Make Social Security Part of the Retirement Plan

Social Security is in trouble. As the baby boom generation nears retirement age, Social Security is getting ever closer to negative cash flow, meaning there will be more people taking payouts from the system than there are workers paying in. The turning point will probably occur in 2016 or 2017.

However, the Social Security Administration reports that the current schedule of benefits will be payable up until 2041, even if nothing is done to amend the system.

The SSA reports that beyond 2041, benefits will still be payable, only reduced by 22% -- further reductions would occur in subsequent years. As a result, it's important to consider the impact Social Security will have on your retirement plans.

First, you need to make sure you get what you deserve in terms of benefits, which means actually checking the Social Security statement that arrives in your mailbox each year, about three months before your birthday.

The amount of your benefits depends on your earnings history, so you'll want to make sure the SSA has the right amount listed for each year you earned taxable income. If you find an error, contact the SSA at 1-800-772-1213.

For more information about your statement, check out the SSA Web site.

Your next big decision is choosing when you receive benefits -- you can get a check from the SSA as early as age 62, or you can wait until you turn 70. The earlier you receive your benefits, however, the less money you'll get in each check.

In fact, if you were born in 1960 or later, you must wait to collect benefits until you turn 67 in order to receive 100% of your retirement benefits. For every year you delay receiving benefits, you'll get an additional 8% added to your monthly check (up to age 70, after which there are no benefits for further delays).

Consider your financial situation in retirement as well as your general health when deciding when to start taking benefits. If you need the money to make ends meet, then receiving your benefits early may make the most sense.

You should also consider receiving the benefits early if you are in poor health or have a family history of lower life expectancy. Delaying your benefits in order to receive higher payments makes sense only if you live past your break-even age. (The SSA has its own break-even calculator).

Also, consider the tax implications of receiving Social Security payments. If you have other sources of income in retirement (e.g., a pension or IRA distributions), you'll probably have to pay at least some taxes on your benefits.

Your benefits are taxable (at whatever income tax bracket you fall under) when half of your Social Security benefit plus all of your other income exceeds the base personal limit -- $25,000 if you're single, and $32,000 if you're married filing jointly.

You can calculate just how much of your benefits are taxable by using the IRS online worksheet. If your total income is above $34,000 if you're single ($44,000 if you're married filing jointly), you'll be liable for taxes on 85% of your benefits -- the top rate.

Once you have a clear picture of the impact Social Security benefits will have on your finances, you can decide to start receiving them at the time that works best for you.

Peter McDougall is a freelance writer who lives in Freeport, Maine, with his wife and their dog.

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