Retirement

Don’t start Social Security too soon

May 1, 2012 By Liz Weston

Dear Liz: I am 66-1/2 and eligible to collect my full Social Security benefit now. I am in good health and assume I will live into my 80s. I am still working and don’t need the extra money. Is it better to put off taking my benefit so that it will grow 8% with Uncle Sam, tax free and guaranteed, or should I take the money now, pay taxes on it and invest it? Politically speaking, I think I should take it, but my gut says let it grow. What do you think? Is there a program available to demonstrate the differences?

Answer: Far too many people grab their Social Security checks too early, locking themselves into lower payments for the rest of their lives. Some do so in the mistaken belief that their benefits, or Social Security itself, will go away or be dramatically altered if they don’t “lock in” their checks. It’s true that Congress needs to change the Social Security program if it is to meet all its future obligations. But lawmakers are far more likely to change benefits for young people than they are to mess with promised benefits for people close to retirement age.

As you’ve noted, when left untouched benefits grow about 8% a year, which is a strong incentive to delay filing. You’d be hard-pressed to find an investment with that kind of guaranteed annual return, let alone one that would offer that yield plus enough extra return to offset the taxes you’d pay on those benefits if you took them earlier.

The Social Security site has a benefit estimator that can show you the effects of claiming your benefit at various ages. You’ll find it at http://www.ssa.gov/estimator.

AARP also has an excellent retirement calculator that can help you plan various scenarios using not just Social Security but all of your retirement benefits. It’s at http://www.aarp.org/work/retirement-planning/retirement_calculator.

Finally, you should check out mutual fund company T. Rowe Price’s information about “practice retirement” at troweprice.com/practice, which details the benefits of continuing to work through your 60s while saving less for retirement. The growth in Social Security benefits and retirement accounts is so great during that decade that it often more than offsets a sharp reduction in savings, which would mean you’d have more money to spend on vacations and other fun pursuits even before you retire.

Windfall in your 50s? Don’t blow it

March 26, 2012 By Liz Weston

Dear Liz: I am 56 and will be receiving $175,000 from the sale of a home I inherited. I do not know what to do with this money. I have been underemployed or unemployed for six years, have no retirement savings and am terrified this money will get chipped away for day-to-day expenses so that I’ll have nothing to show for it. Should I invest? If so, what is relatively safe? Should I try to buy another house as an investment?

Answer: You’re right to worry about wasting this windfall, because that’s what often happens. A few thousand dollars here, a few thousand dollars there, and suddenly what once seemed like a vast amount of money is gone.

First, you need to talk to a tax pro to make sure there won’t be a tax bill from your home sale. Then you need to use a small portion of your inheritance to hire a fee-only financial planner who can review your situation and suggest some options. You can get referrals for fee-only planners who charge by the hour from the Garrett Planning Network at http://www.garrettplanningnetwork.com.

You’re closing in quickly on retirement age, and you should know that typically Social Security doesn’t pay much. The average check is around $1,000 a month. This windfall can’t make up for all the years you didn’t save, but it could help you live a little better in retirement if properly invested.

You should read a good book on investing, such as Kathy Kristof’s “Investing 101,” so you can better understand the relationship between risk and reward. It’s understandable that you want to keep your money safe, but investments that promise no loss of principal don’t yield very much. In other words, keeping your money safe means it won’t be able to grow, which in turn means your buying power will be eroded over time.

Retiree can contribute to IRA

March 5, 2012 By Liz Weston

Dear Liz: I’m 64 and retired on a Social Security income of $10,000. My wife is also 64 and is still working, earning $91,000 a year. She contributes $13,000 to a 401(k). Can both of us also contribute the maximum $6,000 to our IRAs?

Answer: Since your wife has earned income, you both can contribute to IRAs, and you would be able to deduct your contribution. She, however, probably would be able to deduct only part of hers.

Because she’s covered by a retirement plan at work, her ability to deduct an IRA contribution for 2011 phases out at a modified adjusted gross income of between $90,000 and $110,000, said Mark Luscombe, principal analyst for tax research firm CCH, a Wolters Kluwer business. The portion of your Social Security benefits that are taxable would be added to her earned income to determine how much of her contribution is deductible.

“The working spouse would appear, therefore, based on the facts available, to only qualify for a partial deduction of her IRA contribution,” Luscombe said.

You’re luckier. As a non-working spouse, the phase-out range for deducting an IRA contribution is higher: In 2011, it applied to modified adjusted gross income between $169,000 and $179,000. “The non-working spouse would therefore, under these facts, qualify for a full deduction for a $6,000 contribution to an IRA,” Luscombe said.