3 Social Security Strategies to Fund Your Retirement | Smart Change: Personal Finance
From afar, Social Security looks like a very simple program. You pay into the system while you work. Then, once you retire, you collect on it. While this is generally true, the specifics in the way it is designed means that you have some flexibility in how you collect it and how you use the money in your retirement plan.
With that in mind, there are many different strategies you can use with Social Security to make it help fund your retirement. Some require advance planning, so it’s best to start well before you’re ready to collect. These three strategies should give you some great ideas on how to take advantage of Social Security as part of a larger plan.
#1: Default: Take the money and spend it
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If you don’t do much in the way of planning, pretty much by default, you’ll end up signing up to collect Social Security just to spend the money that comes in. While this is a perfectly acceptable use of money, it can also be very limited. The average retiree currently receives about $1,671 a month from Social Security.
If that’s enough to cover your lifestyle, congratulations – you’ll probably be fine. It is enough to keep one person above the poverty line in all 50 states. As long as you don’t have high basic expenses or expect a particularly lavish lifestyle, it may be enough to see you through retirement.
Of course, Social Security wasn’t meant to be the only source of your retirement money. So if you have a way to get another source of money, better Social Security strategies will probably start to become available to you.
No. 2: Delaying the deposit and increasing your monthly income for the rest of your life
You have a choice when you start collecting your Social Security. You can start your payments at any time once you turn 62, the longer you wait – until age 70 – the higher your monthly benefit. This helps in two ways.
First, as long as the program trusts last, Social Security payments provide a guaranteed source of income for its beneficiaries. Even when these trust funds become empty, if nothing else changes, the program expects to be able to pay about 75% of what beneficiaries expect.
Second, Social Security offers its recipients an annual adjustment for inflation based on the level of past benefits. The higher your monthly accrual amount, the more absolute dollar support you will get from this inflation adjustment.
Of course, the trade-off is that the longer you wait to get Social Security, the longer you’ll have to work or the more early retirement costs you’ll have to cover from your other finances. Additionally, if you end up with a shorter-than-average lifespan, by delaying your claim, you may receive less money over the course of your life than you initially hoped.
#3: File early and use the money to help with Roth IRA transfers
If you have a decent balance in traditional style retirement accounts, then you may be You’d like to have some of that money in a Roth IRA before you turn 72. This is because once you turn 72, you’re subject to the minimum distributions required from most of your retirement accounts but not your Roth IRAs. Additionally, once the money is inside your Roth IRA, the tax-exempt can double for the rest of your life and be passed on to your heirs in a more tax-efficient manner than a traditional retirement account can.
The challenge with a Roth IRA transfer is that you need to pay taxes on the money you transfer. If you are able to cover these transfer taxes from a cash source the outside From your IRA itself, you can keep more of the work for you in a tax- and RMD-free Roth IRA. As a result, taking your Social Security money early and using it to help cover your Roth IRA transfer taxes is a great way to get more money into your Roth IRA earlier in your retirement.
Again, there are trade-offs. First, by taking out your Social Security early, your monthly benefit amount will be lower than what you are overdue. Second, there is a five-year waiting period after you first fund your Roth IRA (either directly or via transfers) before you can cash in on your tax-free earnings if you plan to spend it. As a result, it pays to have a pre-existing Roth IRA or if you are sure you won’t need to click the account before five years have passed.
The choice is yours if you plan ahead
If you plan ahead, you can choose to spend your Social Security benefits, try to maximize them by delaying your claim, or use them to help increase the amount you can keep from your Roth IRA transfers. Whatever choice you want to make, the sooner you start with your comprehensive retirement plan, the better your chances of success will be. So get started now and double your ability to take advantage of Social Security to fund your retirement.
The $18,984 Social Security bonus is totally overlooked by most retirees
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Chuck Saletta does not have a position in any of the stocks mentioned. The Motley Fool does not have a position in any of the stocks mentioned. Motley Fool has a disclosure policy.