Social Security Benefits

Making Your Retirement Savings Last

No matter how old you are at this moment, even if you are only a few years from retirement, you can learn how to maximize your Social Security, savings and investment income so that you will be able to retire in your mid to late 60's.   There are a few questions you must ask yourself first.  How much time have you given to your retirement planning? Do you know how much you can expect to receive in Social Security benefits? Have you given any thought to the amount of money you should have in your 401K or IRA? Do you even have an IRA?  Have you decided how to invest it for maximum income? Have you begun to pay off debts and think about where you can afford to live?

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As a Baby Boomer, I know that many of my peers are reaching their retirement age incredibly unprepared. Many of them make general, sweeping statements such as “I’ll just work until I drop.” That sounds good in theory, but what happens if you become ill and cannot work your entire life? What happens if you have a stroke or heart attack, and your ability to support yourself disappears?  Educating yourself and making smart decisions can make a tremendous difference in how your spend your retirement years.

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All of us have the responsibility to plan for our future, no matter what our age. If you are a young person in your 20’s, 30’s or 40’s, you have plenty of time to take the necessary steps. If you are a Baby Boomer in your 50’s or 60’s, you may need to make some quick decisions to avoid disaster. However old you are, here are some interesting facts that you may find helpful.

The Truth about Social Security

First of all, many people assume that Social Security will not be around when they reach retirement age. This is simply not true. According to the figures released by the AARP (the American Association of Retired People), the Social Security Trust Fund has enough money available to pay out full benefits, as promised, to everyone until approximately 2037, and can pay out about 75% of the promised benefits after that, even if absolutely nothing is done to improve the financial footing of the Social Security Administration. If Congress is willing to tweak a few things, such as increasing the earning levels of those paying Social Security and raising the retirement age by a couple of years, they should be able to pay full benefits for many decades.

As a result, your concern should not be whether or not you will get Social Security, but how much your benefit will be. Currently, the average Social Security recipient only receives about $1270. This is not much money to live on, even if you are very frugal. However, it is possible to receive twice that, or even more, if you are patient. Work at least 30 years, and pay into Social Security during that time. Do not retire until you reach your full retirement age of about 66 or 67 or, if you can, continue working until you are 70. The longer you work, the higher your benefits will be, and the more enjoyable your retirement years will be.

How to Make Your Savings Last

If you are like most people, you will want to have additional retirement income, beyond what you are likely to receive from Social Security. It is wise to put aside a little money over the years that you can use when you are no longer able to earn a living. The government believes that this is so important that they are willing to allow you to defer paying taxes on any money that you save in a retirement account. This allows you to pay lower taxes on your current income. You will not need to pay taxes on the money until you retire when, presumably, you will be in a lower tax bracket.  So, you can save tax money now and in the future by putting savings into an IRA or 401K.

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Here is one scenario to help you understand how retirement savings works: If you put aside only $2,000 a year during the 40 years from the time you are 25 until you are 65, you will have saved $80,000. With the interest and/or dividends you will have earned during that time, you should have been able to increase that amount substantially. However, even if you only received a modest amount of interest, and had a few bad investments, you should still have been able to build it up to $100,000.

If you retire with a modest income from Social Security and $100,000 or more in your retirement accounts, I have seen people who immediately began to go through their savings. They take trips, give lavish gifts to their children, and indulge themselves in similar ways. Perhaps they buy that boat they always wanted, or fix up their house. Although this may seem like a fun way to spend the money, it is not wise to go through it so quickly. You may need it in 10 or 15 years, and it will be gone.

Consequently, you need to have a plan that will help you make your money last. Some people have no confidence in their ability to dole the money out slowly, so they buy an annuity. That is one solution, but it doesn’t allow you the ability to dip into the principal if you face a true emergency. If you are confident in your ability to manage your own money, then it is wiser if you handle your assets yourself. There are two approaches you can take.

First, you can invest the money in interest bearing accounts or dividend paying stocks. Then, use the income from your investments, without touching the principal. If you can earn a 5% rate of return from your $100,000, then you will have an extra $5,000 a year to spend in retirement … after only saving $2,000 a year during all those years you were working! As long as you can earn that rate of return, you can continue to enjoy this extra money without ever spending a dime of the principal! In fact, if you manage to increase your rate of return, you may even be able to save a little more money when you first retire.

The second approach is to take the $100,000 and divide it by the maximum number of years you expect to live. If you are 70 when you retire, and you feel confident you will not live past age 95, you can divide the money by 25 and remove that much from your account each year. In this way, you start out only spending $4,000 a year. However, the money will still accumulate interest and dividends. After 5 years, you can reassess. If you have $80,000 left, plus a minimum of about $10,000 in interest and dividends (at only a 2% - 3% rate of return), you will actually have about $90,000 remaining in your accounts. If you expect to live only another 20 years, you can divide the $90,000 by 20 and allow yourself $4,500 a year for the next five years. In this way, your money will last the rest of your life, and you will have allowed for increases to offset inflation.

When you do the math, you can easily see the benefit of saving a modest $2,000 or more a year during your working years. Save more if you can. The payoff when you retire will be substantial.

Between your Social Security Benefits and your retirement savings, you should be able to enjoy a comfortable retirement, as long as you start planning as soon as possible.

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