Including Social Security as Part of Your Retirement Plan

When you’re younger, thinking about retirement seems more like a concept than an eventual reality – the milestone seems so far away. But, one day, it will become a reality, and it’s better to start planning financially as early as possible for that reality to ensure that you have enough money accumulated not simply to exist, but to enjoy your work-free days.

Your retirement plan needs to be funded from different sources. After all, you shouldn’t put all of your eggs in one basket. One source that is often ignored or discounted, but should still be part of your plan – is social security.

What is Social Security?

Funded through payroll deductions, it is a system that you pay into while you are working so that when you retire, you will receive a regular, monthly check to fund or supplement your retirement income. Everyone must pay social security – even the self-employed.

When is the Best Time to Begin Receiving Your Social Security Payments?

You don’t have to wait until you have reached the age of 65 to start drawing on your social security benefits. You can take start drawing on it earlier, but there are penalties for doing so.

For example, 62 is earliest you that you can elect to begin receiving it, however, your payments will be 25 – 30% less than what you would have received if you had waited until the age of 65. This means delaying from age 62 to 63 would give a guaranteed 8% rate of return!

Why then would anyone consider taking early payments? There are many scenarios including health issues, a shorter than average life expectancy, or a financial shortfall, among other reasons.

However, if you plan on working and will earn more than your annual earnings limit, or do not have serious health issues, then you would probably benefit by delaying the start of social security.

Your annual earnings limit is the maximum you are allowed to earn before your social security benefits are affected – your amount due will be reduced by $1 for every $2 you exceed your limit. In 2013, this limit is set at $15,120. Note that this reduction applies to those years before your retirement age, and affects income earned after you start receiving your checks. Once you reach retirement age, this limit no longer applies and you can earn as much as you want without affecting your social security benefit.

Another thing to consider - if your earnings exceed your annual earnings limit, then you may have to pay taxes on it.

There are additional strategies that married couples can employ to get more out of their combined benefits. For example, if one spouse’s benefit is significantly greater than the others, delaying benefits for the higher-earning spouse can be a good course of action because it increases the amount the couple receives as long as either spouse is living. Having one spouse wait to start their social security benefits until age 70 might be the best option.

You can find online calculators that will help determine the approximate amount of social security that you will receive based on “what-if” retirement scenarios, which you then can incorporate into your retirement plan.

Depending on the amount you have saved in your portfolios, your projected passive income stream, your preferred standard of living, and your health, social security may comprise a smaller or larger part of your retirement plan. Be sure to do your research so you understand the nuances of when you should take social security to ensure a long, prosperous, and enjoyable retirement.

So, what do you think? Are you planning social security being available when you retire? When are you planning on taking it?

Alan Moore is a fee-only financial planner and founder of Serenity Financial Consulting in Shorewood WI. Connect on Google+. You can contact him at alan@serenityfc.com, 414-455-5313, or visit his website at www.SerenityFC.com. Want more education? Download your free guide to the “10 Easy Steps To Securing Your Financial Future Today.”