seem like a simple solution, but it may not be that easy. An estimated 78 million baby boomers are moving into retirement, putting an even bigger strain on the system. At the same time, many families are choosing to have fewer children putting the ratio of people paying to those collecting lower and lower. Tough choices will have to be made by our political leaders, which in our opinion probably means providing for less people and not giving as much to everyone. The normal age of full retirement benefits could keep getting pushed out later and later and the amount a person could be eligible for could be less than previously expected. The conclusion is, the younger you are, the more you should save on your own; don’t rely on the government to take care of you.
Next, for those who are close to or in retirement, the question becomes at what age should you begin benefits? Most people are eligible to begin taking reduced benefits at the age of 62 or they can opt to wait a few years until full retirement age, which can vary based upon what year they were born. As The Retirement Guys, a lot of factors are considered in helping clients decide when to begin benefits. For one, consider the health and benefit of both spouses.
If both spouses are equal income earners and one of the spouses has health issues, it can make sense to begin benefits as early as possible. Yet, if one of the spouses was the primary wage earner and the other spouse plans on using 50 percent of their spouse’s Social Security Benefits, waiting to maximize benefits for both spouses can make more sense. If the main income earner passes away first, the surviving spouse could be locked into a lower amount for their lifetime if benefits are started early.
Earned income is also an important issue to consider when deciding to take benefits. If someone is younger than full Social Security retirement age and is still working, it may make sense to wait to collect benefits if earnings will be more than $14,160. For example, if someone is 62 and eligible for $700 in Social Security benefits and earns $20,000 a year in income, his or her Social Security payments would be reduced by about 35 percent. This is on top of a 30 percent reduction for taking benefits early, plus up to 85 percent of the social security could be taxable income if the total taxable income was more than $34,000 ($44,000 for married couples). The bottom line is, when someone is in good health, actively working and younger than full retirement age, it may be a good idea to wait to collect benefits.
Taxes are another area to consider. Anywhere between 50 to 85 percent of Social Security benefits could be taxable, depending upon your total taxable income. This is another area where smart planning comes into to play. For people who are forced to take required minimum distributions because they are older than 70 and a half, a Roth Conversion may help solve a Social Security tax problem. Since distributions from a traditional retirement account like a 401(k) or IRA are considered in the formula to determine taxation on Social Security benefits, moving money in the right direction by doing a Roth Conversion may help or solve the problem.
Also, consider ways to defer taxes on fully taxable accounts that aren’t being used now or in the near future. This could be done by deferring taxes in a tax deferred annuity. Finally, if benefits have not yet begun and a Roth Conversion is a strategy being considered in part of an overall comprehensive retirement plan, consider waiting to start Social Security income until the conversions are completed as withdrawals from a Roth IRA are not considered as the formula to determine taxation on Social Security benefits. Keep in mind withdrawals from a Roth IRA prior to five years and before the age of 59 and a half could be subject to a 10 percent tax penalty.
The Social Security website is www.ssa.gov. It can be reached by phone at 1-800-772-1213, or sit down with a representative at 5151 Monroe St. in Toledo.
For more information about The Retirement Guys, tune in every Saturday at 1 p.m. on 1370 WSPD or visit www.retirementguysradio.com. Securities are offered through NEXT Financial Group Inc., Member FINRA / SIPC. The Retirement Guys are not an affiliate of NEXT Financial Group. The office is at 1700 Woodlands Drive, Suite 100, Maumee, OH 43537. NEXT Financial Group, Inc. nor its representatives provide tax advice.