6 tips for making most of Social Security
What a bore.
Gallup researchers released a poll last week showing that even though confidence in government is at a low ebb, an increasing number of people nearing retirement plan to rely primarily on Social Security in their old age. About 34% of soon-to-be retirees think Social Security will be their major source of support, up from 25% in 2004.
Some naysayers swear the system will collapse soon under its own weight, but don't forget, there are 77 million Baby Boomers getting old in a crowd – a political heatwave that even the most determined reformers of the program will have trouble shoving aside for years to come.
Fortunately, for those of us Baby Boomers who are going to need those checks, the bureaucrats who run Social Security have supplied a few loopholes that will allow the determined to get a lot more money than grandma managed to eke out. Here are six tips offered by the financial whizzes at U.S. News and World Report and others from the insurance company Prudential.
- Embrace your Social Security. Many Boomers will spend 40 years in retirement. In 2010, a 65-year-old worker with $80,000 of final wages and a non-working spouse initially can expect about $30,000 a year from Social Security, indexed for inflation. That's not chump change.
- Don't be in a hurry to collect. If you wait until you're 70, you'll double your benefit, compared to what you'll get at age 62.
- Consider your spouse. Since passage of the Freedom to Work Act of 2000, a worker can "File and Suspend" Social Security benefits once he or she has reached Full Retirement Age – for most 66. This allows the younger spouse to initially receive 50% spousal benefits based on the older spouse's record, then re-file for 100% of his or her own benefits at full retirement age or older.
- Ex-spouses can win too. Former spouses who were married for at least 10 years can collect based on their ex-spouses earnings. But remember, the ex will collect the most when you're dead -- so watch your back.
- Calculate the taxes. Intuitively, it seems like it makes the most sense to avoid spending taxable IRA or 401(k) money and rely instead on Social Security supplemented by as little taxable money as possible. In fact, because of the Byzantine way Social Security is taxed, it may be financially advantageous to spend up the taxable money first and delay taking Social Security until age 70, when the amount you and your spouse are entitled to stops increasing. Prudential calculates that individuals with after-tax income up to the mid-$90,000 range can have significant tax savings from delaying Social Security.
- Start all over again. If you collected at 62 and decide later that you should have waited, consider paying back the amount you've already received and starting fresh at full retirement age or older. While it might seem like a lot of money, the pay off could be great -- as much as $1,000 a month. And, of course, Social Security is indexed for inflation.
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