Social Security provides retirement income you can't outlive. And, in
addition to your own benefit, your spouse may be eligible to receive
benefits based on your earnings record in the form of spousal benefits
and survivor's benefits. So, it's easy to see why, with all of these
potential benefit options, Social Security is an important source of
retirement income. But, according to the Social Security Administration,
only about 40% of an average worker's preretirement income is replaced
by Social Security (Source: SSA Publication No. 05-10035, July 2012).
When trying to figure out how you'll meet your retirement income needs,
you'll probably have to coordinate your Social Security benefits with
other retirement income sources such as pensions, qualified retirement
accounts (e.g., 401(k), IRA), and other personal savings.
Factors to consider
How
you incorporate Social Security benefits into your total retirement
income plan may depend on a number of factors, including whether you're
married, your health and life expectancy, whether you (or your spouse)
will work during retirement, the amount of your Social Security benefit
(and that of your spouse, if applicable), other sources of retirement
income (e.g., pension), how much retirement savings you have, and, of
course, your retirement income needs of you and your spouse, including
the income need of your spouse after your death.
A
factor to consider is that Social Security has a "built-in" protection
against longevity risk. Benefits increase each year you delay starting
benefits through age 69 (benefits do not increase past age 70), so the
later you start receiving benefits, the greater the benefit amount. In
addition, Social Security benefits are inflation-protected, and may
increase with annual cost-of-living adjustments based on increases in
the Consumer Price Index.
How
much you may pay in income tax may also factor into your retirement
income plan. For example, distributions from tax-qualified accounts
(e.g., 401(k)s, IRAs, but not including Roth IRAs) are generally taxed
as ordinary income. Up to 85% of your Social Security benefits may also
be taxed, depending on your modified adjusted gross income and tax
filing status. Tax issues are complex, so you should talk to a tax
advisor to understand your options and the tax consequences.
Pensions
If
you're lucky enough to have a traditional employer pension available,
that's another reliable source of income. You'll want to be sure that
you effectively coordinate your Social Security benefit with pension
income. Your pension may increase in value based on your age and years
of employment, but it may not include cost-of-living adjustments
(COLAs). As mentioned earlier, Social Security not only increases the
longer you delay taking benefits, but it may increase with COLAs.
If
your pension benefit increases past the age at which you retire, you
might consider waiting to take your pension (either single or joint and
survivor with your spouse) in order to maximize your pension benefit
amount. Depending on your income needs, you could start Social Security
benefits earlier to provide income. Or, if you've already reached your
maximum pension benefit, you could start your pension first, and defer
Social Security in order to receive an increased monthly benefit later.
Your decision depends on your individual situation, including your
pension benefit amount and whether it increases in value after you
retire, and the pension options that are available to you (e.g., single
life, qualified joint and survivor). You can get an explanation of your
pension options prior to retirement from your pension plan, including
the relative values of any optional forms of benefit available to you.
Personal savings
Prior
to retirement, when it came to personal savings, your focus was
probably on accumulation--building as large a nest egg as possible. As
you transition into retirement, that focus changes. Rather than
concentrating on accumulation, you're going to need to look at your
personal savings in terms of distribution and income potential. Your
savings potentially can provide a source of income to help you bridge
any gap between the time you begin retirement (if you've stopped
working) and the time you wait to begin taking Social Security benefits.
One
option you might consider, depending on the amount of retirement
savings you have and your income needs, is taking some of your savings
and purchasing an immediate annuity, which will provide a guaranteed
(based on the claims-paying ability of the annuity issuer) income
stream. In this way, your remaining savings may have a chance to
increase in value, while delaying Social Security benefits increases
your annual benefit as well.
Incorporating
Social Security into your retirement income plan involves several other
important factors. Talk to your financial professional for help in
developing the best plan for you.
Source: Sean A. Henderson, Financial Advisor - Waddell & Reed
for more details he can be reached at 210-826-0685 ext: 140 or
cell: 210-784-6952 or email at shenderson@wradvisors.com | 
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Special rules for government pensions
If
your pension is from a job where you did not pay Social Security taxes
(such as certain government jobs), two special provisions may apply. If
you're entitled to receive a government pension as
well as Social Security spousal retirement or
survivor's benefits based on your spouse's (or
former spouse's) earnings, the government pension offset (GPO) may
apply. Under this
provision, your spousal or survivor's benefit
may be reduced by two-thirds of your
government pension (some exceptions apply).
The windfall elimination provision (WEP)
affects how your Social Security retirement or
disability benefit is figured if you receive a
pension from work not covered by Social
Security. The formula used to figure your
benefit is modified, resulting in a lower So
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