08/20/2012

MANAGING Your Retirement Income

Social Security Strategies

Social Security planning plays a vital role in retirement income management. The amount, as well as the longevity, of one's retirement income streams is directly impacted by decisions related to the timing of receipt of one's Social Security retirement benefits as well as the implementation of other income tax planning strategies before any benefits are received.

There are opportunities both before and after the commencement of receipt of benefits to employ varous Social Security planning techniques to enhance one's Social Security income. Retirement Income Center has significant expertise and experience with analyzing and recommending Social Security strategies. 

Social Security
This is definitely an area where one size doesn't fit all. As with other types of financial planning where there are multiple potential courses of action, emotion and perception often influence decision making. This is especially true in the Social Security arena when it comes to assumptions about longevity and potential legislation changes.

Until recent years, most of us thought of Social Security as our retirement income security blanket. Even if they had other sources of reitrement income that were greater in amount, retirees knew that, come hell or high water, they would receive a monthly check or electronic deposit from the Social Security Administration. This feeling of comfort was based on a long-standing history of benefits being paid to workers when they retired at age 65 beginning with the enactment of the Social Security Act of 1935 by President Franklin D. Roosevelt and the first payment of monthly benefits in 1940.

Planning for the Frays in Your Social Security Blanket

Planning for Social Security has become more important over the years as a result of the enactment of various legislation in connection with direct and indirect benefit reductions.  The most significant indirect benefit reduction was the imposition of a tax on Social Security benefits. Beginning in 1984, up to 50% of benefits became taxable if one's income exceeded certain thresholds. The percentage of taxable Social Security benefits increased from 50% to 85% in 1993 for "higher income" beneficiaries.

Even though it would be 65 years (how ironic!) from the enactment of the Social Security Act in 1935 until the beginning of the increase of the sacred age of 65 for receipt of full retirement benefits, beginning in 2000, those individuals born after 1938 were required to wait longer to begin receiving their full retirement benefit. Since then, the commencement of full retirement benefits is based on year of birth, with a delay until age 67 for those born in 1960 and later.  

Although statutory cost of living adjustments, or "COLA's," were implemented beginning in 1975, there were two consecutive years, 2009 and 2010, where there were no adjustments.

One other noteworthy item in connection with Social Security benefit planning is the affect of increasing Medicare Part B premiums on one's Social Security payment. While Social Security payments cannot decrease from one year to the next as a result of an increase in the Part B premium for "lower-income" individuals, this isn't the case for "higher-income" recipients, i.e., those with modified adjusted gross income ("MAGI") of $85,000 or more. Beginning in 2007, "higher-income" individuals have been subject to higher Medicare Part B premiums that increase as their MAGI exceeds specified thresholds.  

As is evident from the legislative history, the Social Security retirement income security blanket, while still intact, is inarguably frayed. With fewer employees paying into the system, increasing numbers of eligible recipients, and record budget deficits, a perfect storm is in place for further benefit reductions and a potential Social Security tax rate increase. Planning for alternative sources of retirement income has never been more important than it is today.

As previously stated, Retirement Income Center has significant expertise and experience with analyzing and recommending Social Security strategies. Robert Klein has written several informative pieces about this topic in Retirement Income VisionsTM blog posts beginning with the March 15, 2010 post, Want to Reduce Taxable Social Security Benefits? Consider a Roth IRA Conversion. This was followed by a weekly series about Social Security strategies, beginning with the September 27, 2010 post, Plan for the Frays in Your Social Security Blanket - Part 1 of 2 through the April 18, 2011 post, Roth IRA Conversions - Don't Let the Tax Tail Wag the Dog - Part 5 of 6.

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